What to Do When a Liquidator Sends You an Unfair Preference Demand in Queensland

Your business supplied goods or services, waited patiently for payment, and finally received it — only to receive a letter from a liquidator months later demanding that money back. If this has happened to you, you’ve received what lawyers call an unfair preference demand.

Unfair preference claims are one of the most common recovery actions run by liquidators in Australian insolvency administrations. For Queensland creditors and directors, understanding what these demands mean, what defences are available, and how to respond is essential. This guide explains every step.

What Is an Unfair Preference Claim?

Under section 588FA of the Corporations Act 2001 (Cth), a transaction is an “unfair preference” if:

• the company and the creditor were parties to the transaction;
• the transaction resulted in the creditor receiving more than they would receive in the liquidation (on a pari passu basis with unsecured creditors); and
• the company was insolvent at the time, or became insolvent because of it.

The most common example is a payment made to a supplier or creditor during the six months before the company went into liquidation. If the company was insolvent at the time, the liquidator may claim that payment was an unfair preference and seek to recover it from the recipient.

The recovery period is six months for ordinary arm’s-length creditors, or four years for related parties (directors, relatives, and associated entities) — under sections 588FE(2) and (4) respectively.

How Does a Liquidator Make a Claim?

The process generally works like this:

1. Investigation: The liquidator reviews the company’s bank statements and payment records to identify payments made in the relation-back period.
2. Demand letter: The liquidator sends a demand letter to the recipient, typically claiming the payment was an unfair preference and requesting repayment within 14–21 days.
3. Negotiation: Many claims settle at this stage, often for less than the face value of the demand — particularly where defences apply.
4. Proceedings: If the recipient does not pay or engage, the liquidator may commence court proceedings. The liquidator has three years from appointment to file (s 588M).

A demand letter does not mean you must pay. It is the opening move in a negotiation. The right response is to get legal advice, assess your defences, and respond strategically.

The Good Faith Defence — Your Most Powerful Protection

Under section 588FG(2), a court must not make a recovery order against a creditor if all three of the following conditions are satisfied:

1. Good faith: The transaction was entered into in good faith.
2. No reasonable grounds to suspect insolvency: At the time of the transaction, the creditor had no reasonable grounds for suspecting that the company was insolvent or would become insolvent.
3. Valuable consideration: The creditor gave valuable consideration — meaning they provided something of value in exchange (goods, services, forebearance of debt).

The good faith defence is not about whether you were a good person — it is about what a reasonable creditor in your position would have known at the time. Relevant factors include:

• Did the company appear to be trading normally?
• Were payments arriving late? Were cheques bouncing?
• Had you heard industry rumours about the company’s financial difficulties?
• Had the ATO or other creditors publicly pursued the company?
• Was the payment made under the ordinary terms of your commercial relationship, or was it unusual?

The classic Queensland authority on the good faith defence is Airservices Australia v Ferrier (1996) 185 CLR 483, where the High Court confirmed that the test is objective — it is what a reasonable person in the creditor’s position would have suspected, not what the creditor personally believed. If you received a payment that looked entirely normal and had no reason to believe the company was struggling, the defence may protect you in full.

The Running Account Principle — Reducing Your Exposure

If your business had a continuous trading relationship with the company — for example, you supplied goods on monthly credit terms, with payments coming in regularly against an ongoing account — the running account principle can dramatically reduce your exposure.

Instead of treating each individual payment as a separate transaction, the running account principle treats the entire continuous trading relationship as a single transaction. Under this approach, the “value” of the preference is not the total of all payments received, but rather the net improvement in the creditor’s position over the entire period.

Example: Your business supplied $200,000 in goods to a company over six months, receiving $180,000 in payments. The company enters liquidation, owing you $20,000. Without the running account principle, the liquidator might claim $180,000. With it, the claim might be assessed at nil or a fraction of that amount — because your position only “improved” by the net reduction in what you were owed. The peak indebtedness rule is a related concept: some liquidators will argue for the highest point of indebtedness during the period as the starting reference, which creditors should contest where facts support a different approach.

The running account principle was confirmed in Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 and developed through subsequent Federal Court and High Court decisions. Applying it correctly requires careful analysis of the full trading history — this is where legal advice is essential.

Comparison: Key Defences at a Glance

Defence	Statutory basis	What you must show	Effect if successful
Good faith	s 588FG(2)	No reasonable grounds to suspect insolvency + valuable consideration	Full defence — no recovery order
Running account / continuous dealing	Case law (Richardson; Airservices)	Continuous trading relationship — reduce claim to net improvement	Reduces quantum of preference
New value	s 588FG(2)(b)	Goods or services supplied after the payment, reducing the net benefit	Reduces quantum of preference
Limitation period	s 588M(4)	Proceedings filed more than 3 years after liquidation appointment	Claim may be time-barred (get advice)

What to Do If You Receive a Liquidator’s Demand

Here is a practical six-step action guide:

1. Do not pay immediately. A demand letter is not a court order. Taking time to assess your defences before paying can save you significant money.
2. Gather your records. Pull together all invoices, credit notes, payment records, and communications with the company for the relevant period (minimum 6 months before liquidation).
3. Document what you knew (and didn’t know) about their financial position. Were there any warning signs? Late payments? Requests for extended terms? Industry gossip? Your contemporaneous records are evidence of your state of knowledge.
4. Get legal advice before responding. The demand letter will often contain a deadline. Meeting that deadline with a properly reasoned response (not just a payment) protects your position. An experienced insolvency lawyer can assess your defences quickly.
5. Negotiate. Most unfair preference claims settle. If your defences are strong, you may be able to settle for cents in the dollar, or have the claim withdrawn entirely.
6. Do not ignore the demand. Ignoring a liquidator’s demand does not make it go away. It will typically result in court proceedings, which are more expensive to defend than a negotiated resolution.

Directors Who Received Pre-Liquidation Payments for Loans

If the company repaid a director loan in the six months before liquidation, that repayment may also be subject to an unfair preference claim — and the four-year relation-back period applies to related party transactions, not six months. Additionally, that repayment may also be scrutinised as an uncommercial transaction under section 588FB or an unreasonable director-related transaction under section 588FDA — which attract an even broader scope for liquidator recovery.

Directors who received pre-liquidation repayments of loans or other payments from companies they controlled should obtain specific advice before responding to any demand.

Frequently Asked Questions

This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.