This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
What Is an Unfair Preference?
When a company goes into liquidation, the liquidator’s job is to distribute available assets fairly among creditors. But not all pre-liquidation payments are treated equally.
Under section 588FA of the Corporations Act 2001 (Cth), a transaction is an unfair preference if it was made between the company and a creditor, the company was insolvent at the time (or became insolvent because of it), and the creditor received more than they would have in a winding up. In simple terms: if you were paid out before the company collapsed, and that payment gave you an advantage over other creditors, the liquidator can potentially claw it back.
Unfair preference claims are one of the most common tools in a liquidator’s arsenal. They can cover payments made up to six months before the relation-back day (or four years if the creditor is a related party). The amounts in dispute can range from a few thousand dollars to millions.
The Good Faith Defence: What Section 588FG(2) Actually Requires
Not every preference payment is automatically recoverable. Section 588FG(2) of the Corporations Act provides creditors with a defence — commonly called the “good faith” defence — where the creditor can prove three cumulative elements:
- The creditor acted in good faith;
- The creditor had no reasonable grounds to suspect insolvency (nor would a reasonable person in the creditor’s position have had those grounds); and
- The creditor provided valuable consideration — that is, they gave something of value in exchange for the payment (typically, goods or services already supplied).
All three elements must be satisfied. Failing on any one of them means the defence fails entirely. This is the part many creditors do not appreciate until it is too late.
What the Federal Court Confirmed in 2026
In Kirk (as liquidator of ARG Workforce Pty Ltd (in liq)) v Commissioner of State Revenue [2026] FCA 192, a Federal Court decision handed down in March 2026, the Court reinforced just how high the bar is for creditors seeking to rely on the good faith defence.
The case turned on the second element: whether the creditor had reasonable grounds to suspect insolvency. The court confirmed the following principles, which are now firmly established in the case law:
- The test is objective, not subjective. It does not matter what the creditor actually believed. The question is whether a reasonable person in the creditor’s position, with the creditor’s knowledge, would have suspected insolvency. This is a significantly higher standard than many creditors expect.
- “Suspicion” is a low threshold. A creditor does not need certainty, or even a belief that insolvency is probable. A suspicion — a positive feeling that something may be wrong — is enough to defeat the defence. If you had a nagging doubt, that may be sufficient.
- Payment delays are a red flag. The court confirmed that awareness of the company’s pattern of late payments or requests for extended trading terms can, in context, constitute reasonable grounds to suspect insolvency. Creditors who noticed these signs but continued trading cannot easily claim ignorance.
- General knowledge of financial difficulty is enough. A creditor who was aware that the company was under financial stress — even without knowing the precise extent of that stress — may be taken to have had reasonable grounds to suspect insolvency.
The practical effect is stark: the more a creditor knew about the debtor’s financial position before receiving payment, the harder it is to rely on the good faith defence. And in most commercial relationships, creditors do know things — because they have been chasing invoices, receiving excuses, or watching delivery schedules slip.
Why Creditors Keep Losing This Defence
In our experience acting for both liquidators and creditors in preference disputes, the pattern is consistent. A creditor receives a letter of demand from a liquidator claiming back a payment of, say, $85,000 made three months before liquidation. The creditor’s first instinct is: “We were owed that money. We did the work. We acted in good faith.”
All of that may be true. But it is not the test.
When we examine the facts, we often find:
- The creditor had been chasing the debtor for payment for months before finally receiving the $85,000
- The debtor had requested extended payment terms at some point during that period
- The creditor had internally discussed whether to continue supplying the debtor given the slow payment history
- Someone at the creditor’s business had expressed concern about the debtor’s financial health
Any one of these facts can be enough to defeat the good faith defence on the “no reasonable grounds to suspect insolvency” limb. And once that limb fails, the entire defence fails — regardless of how genuine the creditor’s good faith was.
What Should Creditors Do When They Receive a Preference Claim?
If you receive a letter of demand from a liquidator seeking to recover a payment as an unfair preference, do not ignore it. The following steps matter:
1. Gather your records immediately
Pull together all documents relating to the payment and the trading relationship: invoices, payment records, emails, internal notes, credit applications, and any communications about late payment or financial difficulty. The strength of your defence depends on what those records show.
2. Get legal advice before responding
Liquidators are experienced in preference recovery. Their letters of demand are typically structured to elicit admissions or to pressure a quick settlement. Before you respond or negotiate, get advice on the strength of your position.
3. Assess whether the defence is genuinely available
A realistic assessment of the s 588FG(2) defence requires honest analysis of what you knew — or what a reasonable person in your position would have known — about the debtor’s financial position at the time. This is not always a comfortable conversation, but it is better to have it early than to discover in litigation that the defence does not hold.
4. Consider the running account defence
Separate from the good faith defence, section 588FA(3) provides a “running account” defence where the payments formed part of a continuing business relationship. This can significantly reduce (or eliminate) the net preference amount. Whether it is available depends on the nature of the trading relationship and whether there were new supplies made after each payment.
5. Act within the timeframes
Liquidators face limitation periods for commencing preference proceedings. However, if you fail to respond to a letter of demand, the liquidator may seek court orders. Do not assume that delay works in your favour — early engagement typically produces better outcomes.
Acting for Both Sides: What We See
Boss Lawyers acts for liquidators pursuing unfair preference claims and for creditors defending them. That dual experience gives us a clear view of how these disputes are won and lost.
For liquidators, the 2026 Federal Court decision confirms that the good faith defence is harder to make out than many creditors appreciate. A creditor who had any knowledge of the debtor’s financial difficulty — even informal or partial knowledge — faces a real challenge.
For creditors, the lesson is that an honest, early assessment of the defence is essential. Some creditors have a strong defence. Many do not. Understanding which category you fall into determines whether you litigate, negotiate, or pay.
How Boss Lawyers Can Help
Whether you are a liquidator seeking to maximise estate recovery or a creditor defending a preference claim, Boss Lawyers has the experience to advise you clearly and act decisively.
We act at the serious end of insolvency law. We do not provide generic advice — we analyse your specific facts, give you a frank assessment of your position, and develop a strategy that reflects the commercial realities of your situation.
Contact Mark Harley, Principal Solicitor, on 1300 267 711 or visit bosslawyers.com.au to discuss your matter.
This article is general information only and does not constitute legal advice. The law summarised above applies to Australian companies under the Corporations Act 2001 (Cth). You should obtain advice specific to your circumstances before taking any action.
