In Australian insolvency law, unfair preference payments are of critical importance. These aim to provide fairness when paying creditors during a company’s financial distress.
To ensure your company avoids these potential financial pitfalls, read this expert guide to understand the legislation and how to remain compliant. You can also call our expert team anytime for a free consultation about opening.
What is an Unfair Preference Payment?
These occur just before a company enters business liquidation. If creditors are paid in a way that disadvantages other creditors, then the company has committed an unfair preference payment.
In other words, it’s as if your company puts the importance of one creditor over another. The payment is unfair if payment:
- Is made to an unsecured creditor.
- Results in creditors receiving more than they should.
- Is made during company insolvency.
- Is within the statutory clawback period (six months prior to liquidation)
If your company faces liquidation, the liquidator will review your trading history and credit payments. During this analysis, if they find you have paid one creditor preferentially, then they will move to recover the money. This is so all creditors may be paid appropriately.
Understanding the Legislative Framework
Company directors may be liable for these payments to the ATO (Australian Tax Office) under Section 588FA of the Corporations Act 2001 (Cth). A liquidator can claim this against your company, but to do so, they have to demonstrate if a:
- Transaction has occurred between you and a creditor.
- Creditor received more than they normally would.
- Transaction took place within the six-month period before liquidation.
- Company was insolvent at the time.
Your company can defend against unfair preference payments in the Corporations Act. There are three types of defence.
1. Good Faith Defence
This is when a creditor receives payment in good faith. In this instance, they wouldn’t know a company was insolvent.
2. Running Account Defence
A process where payments are part of an ongoing business partnership. This may result in payments favouring one creditor over another.
3. Set-Off Rights Defence
Where a creditor offsets debts your company owes. If you owe capital to a creditor, they may be entitled to reduce the amount they repay to the liquidator. If there are mutual debts between parties, it allows for the balancing of accounts equitably.
Legal Consequences of Unfair Preference Payments
If you commit an unfair preference payment and a liquidator challenges it, there can be significant consequences. A court may order a creditor to repay the amount to the liquidator, which would then be distributed amongst all creditors.
If this expectation isn’t met, there may be consequences. Directors may be held liable, which may result in:
- Repayment orders to cover funds or all creditors.
- Covering interest on repayments
- Funding for legal costs
- Director penalties for fraud or misconduct
You may be personally liable if you knowingly overpay one creditor over another as a director.
How to Avoid Making Unfair Preference Payments
There are strategies you can use to ensure you correctly make payments to your creditors. These will reduce the risks, protect your professional standing, and protect your company:
- Use a strict credit risk assessment policy to monitor all payments
- Regularly evaluate the financial health of debtors
- Ensure you have a transparent and fair transaction record
Importantly, you should seek expert legal advice if you have concerns about overpaying or underpaying creditors. A free initial consultation can help you quickly ascertain how to proceed and reduce personal liability risks.
Concerned About Creditor Payments? Act Now!
If you have any concerns regarding payments to your creditors, or are concerned you’ve committed an unfair payments, contact our expert team now.
We’ve helped hundreds of companies overcome financial distress. With our empathy–first approach and a free opening consultation, you can get your business back on track with our assistance.
Can Someone Be Personally Liable for Unfair Preference Payments?
Yes. Under Australian law, a director may be held personally liable in certain circumstances. This means the director would have to repay the amount to a liquidator. If a director knowingly makes preferential payments to a creditor, especially in the case of insolvent trading, this may result in personal liability.
