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Have you received a preference payment?

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If a liquidator claims that you have received a preference payment, you may be able to rely on section 588FG of the Corporations Act 2001 (Cth) to retain the payment received.

To rely on the statutory defence set out in section 588FG of the Corporations Act 2001 (Cth), you must be able to satisfy all three conditions of the defence. The onus of proving the defences is on the creditor, it is not for the liquidator to disprove them.

What are the conditions of the statutory defence?

A creditor can rely on the statutory defence available under section 588FG of the Corporations Act 2001 (Cth) where it satisfies these three conditions:

  1. The creditor must have given valuable consideration for the payment;
  2. The creditor must have received the payment in good faith; and
  3. The creditor must have had no reason to suspect the insolvency of the company.

When has a creditor given valuable consideration?

In order to satisfy the first condition of the statutory defence, the creditor will have to show that they have given something of value in consideration for reviewing the payment.

If the creditor is:

  • a trade creditor, the supply of goods or services will constitute valuable consideration;
  • a loan creditor, the provision of a loan to the creditor will constitute valuable consideration.

When has the payment been received in good faith?

In order to satisfy the second condition of the statutory defence, the creditor must be able to establish that they have not acted in a manner that indicates they were not acting in good faith (i.e. they were acting in normal trading conditions).

If a creditor:

  • commences proceedings against the debtor;
  • issues a statutory demand for payment to the debtor;
  • ceases supply of the goods or services to the debtor,

they will not be taken to have received the payment in good faith.

Simply put, a creditor cannot force payment from the debtor by any form of threat or action.

When does a creditor suspect insolvency?

In order to satisfy the third condition of the statutory defence, the creditor must not have received (or known of) any information or circumstance that would lead them (or a reasonable person in their position) to suspect that the debtor was insolvent.

Where the creditor did not know, believe or expect that the debtor was insolvent, the creditor will not lose the benefit of this statutory defence where a reasonable person in the creditor’s position would have suspected that the debtor was insolvent.

Given the courts recognise that there is a distinction between short-term cash flow problems and insolvency, whether or not the creditor (or a reasonable person in their position) should have suspected that the debtor is insolvency can be difficult to establish.

Generally, the following are indicators that the debtor may be insolvent:

  • the debtor entered into payment arrangements with the creditor for payment of the debt;
  • the debtor has not paid other parties and the creditor knew of such non-payment;
  • the creditor pursued payment from the debtor to no avail.

What should you do if a liquidator claims a preferential payment?

If a liquidator claims you have received a preferential payment, you should check that:

  • the transaction was entered into within the relevant period;
  • you are (or were) a creditor when the payment was made;
  • you are not a secured creditor;
  • the liquidator can demonstrate that you received an advantage over other creditors by virtue of receiving payment from the debtor;
  • the liquidator can demonstrate that the debtor was insolvent at the time (or before) you received payment; and
  • you are able to satisfy the conditions set out above.

What should you do if a liquidator requires you to refund a payment received?

You should lodge a proof of debt with the liquidator if they claim you have received a preference payment and request that you refund the preference payment.

Click here if you want to know more about Insolvency, Bankruptcy and Restructuring.

How we can help

  • Assist you in the recovery or defence of a preference payment claim
  • Advise on whether you meet the conditions of a statutory defence to a preference payment claim
  • Help you lodge a proof of debt with a liquidator
  • Implement streamlined operations to prevent and minimise insolvency, trading and operating risks
  • Advise on safe harbour arrangements, taxation implications and insolvent trading provisions so that you can protect your company