Unfair preference payments: Returning money you're owed?
Did you know that in certain circumstances you’re liable to return payments that you’ve received from your debtors? That’s right – you may have done the work perfectly or supplied your product without fault, but if section 588FA of the Corporations Act 2001 (Cth) (the Act) applies, you must hand over your hard-earned money.
Section 588FA of the Act will apply if:
- a transaction occurred (usually payment of money, but a variety of transactions can be preferential)
- the transaction was between a company in liquidation and an unsecured creditor of that company
- the transaction happened when the liquidated company was insolvent or the transaction caused the liquidated company to become insolvent
- the transaction happened within 6 months (for parties unrelated to the liquidated company) or 4 years (for related parties) before the liquidation of the company started
- the transaction gave the creditor an advantage over other creditors of the liquidated company
- the creditor knew, suspected, or should have known that the liquidated company was insolvent at the time of the transaction.
If those six things are proven by the liquidator, then the creditor has received a preferential payment. Unless the creditor has a defence, they must refund the payment to the liquidator regardless of the quality of the creditor’s work or product, or the amount.
Would you rather keep payments or give them back?
Again, in certain situations, section 588FG of the Act provides a defence to creditors who have received a preferential payment and a ‘claw back’ claim from a liquidator. The creditor must establish all three of the following elements to successfully rely on the defence:
- the creditor gave valuable consideration for the payment;
- the creditor received the payment in good faith; and
- the creditor had no reason to suspect the liquidated company was insolvent when the payment was made.
How long do liquidators have to make a ‘claw back’ claim?
‘Claw back’ claims must be commenced within three years of the date on which the liquidated company was wound up or voluntary administrators were appointed. The liquidator must start a court proceeding within that time, not just send you a letter of demand.
What should you do if you might have received a preferential payment?
If a debtor of yours paid you shortly before entering liquidation and the liquidators have demanded that you forward that payment to them, Clifford Gouldson Lawyers’ Litigation + Dispute Resolution team can help you identify whether the payment actually gave you an advantage over the liquidated company’s other creditors and whether you are able to defend the claim.