When dealing with difficult debtors are you or is your company having to;
- Enter into payment plans?
- Make stop work threats?
- Threaten commencing legal action? or
- Accept payments outside the normal trading terms?
These might be perceived as normal industry practice in order to get paid, but, as a creditor you should know the real risks that moneys received in these circumstances could very well be clawed back and repaid to a liquidator.
It is an affronting prospect that a creditor has to hand back monies earned for hard work to a company that may still owe them even more money. The classic examples are sub-contractors that have cash flow problems themselves having to pay back money to the larger building company when liquidators are appointed.
If a creditor receives a payment from a company within 6 months of that company going into liquidation (winding up) then that payment could be deemed an Unfair Preference Payment under the Corporations Act. It is deemed to be “Unfair” because the creditor has received more than it would have as a normal unsecured creditor in the winding up of the company.
There are Defences available. A creditor may be able to prove that it was a party to the transaction in good faith and had no reasonable grounds to suspect that the company was trading whilst insolvent (Good Faith Defence) or that it was part of an ongoing business relationship (Running Account Defence).
As with any potential legal problem prevention is the best cure. To minimise the risk of a later Preference Claim individuals and companies should;
- Listen to your industry if you hear that a company is not paying its bills on time or struggling do not supply them;
- Request money up front or at the time of supply;
- Have clear terms of trade and stick by them;
- For larger clients offer to enter a running account whereby an agreed monthly amount is paid.
If you have been the subject of an Unfair Preference Claim by a liquidator contact Everingham Solomons dispute resolution team. Our team is committed to providing the most time and cost efficient outcome when advising on Unfair Preference Claims or your debt collection needs because Helping You is Our Business.
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