Unfair preferences

What it covers

A payment or other transaction with an unsecured creditor is an unfair preference if it left that creditor better off than it would have been by proving for the debt in the winding up. The liquidator can recover it if it was also an insolvent transaction made inside the window in s588FE.

"…the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company…"s588FA(1)(b)

1. 1The company and the creditor are parties to the transaction

   It doesn't matter if someone else is also a party.

   s588FA(1)(a)
2. 2It concerns an unsecured debt

   A secured debt counts as unsecured to the extent the security doesn't cover it.

   s588FA(1)(b), (2)
3. 3The creditor received more than it would in the winding up

   Compare what the creditor got with what it would receive if the transaction were set aside and it proved for the debt. A court order or agency direction requiring the payment doesn't change this.

   s588FA(1)(b)
4. 4It was an insolvent transaction

   The company was insolvent when the transaction was entered into or given effect to, or became insolvent because of it.

   s588FC
5. 5It falls inside the window

   The 6 months ending on the relation-back day, or after that day up to the day the winding up began. 4 years if a related entity is a party, and 10 years if the company's purpose was to defeat, delay or interfere with creditors.

   s588FE(2), (4), (5)

Running accounts

Where the transaction is an integral part of a continuing business relationship, such as a running account, all the transactions in the relationship are treated as a single transaction. Only the net effect can be an unfair preference.

Defence

No order is made against a person who became a party in good faith, had no reasonable grounds to suspect insolvency (and a reasonable person in their position would have had none), and gave valuable consideration or changed their position in reliance on the transaction (s588FG(2)). Paying a tax debt counts as valuable consideration (s588FG(3)).

Cases