legal tip 63: Preference payments - being asked to give back money that was owed to you

Preference payments - being asked to give back money that was owed to you


Imagine you are owed money by a company. It may be for supplies given or for work performed or a number of other reasons. The company is slow in paying but you keep pestering them and they start to pay you some money owed on a few different transactions but the company enters liquidation before they can give you the rest.


You lose out, but write it off as a bad debt. Then you are contacted by the liquidator who asks you to give back the money that was paid to you because it was a voidable transaction.


Liquidators have the power to set aside certain transactions under part 5.7B of the Corporations Act.


In this instance the money may be clawed back as you were given preferential treatment over other creditors. Under the law all unsecured creditors should be treated equally

 

This makes sense. Say my brother's company owes me $50k and is about to go under. He could pay me out at the expense of all the other unsecured creditors; or if my company owes me money, it would stop the company paying the debts that favour its directors or shareholders.

However it seems harsh for the little business owner or tradie who just wants to get paid.

Is that about right?

 

We do this for liquidators on a speculative basis. You don't want to be involved in this if you can, painful and not your fault.

 

Yes. It is meant to be fair, but can be unfair to some.

I guess the moral of the story is to get paid asap as the claw back clock starts ticking sooner.

 

This issue can demonstrate importance of people owed money through trading terms using correct processes to ensure they do have a preferential right recognised in law:

- Lien over unpaid merchandise that is unpaid for
- Security of Payments Act for contractor debts in your state

etc....Demonstrates value of good legal advice and terms of supply. I had a client owned substantial $ when a hardware chain collapsed. Their terms permitted access to site to repatriate unsold stock held by the liquidator.