Preference Claims

Companies that are struggling to pay their debts often request entering into payment arrangements with their creditors in order to sustain a cash flow. Creditors who accept these payment arrangements need to realise there are implications in accepting these part payments if the struggling company is placed into liquidation generally within six months of receiving those part payments.

The liquidator has the legal right to recover some of those payments for the benefit of all creditors.

Essentially, the creditor is seen to have received an “unfair preference” if they receive payment of some of their debt ahead of other creditors.

When a liquidator seeks to recover these unfair preferences from creditors, it is called a preference claim. If a creditor refuses to repay the money demanded by the liquidator, the liquidator can seek a Court order to do so. However, it is common for preference claims to be settled out of Court.

The defences available to a creditor facing a preference claim include:

• It was party to the transaction in good faith
• When the transaction occurred, it had no reasonable grounds for suspecting the company was insolvent or would become insolvent as a result of the transaction, and
• It provided valuable consideration as part of the transaction
• the transaction was part of an ongoing business relationship (the running account defence)
  

To find out more about Preference Claims, please contact our office now to speak to one of our Accredited Specialists or Senior Solicitors to discuss what is appropriate in your circumstances.

Call 8197 0105.