It's an unfortunate situation that those who provide a product or service often find themselves in. They've done the work, provided a product, invoiced for the work or product and are therefore entitled to be paid. It can therefore be quite a shock to receive a letter from a liquidator demanding back payment of the money due to an unfair preference.

Madgwicks is pleased to be presenting our eight-part series on unfair preferences as we delve into the practical realities of dealing with an unfair preference.

In our first article, we will provide an overview of the basics.

What is an unfair preference?

When a liquidator is appointed to a company, they have powers that enable them to make claims against parties in an attempt to recover money for the benefit of the creditors of the company in liquidation.

The idea behind the preference regime is that where one creditor had been paid and others haven't, it has been ‘preferred' which isn't fair. As such, the money they received should be returned and go into the pot to be divided up between all of the creditors.

What period of time prior to their appointment can a liquidator claw back transactions?

Generally, a voidable transaction is a transaction (usually a payment) that is made in the six months prior to an external administrator being appointed, or a winding up application being made with a Court. This is known as the ‘relation back period'.

The date on which the relation back period begins (on the relation back day) depends on how the liquidator was appointed and you should seek advice in this regard.

You should bear in mind that there are other types of claims that a liquidator can make to claw back transactions that extend beyond this six month period.

How long does a liquidator have to bring a claim for an unfair preference?

A liquidator has the earlier of the following to bring a claim for an unfair preference (unless they have a Court order for a longer period of time):

  • a) three years after the relation-back date; or
  • b) 12 months after the first appointment of a liquidator in relation to the winding up of a company.

Are there any defences to an unfair preference?

This series will cover the defences in greater detail in following articles, however generally the following may be available depending on your circumstances:

  • a) The good faith defence which includes the following elements:
    • i) the creditor provided valuable consideration for the transaction or changed their position in reliance on the transaction; and
    • ii) the creditor received the benefit of the transaction in good faith; and
    • iii) at the time of the transaction:
      • the creditor ‘had no reasonable grounds for suspecting that the company was insolvent'; and
      • a reasonable person in the creditor's circumstances would have no reason for suspecting the company's insolvency.
  • b) Running account defence – this relies upon a continuing busines relationship between the parties.
  • c) Set off defence - amounts due to you may be set off by amounts owing by the insolvent company to you.

Lessons

There is a huge amount of case law regarding the different elements of an unfair preference claim and new cases are being handed down frequently. It is therefore important that you always seek legal advice for the best result when faced with an unfair preference claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.