Unfair Preference Claim by Liquidator

Last reviewed and updated: July 2026

If your company has been paid money by a company that later went into liquidation, you may receive a letter from the liquidator demanding that money back. This is an unfair preference claim, and it is one of the most common forms of insolvency litigation in Australia.

For creditors, the experience is deeply frustrating: you did business legitimately, you were paid for goods or services provided, and now the liquidator wants the money returned. The law, however, is clear, and the grounds for challenging a preference claim are specific.

This guide explains how unfair preference claims work, what the legal test is, what defences are available to creditors, and what to do if you receive a demand.

What Is an Unfair Preference?

Under s 588FA(1) of the Corporations Act 2001 (Cth), a transaction is an unfair preference if:

1. The company and the creditor are parties to the transaction; and
2. The transaction results in the creditor receiving, in respect of an unsecured debt, more than the creditor would receive in a winding up if the transaction were set aside and the creditor were to prove for the debt.

The core concept is that, in insolvency, all unsecured creditors are supposed to share equally in the available assets. If one creditor was paid out in full shortly before winding up, while others received nothing, that creditor has an “unfair preference” over the others — and the liquidator can recover it.

The Full Legal Test — What the Liquidator Must Prove

To succeed in a preference recovery action, the liquidator must establish each of the following elements:

1. Transaction: There was a transaction (including a payment) between the company and the creditor.
2. Unsecured debt: The payment was in respect of an unsecured debt owed by the company to the creditor.
3. Preference: The payment resulted in the creditor receiving more than they would have in a liquidation (s 588FA(1)).
4. Insolvent transaction: The company was insolvent at the time of the transaction, or became insolvent because of it (s 588FC).
5. Relation-back period: The transaction occurred during the 6-month period ending on the relation-back day (or 4 years for related parties under s 588FE(4)) (s 588FE(2)).
6. Voidable: The transaction is voidable (s 588FF).

The relation-back day is generally the date winding up commenced. For a creditors voluntary liquidation, it is the date the resolution to wind up was passed. For a court-ordered winding up, it is the date the application was filed (if winding up is ultimately ordered).

What Is the Running Account Principle?

One of the most important defences for creditors with ongoing supply arrangements is the running account principle.

Where a creditor and the company had a continuous trading relationship throughout the suspect period (making and receiving payments, supplying goods or services, and having the balance of the debt fluctuate), the court looks at the net effect of all transactions during the suspect period rather than each individual payment in isolation.

If the net result of all transactions was that the overall indebtedness decreased during the suspect period, the preference is limited to the amount of that net decrease. If the overall debt remained the same or increased, there may be no preference at all.

For example, if the company owed your business $100,000 at the start of the 6-month period, and at the end owed $80,000 (having received goods and made payments throughout), the maximum preference recovery is $20,000 — not the total of all individual payments received during that period.

Defences Available to Creditors

The Good Faith Defence (s 588FG(2))

The primary statutory defence for creditors is the good faith defence under s 588FG(2). To succeed, the creditor must establish all three limbs:

1. No reasonable grounds to suspect insolvency: The creditor had no reasonable grounds to suspect that the company was insolvent (or would become insolvent) at the time the transaction was entered into.
2. Good faith: The creditor acted in good faith throughout.
3. Value provided: The creditor provided valuable consideration for the transaction (supplied goods, performed services, or provided credit).

The reasonable grounds test is objective: not what the creditor actually knew, but what they ought to have known. Warning signs that courts consider include: the company paying late, requesting extended credit terms, issuing dishonoured cheques, making partial payments, or sending communications about cash flow difficulties.

No Preference in Fact

If the liquidator cannot establish that the creditor received more than they would have in a liquidation, there is no preference. This requires analysis of the actual dividend likely to be paid in the winding up. If a liquidator is on track to pay 30 cents in the dollar, a payment of $10,000 is only a preference to the extent it exceeds $3,000 (the 30% that the creditor would have received anyway).

Secured Creditor Defence

Section 588FA only applies to payments in respect of unsecured debts. If the creditor held a valid, properly registered security interest under the Personal Property Securities Act 2009 (Cth) (PPSA), the payment is in respect of a secured debt and is not an unfair preference.

Out of Time

A liquidator must commence proceedings to recover a preference within 3 years of the relation-back day, or 12 months after the appointment of the liquidator, whichever is the later (s 588FF(3)). A claim commenced outside this limitation period is statute-barred.

What to Do If You Receive a Preference Demand

Liquidators regularly send demand letters to creditors who received payments in the suspect period. The letter will typically:

• Identify the amount claimed as a preference
• Set a deadline for payment (often 14-21 days)
• Threaten court proceedings if payment is not made

Do not ignore a preference demand. Do not pay it without getting legal advice first. Here is what to do:

1. Get legal advice immediately. The response strategy depends on the specific facts — the nature of the trading relationship, what warning signs existed about the company’s financial position, and whether the running account principle applies.
2. Gather your records. Collect all invoices, delivery records, payment receipts, and any communications with the company. The trading history is essential to assessing the preference exposure and any good faith defence.
3. Do not admit liability. A response that appears to concede the claim will be used against you. All communications with the liquidator should be carefully considered.
4. Consider negotiating. Preference claims are regularly settled at a significant discount. Liquidators have limited resources and litigation is expensive. Early engagement with a focused response often leads to a better outcome than waiting.

Frequently Asked Questions

Can a liquidator recover a preference payment from a secured creditor?

Generally, no. Section 588FA applies to payments in respect of unsecured debts. If the payment was made in reduction of a debt secured by a valid PPSA-registered security interest, it is not an unfair preference. However, if the security was not properly registered, the creditor may be exposed.

What is the suspect period for a preference claim?

For arm’s length creditors, the suspect period is the 6 months ending on the relation-back day (s 588FE(2)). For related parties (such as a company controlled by the same director), the suspect period extends to 4 years (s 588FE(4)).

How is insolvency established in a preference claim?

The liquidator must prove the company was insolvent at the time of the transaction. ASIC statistics show that many companies show signs of insolvency 12-18 months before formal winding up. Evidence of insolvency includes: failure to pay ATO debts, bounced cheques, aged creditor lists, and management accounts showing negative equity.

I received payments over several months. Is each payment a separate preference?

Not necessarily. The running account principle may apply if there was a continuous supply relationship during the suspect period. Courts look at the net effect of all transactions. Individual payments in a running account are not assessed in isolation.

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If you have received a preference demand from a liquidator, Boss Lawyers can assess your position and advise on your defence options. Our insolvency lawyers Brisbane act for creditors in preference disputes regularly. Call 1300 267 711 for an assessment of your situation.

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