What are Unfair Preference transactions?

When a company is in liquidation, the appointed liquidator has the ability to recover ‘Unfair Preference’ transactions made by the company to its unsecured creditors.

The ability of a liquidator to recover ‘Unfair Preference’ transactions helps to ensure that the assets of the company in liquidation are distributed equally among its creditors and that no single creditor receives preferential treatment (unless permitted by law).

Pursuant to section 588FA(1) of the Corporations Act 2001 (“the Act”), a transaction is an ‘Unfair Preference’ given by a company to a creditor of the company if, and only if:

a) The company and the creditor are parties to the transaction (even if someone else is also a party); and

b) 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 debit if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

For an ‘Unfair Preference’ transaction to be ‘voidable’ and thus recoverable by a liquidator, certain conditions, as set out in section 588FE of the Act, must exist.

Generally, an ‘Unfair Preference’ transaction is ‘voidable’ if:

• • The transaction was between the company and its creditor;
  • The company was insolvent at the time the transaction occurred;
  • The transaction occurred within 6 months prior to the date of liquidation;
  • As a result of the transaction, the creditor received more than they would have in the event of liquidation.

When attempting to recover ‘Unfair Preference’ transactions, the burden of proof falls on the liquidator, meaning that they must prove that the abovementioned elements existed at the time any such transaction occurred.

In a future article, I will discuss the various defences available to creditors in the event of an ‘Unfair Preference’ claim being brought against them by a liquidator.

Should you or your client have any queries in relation to ‘Unfair Preference’ transactions or insolvency more generally, please do not hesitate to contact our office for a confidential, obligation free discussion.