Preference Claims – keeping the money

If a company you are doing business with goes into external administration (administration or liquidation) then all of your transactions in the preceding months (or even years) go under the microscope of forensic accounting.

Amounts that you received from that company may be clawed back if they are “preferential payments”. This means that you will be required to repay amounts for redistribution to all creditors. The theory here is that you had an unfair advantage over other creditors and that the money you received should be put back in the kitty and distributed to all creditors proportionately (including you).

If you are not “related” to the company, administrators and liquidators can look back 6 months from the date of appointment. If you are a related party (as defined in the Corporations Act) they can go back 4 years.

The question is then, how do you protect your business from such claims?

Here are our four tips:

  • Register your interest (in being paid for goods) on the Personal Properties Securities Register. If you do that, you are a secured creditor. Preference claims can only be made against unsecured creditors.
  • Keep across solvency issues of your customers as best you can. For a transaction to qualify for a preference claim the company must have been insolvent or would become insolvent because of the transaction. Signs of financial distress in customers should not be ignored. It is a defence if you had no reasonable grounds for suspecting the insolvency of the company or if you received the payment in good faith. This is seemingly contradictory because the more diligent you are about a company’s financial health, the more likely you had reason to think that it might have been insolvent.
  • There must be a debtor – creditor relationship for a preference claim. Consider reverting to cash-on-delivery (in which case you cease to be a creditor), especially if you have concerns about the customer’s solvency.
  • There is a defence if you gave valuable consideration for the payment. This means supply of goods or services to the value of the payment received. Make sure payments received are linked to a particular supply provided.

We defend many preference claims successfully but the most successful strategy is always prevention.