A liquidator can demand payment from a creditor or other party who received payments, property or benefits from a company that subsequently enters liquidation. It means that even if you or your business is not in financial difficulty, your assets can be at risk if you trade or deal with a company in liquidation. It means that even if you are owed money by a company in liquidation, the liquidator can seek to recover payments you received before liquidation.
However, unfair preference claims and uncommercial transaction claims can be difficult for a liquidator to prove and there are various defences available to you if a liquidator demands payment from you for such a claim.
What is a voidable transaction?
To protect a company's creditors in liquidation, a liquidator can pursue various claims against creditors or parties who dealt with the company before liquidation to recover money or property for the benefit of creditors.
The two types of voidable transaction claims most commonly pursued by liquidators include unfair preference claims and uncommercial transaction claims detailed under sections 588FA and 588FB of the Corporations Act. While voidable transaction claims for unfair loans and unreasonable director-related transactions are also available to a liquidator, these are less common and generally involve related parties of the company.
If the liquidator successfully proves his voidable transaction claim, the Court may order the party to return to the liquidator the money or property received, or money to the value of the property. Alternatively, the liquidator may agree to settle their claim without the need for Court action.
Unfair preference claims
Trade suppliers need to be aware of the risks of potential unfair preference claims.
Unsecured creditors, in particular trade suppliers, need to be aware of the risks of potential unfair preference claims when dealing with a company they suspect may be insolvent.
If a customer's debt has ballooned and they pay down their debt in the six months before entering liquidation, those payments may be at risk. Steps you take to obtain payment from the customer such as legal demands, stopping supply and entering payment arrangements may be used by a liquidator to recover amounts from you if they can prove the company was insolvent at the time the payments were made to you and you had reasonable grounds to suspect the company was insolvent. Despite a liquidator's assertions, these can be very difficult to evidence and prove to the Court.
For related parties of a liquidated company, the liquidator can pursue unfair preference claims for payments the company makes up to four years prior to liquidation.
What defences are available to unfair preference claims?
While preference claims are intended to ensure that the assets of an insolvent company are distributed equally among its creditors, the law provides a number of defences to protect creditors where they:
- Became a party to the transaction in good faith,
- Did not have reasonable grounds to suspect the company was insolvent,
- Had a valid PPSA security interest in respect of their debt (eg. for retention of title), or
- Transactions were part of an ongoing account for supply and payment.
If you receive a liquidator's unfair preference demand, it is important to seek advice before you respond as things you say may be used against you
An uncommercial transaction claim may arise against you when:
- A company transfers property to you in the two years (four years for related parties) prior to it entering liquidation,
- At a time when it is insolvent, and
- Having regard to the benefit you receive or the detriment to the company, a reasonable person would not have entered into the transaction.
An uncommercial transaction may occur if you receive or purchase property or money from the company to the detriment of it and its creditors, i.e. for less than their fair value. If you are a party to such a transaction, a liquidator may recover from you the property you received, or an amount equal to the difference between the property's value and the price you paid to acquire it.
What defences are available to uncommercial transaction claims?
Uncommercial transaction claims seek to recover a company's property which it transfers when it is insolvent, for the benefit of creditors. However, the law seeks to protect those parties dealing with the company in scenarios where they:
- Became a party to the transaction in good faith,
- Did not have reasonable grounds to suspect the company was insolvent, or
- The transaction was reasonable, having regard to the benefit they received and the value of the consideration they provided for the transaction.
Will these defences work for you?
Our team comprises experienced insolvency professionals who understand what liquidators need to prove to successfully pursue voidable transaction claims. Besides the complexity of such claims, we also understand the commercial and legal factors liquidators need to consider in determining what steps to take in pursuing claims.
If you have received a liquidator's demand, or if you are concerned about your dealings with a company which you suspect may be insolvent, we can assist you to understand the potential risks, as well as the strengths and weaknesses of the liquidator's claim.
From there, we can help you decide what action to take to protect yourself and respond to the claim. If it is appropriate to try to settle the liquidator's claim, we can act for you in negotiating a commercial outcome, or alternatively we can assist you engaging lawyers to defend Court action. It can be a complicated and difficult process, but you may have strong defences to such claims which the team at Cactus Consulting can help you understand.