The practicalities of unfair preference claims

Any business who receives payment for goods or services from a company is at risk of having payments ‘clawed back’ if that company is deemed to have been insolvent at the time of the payment.  This can result in significant costs for the business to defend the claim and the risk of having to repay the amount.

So what can a business do to protect itself from unfair preference claims?

Unfair preference claims cannot be contracted out of. Which means that the best protection for a business is to try and avoid a claim arising.   The following tips can assist with this:

Be alert

A business should be aware of any signs that a company, which they trade with, may be insolvent.  This means vigilance.

  • Monitor regular payment arrangements.
  • Is the company paying outside trading terms?
  • Are they suddenly making rounded payments or payments which are not easily identifiable to an invoice?
  • Has its trading history suddenly changed pattern?
  • Have they asked for more time to make payment, or implied that they were facing difficulty to do so?

If you have a suspicion about the insolvency of a company, consider whether you should continue trading with that company and seek legal advice.

Keep good records

This means records of trading terms, any demands made, any phone calls, emails or letters from either party which may assist in defending a claim.

What if you do receive payments from a company which is insolvent?

Typically, the liquidator will notify the business of the claim in the form of a letter of demand.

The demand will state an amount that is claimed by the liquidator to have been received by the business from the insolvent company during a 6 month period.

It is important not to ignore this letter and to seek legal advice.

Recently, a client received a letter of demand from the liquidator seeking $225,000 on the basis of an unfair preference claim.

The client sought advice early and we were able to negotiate the liquidator down to a $90,000 settlement.

This was a good outcome for our client and reaching that agreement early saved them incurring substantial legal costs to defend the claim.  The liquidator was able to agree to a lesser amount as proceedings had not yet commenced.

What if proceedings are commenced?

When proceedings are commenced it can become expensive. Although there is still the option to negotiate a settlement, the pressure to do so increases as there are court deadlines that also need to be met.  It is important for a business to be conscious that time defending a claim, is also time where they are not able to focus on its profit generating activities, resulting in more costs to the business.

How do these claims usually resolve?

In a liquidation there are generally limited funds available and it costs time and money to go to trial on the claim.  This usually results in a settlement being agreed either prior to proceedings commencing, or during the initial period of proceedings.

The take home message:

  • Don’t bury your head in the sand, be alert to signs of an insolvent company;
  • Keep good records; and
  • Get advice early, it can save you money and time.

If you have any queries or would like further information regarding this article, please contact:

Brett Cassidy
M: 0438 368 053

Published: 15 March 2017

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