Received a Letter of Demand from a Liquidator? What Directors and Creditors Must Do in the Next 7 Days

A letter of demand from a liquidator is not a court order, but it must be taken seriously. Under the Corporations Act 2001 (Cth), a liquidator has the power to commence proceedings to recover money paid to creditors or lost through director conduct — and in most cases has 3 years from the date of the winding up order to do so (s 588FF(3)). If you have just received one, you are not alone, and you are not without options.

This article explains what a liquidator’s letter of demand means, the five types of claims a liquidator can make, what happens if you ignore it, and the practical steps you need to take in the next seven days.

What Is a Liquidator’s Letter of Demand?

When a company is placed into liquidation, a liquidator is appointed to wind up its affairs, realise its assets, and distribute the proceeds to creditors in the order set out in the Corporations Act. Part of that role is to investigate the company’s financial affairs in the period before it collapsed and to recover money that was paid out or lost in circumstances the law treats as unfair or improper.

A letter of demand is the first formal step in that recovery process. It is a written demand from the liquidator — or their lawyers — alleging that you (as a director or a creditor of the company) received money or obtained a benefit you are legally required to return. The letter will typically:

• identify the legal basis for the claim (often citing specific sections of the Corporations Act)
• state the amount being demanded
• give you a deadline — commonly 14 or 28 days — to pay or respond
• warn that proceedings will be commenced if the demand is not met

Liquidators are officers of the court and have statutory powers to pursue these claims on behalf of the company’s creditors. The letter you have received is the opening move in what may become litigation — or what may be resolved through negotiation. How you respond in the first seven days will shape the trajectory of that outcome.

The 5 Types of Claims a Liquidator Makes

Not all liquidator demands are the same. Understanding the type of claim being made is essential to assessing your exposure and identifying your defences.

1. Unfair Preference Claims (s 588FA / s 588FE)

An unfair preference arises where a company, at a time when it was insolvent, made a payment (or gave some other benefit) to a creditor that resulted in that creditor receiving more than it would have received in the liquidation. The classic example is a company paying a supplier or financier in the months before collapse, while other creditors went unpaid.

Under s 588FE, a liquidator can void the transaction and seek recovery from the creditor. The “relation back period” is generally 6 months before the winding up application (or 4 years for related parties). For a detailed explanation of the unfair preference demand process in Queensland, see our dedicated guide.

2. Insolvent Trading Claims (s 588G / s 588M)

This claim is directed at directors, not creditors. Under s 588G, a director who allows a company to incur a debt at a time when the company is insolvent (or when there are reasonable grounds to suspect insolvency) may be personally liable for the loss suffered by creditors as a result. A liquidator can pursue a director under s 588M to recover compensation equal to the amount of that loss.

This is one of the most serious claims in a liquidator’s arsenal. Personal liability means your own assets are at risk. For broader context on when a director can be held personally liable, see our guide to director personal liability in Australia.

3. Voidable Transaction Claims (s 588FB / s 588FC / s 588FE)

Beyond unfair preferences, the Corporations Act also allows liquidators to set aside uncommercial transactions (s 588FB) — transactions where the company received significantly less than the market value of what it gave away — and other arrangements entered into in circumstances that were commercially unreasonable. These are also caught by the voidable transaction regime in s 588FE, which sets out the look-back periods applicable to each type of transaction.

4. Unreasonable Director-Related Transactions (s 588FDA)

Section 588FDA targets a specific category of transaction: payments made, property transferred, or other benefits given by the company to a director (or a close associate of a director) that a reasonable person in the company’s circumstances would not have made. This section is distinct from the uncommercial transaction provisions — it applies even if the company was solvent at the time of the transaction, provided it was unreasonable.

This provision is increasingly used by liquidators in situations involving director loans, salary overpayments, or asset transfers to related parties. The look-back period is 4 years before the winding up application.

5. Unfair Loans (s 588FD)

An unfair loan is one made to the company where the interest or charges were or became extortionate in the circumstances. Liquidators can use this provision to recover excess interest or charges paid by the company on loans with unconscionable terms. It is less commonly encountered than preference or insolvent trading claims, but it does appear in situations involving related-party financing or predatory lending arrangements.

What Happens If You Ignore It?

Ignoring a liquidator’s letter of demand is one of the most costly mistakes a director or creditor can make. The consequences are both immediate and compounding.

The liquidator commences court proceedings. If you do not respond within the deadline, the liquidator will file proceedings in the Federal Court or the Supreme Court. You become a defendant in commercial litigation.

Default judgment risk. If you are served with proceedings and fail to file a defence within the required time, the liquidator can apply for judgment in default. A default judgment is enforceable against your assets — bank accounts, property, business interests — without the merits of the claim ever being tested.

Interest accrues. Judgment debts attract interest at the relevant court rate from the date of judgment. On a six-figure demand, this compounds quickly.

Adverse cost orders. Commercial litigation is expensive. If the matter proceeds and the court finds against you, you will ordinarily be ordered to pay a significant portion of the liquidator’s legal costs in addition to the judgment sum.

Director disqualification risk (insolvent trading claims). A successful insolvent trading claim can, in egregious cases, trigger referral to ASIC for director disqualification proceedings under the Corporations Act.

What to Do in the Next 7 Days

This is a seven-day action plan. Follow it closely.

Day 1 to 2: Do not respond yet. Get legal advice immediately.

The instinct is to write back, dispute the claim, or call the liquidator directly. Resist it. Anything you say — in writing or verbally — can be used against you in proceedings. Your first call should be to a commercial lawyer who understands insolvency law. This is not general commercial work. You need someone who understands the Corporations Act voidable transaction regime, the specific defences available, and how liquidators assess their cost-benefit case.

Day 2 to 3: Gather all relevant documents.

Start assembling everything that relates to your dealings with the company:

• Invoices, payment records, and bank statements showing all payments you received from the company
• Contracts, purchase orders, and delivery receipts
• Board minutes and resolutions (for directors)
• Any correspondence with the company in the period before it collapsed
• Your credit history with the company — did you extend credit? Were you on a running account?

This documentation is the raw material from which your defence is built. The earlier you have it organised, the better.

Day 3 to 4: Assess the type of claim and the limitation period.

With your lawyer, identify precisely what type of claim is being made and when the winding up order was made. Under s 588FF(3), a liquidator must commence proceedings within 3 years of the winding up order (or such longer period as the court allows on application). If that period has expired or is close to expiring, this is a critical piece of information that changes the dynamics of the negotiation entirely.

Day 5 to 6: Draft a “without prejudice, reservation of rights” holding response.

Once your lawyer has reviewed the claim, the next step is a written holding response. This letter should:

• acknowledge receipt of the demand
• state that it is sent “without prejudice and with full reservation of rights”
• note that you are taking legal advice
• request a reasonable extension of time to respond substantively
• not admit or deny any of the facts alleged in the demand

This letter buys you time, signals engagement (reducing the risk of the liquidator immediately commencing proceedings), and does not prejudice your position.

Day 7: Brief your lawyer fully for a strategy session.

By Day 7 you should have your documents in order and have engaged a lawyer. Use this session to map out: the strength of the liquidator’s claim against the available defences, the limitation period and whether proceedings have been commenced, the liquidator’s likely cost-benefit calculus, and whether to negotiate, defend, or seek a consent order.

Your Defences — The Key Ones That Work

A letter of demand is the beginning of a negotiation, not the end of it. Defences to liquidator claims are real, available, and frequently succeed.

Running Account Principle (Unfair Preferences)

For unfair preference claims, the running account principle is one of the most powerful defences available to a creditor. Rather than looking at each individual payment in isolation, the court assesses the net effect of the ongoing trading relationship between the company and the creditor over the entire relation-back period.

If you continued to supply goods or services to the company throughout the period in which you were receiving payments, the preference is not the total amount you received — it is the net improvement in your position (payments received minus the value of goods and services you continued to supply). In many cases, this dramatically reduces the claimed preference amount, and sometimes eliminates it entirely.

The High Court authoritatively confirmed the scope and operation of the running account principle in Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2. Our detailed analysis of Bryant v Badenoch and its implications for preference claims explains how the High Court’s decision applies in practice.

Good Faith Defence (s 588FG)

Under s 588FG, a transaction cannot be recovered as a voidable transaction if the other party (the creditor) can establish that they received the payment in good faith, at the time of the transaction they had no reasonable grounds to suspect the company was insolvent, and they provided valuable consideration for the payment. This defence is available for unfair preferences and other voidable transactions. It requires evidence of your state of knowledge at the time of each payment.

Safe Harbour Defence (s 588GA — Insolvent Trading)

Introduced in 2017, the safe harbour provisions in s 588GA provide a defence to insolvent trading liability for directors who, at the time they allowed the company to incur a debt, were developing or implementing a course of action reasonably likely to lead to a better outcome for the company than immediate administration or liquidation. To rely on s 588GA, the director must demonstrate they were taking expert advice, keeping proper financial records, paying employee entitlements, and that the course of action had a genuine prospect of success.

Business Judgment Rule (s 180(2))

Section 180(2) of the Corporations Act provides that a director satisfies their duty of care and diligence in respect of a business judgment if they make the judgment in good faith, for a proper purpose, without a material personal interest, having informed themselves to the extent they reasonably believed appropriate, and rationally believing the judgment was in the best interests of the corporation. While primarily invoked in duty of care and diligence claims, it provides relevant context for directors facing allegations arising from decisions made during a period of financial difficulty.

Solvency at the Time of the Transaction

For many voidable transaction claims, the liquidator must establish that the company was insolvent at the time of the transaction. This is not always straightforward. You have the right to put the liquidator to proof on this issue. Challenging the assumed insolvency date — through expert evidence on the company’s actual financial position — is a legitimate and sometimes highly effective defence strategy.

Can You Negotiate With a Liquidator?

Yes. And more often than not, you should.

Liquidators are not pursuing litigation for its own sake. They are officers with obligations to the company’s creditors, and their decisions about whether to litigate must be commercially rational. Every liquidator performs a cost-benefit analysis before filing proceedings: what is the likely recovery? What will litigation cost? What is the probability of success? How long will it take?

This analysis works in your favour if you engage early and intelligently. A creditor who has a genuine running account defence, or who can demonstrate good faith reliance, may be able to negotiate a settlement at a fraction of the claimed amount. Liquidators regularly settle unfair preference claims where the cost and risk of litigation make a negotiated outcome preferable.

The key to negotiating effectively:

• Engage promptly. A liquidator who receives a substantive “without prejudice” response within 21 days knows you are taking the matter seriously and are represented. That changes the dynamic.
• Know your defences before you negotiate. Negotiating without understanding your exposure is giving away leverage.
• Put any settlement in writing and have it court-approved. A compromise of a voidable transaction claim requires the court’s approval under s 477(2A) if the value exceeds the threshold. Your lawyer will manage this.

Limitation Periods — When the Liquidator’s Claim Expires

Time is critical in liquidator demands. Under s 588FF(3) of the Corporations Act 2001 (Cth), a liquidator must commence proceedings to recover a voidable transaction within 3 years of the winding up order, or within 12 months of the liquidation commencing, whichever is the later.

However, this period is not absolute. A liquidator can apply to the court for an extension of time before the limitation period expires, and courts do grant extensions — particularly where the liquidator can demonstrate they were not aware of the facts giving rise to the claim within the ordinary limitation period. An approaching limitation date does not mean you can simply wait out the clock.

What the limitation period does give you is a powerful piece of leverage:

• If the 3-year period has already expired when you receive the demand, no court proceedings can be commenced without a court order extending time. That is a significant advantage.
• If the period is close to expiring, the liquidator is under time pressure to either commence proceedings or reach a settlement. This shifts negotiating dynamics in your favour.
• If the period still has years to run, the liquidator has time on their side — which is a reason to resolve the matter early, on your terms, rather than on theirs.

Always confirm the date of the winding up order as one of your first steps. This is publicly available from ASIC’s registers and sets the clock for the entire dispute.

Boss Lawyers Can Help

Boss Lawyers acts for both directors and creditors facing liquidator demands across all types of voidable transaction claims. Whether you have received an unfair preference demand, an insolvent trading claim, or a demand alleging an unreasonable director-related transaction, we provide practical, commercial advice on your options.

Mark Harley has more than 17 years of experience in commercial litigation and insolvency matters. He understands how liquidators think, how courts approach these claims, and how to build a defence or negotiate an outcome that protects your interests. Our insolvency lawyers in Brisbane act for creditors and directors across all stages — from the first letter of demand through to trial. If your matter involves questions of director liability, our director disputes team can assist.

If you have received a letter of demand from a liquidator, contact Boss Lawyers today on 1300 267 711 or visit bosslawyers.com.au.

Frequently Asked Questions

Is a letter of demand from a liquidator the same as being sued?

No. A letter of demand is a pre-litigation step — it is the liquidator’s formal notice that they believe you owe money to the company in liquidation and that you must pay or face court proceedings. It is not a court document and does not carry the same immediate legal consequences as being served with a statement of claim. However, it is a serious legal document and you should obtain advice immediately. Ignoring it will likely result in proceedings being commenced.

How long do I have to respond to a liquidator’s letter of demand?

The deadline stated in the letter — typically 14 to 28 days — is set by the liquidator and is not a statutory requirement. However, if you do not respond within that period, the liquidator can commence proceedings without further notice. In practice, a “without prejudice, reservation of rights” holding letter requesting an extension of time — sent before the deadline — will generally be accepted by a liquidator who is acting reasonably.

Can a liquidator pursue me personally as a director for company debts?

Yes, in certain circumstances. Under s 588G of the Corporations Act 2001 (Cth), a director who allows a company to incur a debt when it is insolvent may be personally liable for the amount of those debts. The safe harbour defence under s 588GA may be available depending on the circumstances. If you have received a demand alleging insolvent trading, you need legal advice urgently.

What is the limitation period for a liquidator to recover a voidable transaction?

Under s 588FF(3) of the Corporations Act 2001 (Cth), a liquidator must commence proceedings to recover a voidable transaction within 3 years of the date of the winding up order (or 12 months of the commencement of liquidation, whichever is later). The court has a discretion to extend this period on application. If the limitation period has expired, you have a strong technical defence — but you should confirm this with a lawyer before relying on it.

What happens if I pay the liquidator’s demand without getting legal advice?

You may pay more than you legally owe, particularly if you have a running account defence that would have reduced the preference amount. Additionally, paying the demand does not improve your ranking as a creditor in the liquidation. You will still rank in the same order as other unsecured creditors when distributions are made. Always get legal advice before paying any liquidator demand.

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This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances before taking any action in response to a letter of demand from a liquidator.