Unfair Preference Claims in Liquidation: What Creditors and Directors Need to Know

When a company collapses into liquidation, the appointed liquidator does not simply wind up operations and distribute whatever remains. They investigate. One of the most powerful tools in a liquidator’s arsenal is the right to reverse transactions made in the months before the company failed — including payments to creditors who did nothing wrong. These are called unfair preference claims, and they can put money you legitimately received at serious risk of being clawed back.

This guide explains how unfair preference claims work under the Corporations Act 2001 (Cth), who is at risk, what defences are available, and when you need a Brisbane insolvency lawyer in your corner.

What Is an Unfair Preference Under the Corporations Act?

Section 588FA of the Corporations Act 2001 (Cth) defines an unfair preference as a transaction between an insolvent company and one of its creditors, where the creditor ends up in a better position than they would have been if the transaction had not occurred and the company was simply wound up.

In plain terms: if a company paid you money it owed you, but was insolvent when it did so, the liquidator may be able to demand that money back. The logic is that all unsecured creditors should share equally in the insolvent estate. Payments made to some creditors just before the collapse are seen as giving those creditors an unfair advantage over the rest.

The classic scenario: a supplier has been chasing payment for three months. The company finally pays the invoice — in full, or in part — shortly before appointing an administrator. Six months later, the administrator converts to liquidation. The liquidator writes to the supplier demanding repayment of the amount received.

The Legal Framework: Sections 588FA to 588FF

The unfair preference regime sits within Part 5.7B of the Corporations Act 2001 (Cth), which deals with voidable transactions. The key provisions are:

• s 588FA — defines an unfair preference
• s 588FC — defines an insolvent transaction (the transaction must occur when the company is insolvent, or become insolvent as a result)
• s 588FE — sets the relation-back period (generally 6 months, or 4 years for related parties)
• s 588FF — gives the Court power to make orders and sets the 3-year time limit for commencing proceedings
• s 588FG — sets out the defences available to creditors

The relation-back day is, broadly, the day the company first enters external administration (administration or liquidation). All transactions within 6 months before that date are potentially voidable if the other conditions are met.

The Four Elements a Liquidator Must Prove

To successfully recover an unfair preference, a liquidator must establish:

1. There was a transaction — this includes payments, transfers of property, granting security, or entering into an agreement. Most cases involve simple cash payments.
2. The company was a party — the payment must have come from the company in liquidation.
3. The transaction was an insolvent transaction — the company was insolvent at the time of the transaction, or became insolvent as a result.
4. The creditor received more than they would in a winding up — if the creditor is unsecured and the company had no assets to distribute, any payment received is a preference.

The solvency question is often the most heavily contested. Insolvency is not simply having more debts than assets — it is whether the company was unable to pay its debts as and when they fell due: s 95A Corporations Act. Liquidators frequently rely on expert accountants to establish insolvency over a historical period, and creditors can challenge this analysis.

The Relation-Back Period: How Far Back Can Liquidators Look?

The standard relation-back period under s 588FE(2) is 6 months before the relation-back day. For most unsecured trade creditors, this is the relevant window.

However, the period is extended in specific circumstances:

• 4 years — if the creditor was a related entity (such as an associated company, a director’s spouse, or a company with overlapping directors): s 588FE(4)
• 10 years — if the transaction involved a creditor who was acting dishonestly or had actual or imputed knowledge of the company’s insolvency: s 588FE(6)

For a SEQ subcontractor who received payment from Open Projects Group or a similar collapsed builder in the months before liquidation, this means transactions from approximately December 2025 to June 2026 could potentially be scrutinised by the appointed liquidator.

Defences Available to Creditors

Receiving a demand from a liquidator does not mean you will have to repay the money. Section 588FG provides two primary defences:

1. The Good Faith and Change of Position Defence (s 588FG(2))

This is the most commonly used defence. It applies if the creditor can prove:

• They received the benefit in good faith;
• At the time of the transaction, they had no reasonable grounds to suspect, and did not suspect, that the company was insolvent or would become insolvent; and
• A reasonable person in their position would also have had no such grounds for suspicion.

What counts as reasonable grounds for suspicion? Courts have found that warning signs include: persistent late payment of invoices, requests for extended terms, rumours in the industry, unpaid ATO obligations visible from public records, and demands from other creditors. If you knew the company was in financial difficulty and still accepted payment, the good faith defence becomes harder to run.

Critically, you must also show you have changed your position in reliance on the payment — for example, you used the funds to pay your own suppliers or meet other obligations. Courts have interpreted this element broadly, but it is not automatic.

2. The Running Account Defence

If there was an ongoing commercial relationship with continuous dealings between the creditor and the company, the Court may treat the overall transaction as a single running account rather than individual preference payments. Under this approach, only the net balance across the relation-back period is considered, not each individual payment. For suppliers with ongoing invoicing relationships, this can significantly reduce or eliminate the preference exposure.

How Much Can You Be Ordered to Repay?

If the liquidator succeeds, the Court may make an order under s 588FF(1) requiring the creditor to pay the liquidator an amount equal to the preference received. Interest from the date of the order is also recoverable.

In practice, most preference claims settle. Liquidators weigh the cost of litigation against the likelihood of recovery, and many creditors resolve claims through negotiation. However, a well-advised creditor with a genuine good faith defence is in a much stronger bargaining position than one who simply ignores the demand.

The 3-Year Time Limit for Proceedings (s 588FF(3))

Liquidators cannot chase preference claims indefinitely. Section 588FF(3) requires an application to be made within 3 years of the relation-back day, or within such longer period as the Court allows on application by the liquidator.

Courts do grant extensions, but the liquidator must demonstrate a good reason (such as complexity of the investigation or difficulty in identifying assets). Creditors who receive a letter of demand from a liquidator and then simply wait it out are taking a risk — the liquidator can still commence proceedings within time and proceed to judgment.

Directors: When Can You Be Personally Liable?

Directors are not personally liable for unfair preferences in the ordinary sense — the claim is against the creditor who received the payment, not the director who authorised it. However, directors face separate exposure if they authorised payments knowing the company was insolvent, as this may constitute a breach of the duty to prevent insolvent trading under s 588G of the Corporations Act.

Where a preference payment was made to a related party — such as a company controlled by a director’s family member, or a company with shared directors — the 4-year look-back period applies and the good faith defence is more difficult to establish.

What to Do If You Receive a Letter of Demand from a Liquidator

Acting quickly is essential. Here is the process:

1. Do not ignore the demand. Ignoring it does not make the claim go away. A liquidator who does not receive a response will commence proceedings.
2. Gather your records. Obtain all invoices, payment records, bank statements, and correspondence relating to the payments in question. You need this evidence to assess your position and run a defence.
3. Engage a commercial lawyer immediately. Assess whether the good faith defence or running account applies. An experienced insolvency lawyer in Brisbane can assess the liquidator’s claim, identify weaknesses in their solvency analysis, and advise on whether to settle or defend.
4. Assess the liquidator’s insolvency evidence. Has the liquidator provided a solvency analysis? Do the indicators of insolvency actually support insolvency at the time of your payment? Challenge weak evidence.
5. Negotiate if appropriate. Many preference claims settle at a fraction of the amount demanded, particularly where the creditor has a credible good faith argument.

How Boss Lawyers Can Help

Boss Lawyers acts for both creditors defending unfair preference demands and directors navigating insolvency-related claims. We understand the commercial reality of these situations: you received payment for legitimate work, and now a liquidator is demanding it back.

We assess each claim on its merits, analyse the liquidator’s insolvency evidence, identify the strongest available defences, and advise on the most commercially sensible approach — whether that is a robust defence, a negotiated settlement, or a combination of both.

If you have received a preference demand or received a clawback action from a liquidator, our commercial litigation lawyers Brisbane work closely with our insolvency team to provide a coordinated defence. Call 1300 267 711.

If you have received a preference demand or letter of demand from a liquidator, contact Boss Lawyers on 1300 267 711 or email enquiries@bosslawyers.com.au for a confidential assessment.

Frequently Asked Questions

What is an unfair preference payment?

An unfair preference payment is a payment made by an insolvent company to one of its creditors within 6 months before liquidation, which gives that creditor more than they would have received if the company had simply been wound up. Liquidators can apply to the Court to claw back such payments under s 588FA of the Corporations Act 2001 (Cth).

How far back can a liquidator claim unfair preferences?

For ordinary unsecured creditors, the look-back period is 6 months before the relation-back day. For related party creditors (such as companies controlled by directors or their associates), the period extends to 4 years. In cases involving dishonesty or knowledge of insolvency, the period can extend to 10 years.

What is the good faith defence to a preference claim?

Under s 588FG(2) of the Corporations Act, a creditor can defend a preference claim by proving they acted in good faith when receiving the payment, had no reasonable grounds to suspect the company was insolvent, and changed their position in reliance on the payment. This is the most commonly used defence in preference litigation.

Can preference claims be negotiated?

Yes. Many unfair preference claims settle before trial, particularly where the creditor has a credible good faith defence or the solvency evidence is contestable. Engaging a commercial lawyer to assess the claim and negotiate early typically produces the best commercial outcome.

Do I have to repay money I received for legitimate work?

Potentially. Even if the payment was for genuine goods or services provided to the company, a liquidator may still seek to recover it as an unfair preference if the company was insolvent when it paid you. The good faith defence is your primary protection — seek legal advice immediately if you receive a demand.

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Disclaimer: This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances. The law referred to in this article is current as at June 2026.

Written by Mark Harley, Principal Solicitor, Boss Lawyers. Mark has 17+ years of experience in commercial litigation and insolvency law in Queensland.