Our Insolvency area is led by Bill Morgan, who has over 20 years experience in all facets of insolvency matters and commercial litigation services.
Insolvency Litigation Services
Morgan Mac Lawyers acts in insolvency litigation services for creditors and debtors in numerous situations relating to corporate and personal insolvency including:
- Acting for creditors in bankruptcy proceedings against a debtor.
- Applications to set aside a bankruptcy notice or to oppose a creditor’s petition.
- Applications for annulment of a bankruptcy.
- Preparing and serving statutory demands on a corporate debtor.
- Applications to set aside a statutory demand.
- Acting for a corporation opposing a winding up application.
- Acting in winding up proceedings for a creditor.
- Acting in unfair preference claims commenced by a liquidator or a trustee in bankruptcy.
- Acting for a director of a company served with a notice by the Australian Taxation Office in respect of a company’s tax liabilities.
Facing an unfair preference claim
A creditor faced with a claim by a liquidator or a trustee in bankruptcy for return of monies paid to the creditor on the grounds that the payment was an unfair preference may be defended by the creditor on several grounds of defence.
A payment received by a creditor is an unfair preference if the payment confers a preference on the creditor in respect of an unsecured debt over other unsecured creditors of the company. In other words, an unsecured creditor if placed in a better position than the creditor would be if it lodged a proof of debt in the bankruptcy without receiving the payment, has received an unfair preference.
The payment must be made at a time when the debtor is bankrupt or insolvent or the payment makes the debtor bankrupt or insolvent.
If the payment is made during a certain period prior to a person committing an act of bankruptcy (if an individual) or prior to the winding up of a company, then it may be an unfair preference subject to certain defences the creditor who is facing an unfair preference claim concerning the payment may argue in Court.
The first thing to consider is whether the debt that was paid is an unsecured debt or a secured debt. If the debt is secured, then the payment is not an unfair preference.
There are various forms of security, and you should seek advice if you are unsure whether your debt is secured.
A liquidator’s claim from fair preference
If debt is unsecured that then there are defences available to the creditor pursuant to the Corporations Act.
The grounds of defence pursuant to the Corporations Act require the creditor to show that:
- The creditor received the payment from the insolvent company in good faith.
- At the time of the payment the creditor had no reasonable grounds to suspect that the company was insolvent, or it became insolvent, by making the payment to the creditor.
- A reasonable person in the circumstances of the creditor would have had no grounds to suspect the company was insolvent or that the payment would make the company insolvent.
- The payment was provided in exchange for valuable consideration provided by the creditor.
If you are faced with a claim by a liquidator to repay monies on the grounds that you received an unfair preference you should immediately seek legal advice.
The running account defence
A running account defence to a preference claim may be maintained if there is a continuing business relationship between the creditor and the debtor and the creditor can show the payment was made by the debtor to secure the future supply of goods and services rather than to reduce a past increasing debt.
Deciding whether any payment by the debtor to the creditor is to secure future supply of goods and services or merely to reduce past debt may be difficult to prove.
Trustee in bankruptcy claim for recovery of an unfair preference
If an unsecured creditor receives a preference payment from a debtor who is not a company the trustee in the debtor’s bankruptcy may apply to set it aside under section 122(1)(b) of the Bankruptcy Act.
There is a statutory defence available to the unsecured creditors. To successfully argue the statutory defence the creditor must show:
a. That the transfer was in the ordinary course of business;
b. That the creditor acted in good faith in the transaction;
c. The creditor gave at least fair market consideration for the payment made.
How recovery of an unfair preference commences
A trustee in bankruptcy or a liquidator will usually start the process of recovering an unfair preference by sending a letter seeking recovery of the unfair preference payment and giving an explanation to the creditor why the liquidator believes that the payment was an unfair preference over other creditors.
It is important that you seek legal advice as soon as you become aware that you may be subject to an unfair preference claim.