Last reviewed and updated: April 2026
How to fight a
Liquidator’s Unfair Preference Claim
What to do when faced with a liquidator pursuing you for
alleged Unfair Preference Payments? Here Mark Harley looks at the latest
defences that may be available to creditors and how to assess your potential
exposure under the Unfair Preference regime.
What is an Unfair Preference
Claim?
Unfair Preferences are the most common type of voidable transaction and occurs where a creditor has received an advantage over other creditors, by receiving payment (or other type of transaction) for their outstanding liabilities and does so in circumstances where they knew, or ought to have known, that the company was insolvent.
The Legal Test
Essentially, Unfair Preference provisions can be reduced to
the following:-
- The transaction being attacked must be a
transaction of the company; - The company and the Creditor are parties to the
transaction; - The transaction confers a preference with
respect to an unsecured debt of the company to the creditor; - The Company was insolvent at the time the
transaction was entered into, or the company becomes insolvent because of the
company entering into the transaction; and - The transaction was entered into during the
relevant period prior to the winding up of the company.
Situation where an Unfair Preference claim can arise
Broadly speaking, an Unfair Preference received by a
creditor can occur when:
- a debtor company owes a creditor an unsecured
debt; and - the debtor company and the creditor are parties
to a transaction (usually payment of some or all of the unsecured debt); and - receipt of the payment results in the creditor
receiving more than it would have received had the debtor company been in
liquidation and the liquidator paid all unsecured creditors a dividend.
An Unfair Preference for an insolvent transaction does not apply to secured debt.
Defences to Unfair Preference Claims
No suspicion of insolvency (often referred to as the good faith defence);
You can defend an Unfair Preference claim on the basis that
you had absolutely no idea that the company you were dealing with was insolvent. However, the onus lies on the creditor to
make out the defence on the balance of probabilities.
In order to successfully raise a defence pursuant to Section
588FG (2) of the Act, a creditor must establish:-
- that it received the payments from the Company in good faith; and
- at the time of the relevant payment:-
- the creditor had no reasonable grounds for suspecting that the Company was insolvent at that time or would become insolvent as a result of making the payments;
- a reasonable person in the creditor’s circumstances would have had no such grounds for so suspecting; and
- that the creditor provided valuable consideration for the payments.
Debt is secured
For a liquidator to bring an Unfair Preference claim against
a creditor, they should be satisfied the payment was made in relation to
unsecured debts. While the Corporations Act doesn’t define unsecured debt, it
does define ‘secured
party’ as those with a PPSA security interest (Personal
Property Securities Act). A trade creditor may have their debt be secured by:
- Charge/mortgage
- Consigning goods – a security interest over the
goods until purchase and payment occurs - Bailment – handing over possession of goods to
somebody else for two years or more (or for an indefinite period in certain
situations) - Retention of Title over the assets supplied
until payment occurs.
As a trade credit supplier, including a Retention of Title
clause in your terms of trade, may give you a security interest over your
customer. With this security interest, you can register on the Personal
Property Securities Register (PPSR) and claim to be a secured creditor.
If you’ve received payments before your customer goes into liquidation and you’re being pursued for Unfair Preferences claims, you may be able to use the defence that you were secured at the time the payment came in.
The running account defence
The running account reduction can be an effective way to
reduce your risk of Unfair Preferences if there has been ongoing trade. This
calculation considers that there has been continuous supply during the relevant
Unfair Preference period, rather than the more common approach by liquidators
of just looking at the payments received over that time.
Set off unpaid debt.
Section 553C of the Corporations Act can assist creditors
under which mutual debts are set-off in a liquidation. Liquidators are allowed
to set-off mutual claims as against each other in proofs of debt. For example,
a creditor may put in a proof of debt for $200,000, but if the creditor
actually owes $100,000 to the customer, then the liquidator can argue that this
has to be reduced down to $150,000 on the basis of the set-off.
There is some case law that has allowed setting-off by creditors on debts
owed to them as against the liquidator’s Unfair Preference claims
We’re here to help. Make an enquiry now.
If you have a question about unfair preference claims, or you have received a demand by a liquidator, or want some more information or would just like to speak to someone, make an enquiry now and our Commercial Litigation team will be in touch with you as soon as possible.
Related Articles by Boss Lawyers
Unfair Preference Claim by Liquidator
Principles applied by the Courts to determine company solvency
Unfair Preference claim against secured creditors
Legislation
How Boss Lawyers Can Help
If you need guidance on this issue, our experienced team can provide practical, strategic advice tailored to your situation. Our practice areas include insolvency lawyers, commercial litigation lawyers.
Contact Boss Lawyers on 1300 267 711 or visit bosslawyers.com.au.
Disclaimer: This article provides general information only and does not constitute legal advice. You should obtain specific legal advice relevant to your circumstances before taking any action.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances. For expert advice, contact Boss Lawyers on 1300 267 711.
