Liquidator Preference Claims

It is one of the most unwelcome letters a business owner can open.

On a regular basis, we are seeing many cases where, months ago, a struggling customer finally cleared its overdue account owed to a business. The money was banked, the invoices were closed, the relationship moved on. Then, at a later date, that customer who paid you has gone into liquidation, and now a liquidator has been appointed to that customer's company — and is demanding the money back.

This is an unfair preference claim. It is lawful, it is routine, and it catches out good businesses every week. The supplier did nothing wrong. It simply got paid ahead of everyone else at a time when the customer could not pay everyone.

With companies. Across the construction industry, going into liquidation such as Bathla Group, there will be a domino effect with insolvency appointments running at elevated levels, and the ATO continuing to push non-viable businesses toward the exit. This will result in more suppliers receiving these letters over the next two years. Here is how the regime works, why it is so hard to defend, and — most importantly — what a supplier can do before a customer fails.

The principle: equal treatment of creditors

When a company goes into liquidation, unsecured creditors are meant to share in what is left on a pari passu basis — rateably, cents in the dollar.

That principle would mean little if, in the months before the collapse, the creditors who pushed hardest (or were simply luckiest) could be paid in full while everyone else received a fraction. The unfair preference provisions in section 588FA of the Corporations Act 2001 exist to unwind that.

A transaction is an unfair preference where:

• the company and the recipient are parties to it, and the recipient is a creditor of the company;
• it relates to an existing (antecedent) debt; and
• it results in the creditor receiving more than it would have received had it proved for that debt in the winding up.

To be recoverable, the preference must also be an insolvent transaction — entered into when the company was insolvent, or one that caused it to become insolvent — and it must fall inside the relevant clawback period.

Notice what is not required. The liquidator does not need to prove the creditor knew the company was insolvent, acted dishonestly, or pressured anyone. Intent is irrelevant to establishing the claim. Knowledge only becomes relevant in the defence — and there, the burden sits with the creditor.

The clawback periods

The periods run backwards from the relation-back day — generally the date the winding-up application was filed with the court or, where the company went into administration first, the date the administrator was appointed.

• Unrelated creditors: 6 months before the relation-back day
• Related entities (directors, associated companies, family members): 4 years
• Transactions intended to defeat creditors: 10 years

A liquidator generally has three years from the relation-back day to commence proceedings (with some scope for extension, and longer where the liquidator was appointed late in that window). So a payment received two and a half years ago can still be live.

Why "we were just paid what we were owed" is not a defence

This is the conversation I have most often with business owners on the receiving end of a demand. The instinct is that receiving payment of a genuine debt cannot be unfair.

But the regime does not ask whether the debt was genuine. It asks whether the creditor ended up better off than the creditors who were not paid. If unsecured creditors receive 5 cents in the dollar and you received 100 cents, you were preferred — regardless of how legitimate the invoice was.

Two High Court decisions in early 2023 made the position harder for creditors:

• Metal Manufactures Pty Ltd v Morton [2023] HCA 1 — a creditor cannot use the statutory set-off in section 553C to reduce a preference claim by the amount the company still owes it. You cannot net off your unpaid invoices against the money the liquidator is clawing back.
• Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 — the "peak indebtedness" rule, which allowed liquidators to choose the high point of a running account as the starting point for their claim, was rejected. That was a genuine win for creditors, but it also confirmed the running account analysis must look at the net effect of the whole continuing relationship.

Running accounts: the most important concept for trade suppliers

Most trade suppliers deal on a running account — goods or services go out, invoices issue, payments come in, and the cycle repeats. Section 588FA(3) treats all transactions forming part of that continuing business relationship as a single transaction.

The practical effect is that the liquidator is not entitled to claim every payment received in the six months. The claim is limited to the net reduction in the debt across the relationship during the clawback period.

A simple example. At the start of the six-month window, a customer owes a supplier $80,000. Over the following months the customer pays $200,000 and the supplier delivers a further $170,000 of goods on credit. At liquidation, the balance owing is $50,000.

The net reduction is $30,000 ($80,000 down to $50,000). That is the exposure — not the $200,000 of payments received.

The lesson is counter-intuitive. The supplier who keeps trading — continuing to supply against each payment — usually has a much smaller preference exposure than the supplier who presses for payment and then stops supply. Cutting off a customer while collecting the arrears is the textbook way to crystallise the full amount as a preference.

The defence is narrow, and your own file can sink it

Section 588FG(2) provides a defence where the creditor can prove all of the following:

• it received the payment in good faith;
• at the time, it had no reasonable grounds for suspecting the company was insolvent — and a reasonable person in its circumstances would have had no such grounds; and
• it provided valuable consideration or changed its position in reliance on the payment.

The second limb is where most defences fail. The test is objective: not what you actually suspected, but what a reasonable person in your position would have suspected given what you knew.

Courts look at the ordinary signs of financial distress, and creditors' own records routinely prove them. Common red flags include:

• payments well outside trading terms, or a history of repeated late payment
• email requests by the debtor for extended terms or instalment arrangements on overdue amounts
• round-sum payments that do not match particular invoices
• dishonoured payments, or promises of payment that are not kept
• letters of demand, statutory demands or legal proceedings issued by you or other creditors
• the customer telling you it is waiting on cash, refinancing, or "sorting out the ATO"
• tax debt disclosed on the customer's credit file, or other creditors placing it on stop supply

If your credit controller's notes record a debtor admitting cash-flow problems, or your emails threaten to stop supply unless the arrears are cleared, the defence is very difficult to run. The harder a supplier had to chase, the more likely a court is to find it had grounds to suspect.

Preventing preference exposure before it arises

Preference risk is largely determined by decisions made before a customer fails. The following measures and actions should be taken by suppliers extending trade credit.

1. Know who you are trading with — and keep checking.

Credit checks at onboarding are standard. Ongoing monitoring is not, and it should be. ASIC alerts, credit-bureau monitoring (including disclosed tax debts), PPSR searches and court-list searches cost little compared with a clawback.

2. Keep terms tight and enforce them early.

Short payment terms, credit limits that are actually applied, and a consistent stop-supply policy limit how much debt can build. A preference claim can only ever be as large as the debt you allowed to accumulate.

3. Move distressed customers to payment in advance or cash on delivery.

A payment for goods delivered at the same time — or paid for beforehand — is not a payment of an existing debt, so it is not a preference. If a customer's position deteriorates, switching new supply to prepayment or COD protects you going forward. Be careful about tying new supply to repayment of old arrears: that is the pattern most likely to create a claim.

4. Think about the running account before you stop supply.

Where commercially sensible, continuing to supply against payments keeps the net reduction small. This is a judgement call — continuing supply to a business that is going to fail adds to your unsecured exposure — but it should be a deliberate decision, not a reflex.

5. Be wary of informal payment plans on old debt.

An instalment arrangement over overdue amounts is a strong signal that the customer cannot pay its debts as they fall due. Every payment received under it is a likely preference if the customer fails within six months. If a plan is unavoidable, pair it with security.

6. Treat your credit files as future evidence.

Train credit staff to record facts accurately. This is not about avoiding knowledge — wilful blindness does not help the defence — but about not creating speculative or exaggerated records of distress that a liquidator will later rely on.

7. Understand where the money comes from.

A payment made from a director's own funds (rather than company money) is generally not a payment by the company and not a preference. But labels do not control substance; money routed through the director from company accounts is still company money.

PPSA Taking security: the strongest protection of all

An unfair preference claim only bites because the creditor is unsecured. A creditor holding a valid, properly perfected security interest is generally not "preferred" by being paid — it would have been paid from its security in the winding up anyway.

For any ongoing supply agreement, security should be considered at the outset, not when the account is already overdue.

Retention of title — and why registration is everything

Most supply terms include a retention of title (ROT) clause: ownership of the goods stays with the supplier until they are paid for. Under the Personal Property Securities Act 2009 (PPSA), an ROT clause is a security interest.

That has a consequence many suppliers still do not appreciate. If the security interest is not perfected by registration on the PPSR, it vests in the customer on liquidation. The goods become the company's property, available to all creditors, and the supplier becomes an ordinary unsecured creditor — with title clause in hand and nothing to enforce it against.

Getting it right means:

• Register as a purchase money security interest (PMSI) to obtain super-priority over the customer's other secured creditors, including its bank. For goods the customer holds as inventory, the registration must be in place before the customer takes possession. For other goods, there is a window of 15 business days after possession.
• Register promptly. Under section 588FL of the Corporations Act, a security interest registered more than 20 business days after the security agreement came into force, and within six months before the customer's insolvency, can vest in the company. Late registration is close to no registration.
• Use the correct grantor details. For a company, that is generally its ACN; for a trustee acting in that capacity, the trust's ABN. A registration against the wrong identifier can be seriously defective and therefore ineffective.
• Choose the right collateral class and make sure the registration matches what the agreement actually covers.
• Make the terms enforceable. The ROT clause must actually form part of the contract — signed credit applications and terms accepted before supply, not terms printed on the back of an invoice after delivery.

Other forms of security

Depending on the size of the account and the risk, suppliers should consider:

• Personal guarantees from directors. Well-drafted guarantees include a clause reviving the guarantor's liability if the supplier is forced to repay a preference — so the money clawed back by the liquidator can be pursued from the director.
• General security agreements over the customer's assets. Be aware that under section 588FJ, a circulating security interest granted within six months before the relation-back day is void except to the extent of new value provided — security taken over an existing debt from a customer already in trouble may not survive.
• Real property security, such as a mortgage or a charge supporting a caveat, where a director or associated entity owns property.
• Deposits, bank guarantees or security bonds, which sit outside the preference regime because the supplier holds the funds itself.
• Trade credit insurance, which does not prevent a claim but transfers the loss.

The common thread is timing. Security taken at the start of a relationship, for new value, and properly registered is robust. Security scrambled together once the customer is already in difficulty is exactly what liquidators look to set aside.

If a preference demand arrives

Do not pay it on receipt, and do not ignore it. Liquidators' demand letters often claim the full sum of payments received; the defensible amount is frequently much lower. Check:

• whether the payments fall inside the clawback period
• whether the liquidator can actually prove insolvency at the time of each payment
• whether a running account applies, and what the true net reduction is
• whether the good faith defence is genuinely available on your records
• whether you are a related party (which changes the period, but not the test)

Many claims settle commercially once the numbers are properly tested. If you do repay, you can prove in the liquidation as an unsecured creditor for the amount repaid.

On reform: the Government released its response to the 2023 Parliamentary Joint Committee inquiry into corporate insolvency on 6 August 2026, but preference reform is not imminent. Most recommendations have been pointed toward the Productivity Commission's business dynamism inquiry, which does not report finally until May 2027. Suppliers should plan on the current law applying for some time yet.

What this means for directors and their advisers

For suppliers, preference risk is a credit-management issue first and a legal issue second. Tight terms, monitored customers, and properly registered security will do more than any defence argued after the event.

For directors of companies under pressure, the regime cuts the other way. Choosing which creditors to pay in the months before an appointment — particularly related parties, or creditors you have personally guaranteed — is something a liquidator will scrutinise closely, and the related-party clawback period is four years, not six months.

Get the Right Advice

At BTD we work with suppliers on trading terms, PPSR registration strategy and responding to preference demands, and with directors and their accountants when a business is under financial pressure and the order of payments starts to matter.

If either side of this issue is on your desk, get in touch — the earlier the conversation, the more options exist.