Creditors should be very wary when pressing debtors for payment of outstanding invoices in circumstances where the debtor may be insolvent.

The Corporations Act 2001 (Cth) and the Bankruptcy Act 1966 (Cth) provide liquidators and trustees in bankruptcy with broad powers to recover “unfair preference” payments by debtors to their creditors in circumstances where:

  1. the creditor and debtor are parties to a transaction;
  2. the debtor is insolvent; and
  3. the transaction results in the creditor receiving a payment from the debtor for an unsecured debt and the amount of that payment is greater than what the creditor would have received if it had, instead of receiving the payment, lodged a proof of debt in the liquidation or bankruptcy of the debtor.

Such payments are called “unfair preferences” because after receipt of payment, the creditor recovers more than what it would have if the creditor had proved in the liquidation or bankruptcy of the insolvent debtor, thereby obtaining an unfair preference over other creditors who have lodged proofs of debt in the liquidation or bankruptcy.

There are some limited defences to claims by liquidators and trustees for unfair preference payments. However, a secured creditor can realise the full value of its security notwithstanding that upon realisation it receives more than other unsecured creditors.

Accordingly, clients should seriously consider taking security from high risk debtors to avoid facing an unfair preference claim or being left out of pocket if they are required to prove in a liquidation or bankruptcy.

This article is a very broad overview of a complex area of law, and should not be relied upon as legal advice. If you have received notice of an unfair preference claim, you should seek legal advice relevant to your specific circumstances.

For more information please do not hesitate to contact Daniel Fleming d.fleming@pigott.com.au.