GM Advisory Logo

Unfair Preference Claims

Liquidators should not use scattergun approach

Unfair preferences are important recoveries for liquidators because in many cases they are all that can be used to pay the liquidators’ costs. Creditors should only return the money if the liquidators’ claim is legitimate – don’t become a victim of the ‘scattergun’.

Liquidators are not supposed to pursue preferences by throwing out the net and seeing what comes in.  I call this the scattergun; where the liquidator sends letters demanding all creditors who have received a payment from the company in the previous 6 months return that money to the Company.  This approach can be inappropriate where the liquidator has not undertaken any inquiry to determine whether the substantive elements of an unfair preference can be established.  A point seemingly not missed in ASIC’s recent newsletter to liquidators where they were reminded about the judicial remarks of Justice Lee in the matter of Worldwide Specialty Property Services Pty Limited (in liq) v Worldwide Specialty Property Services Pty Limited (in liq) [2017] FCA 687 [at paragraph 68]:

A liquidator holds an important statutory office. It is a matter of concern that any liquidator would make demands of third parties for the recovery of monies when the liquidator did not have, at the time the demand was made, a proper basis for making that demand. Notwithstanding that [the liquidator] was motivated by the laudable motive of seeking to maximise the recovery of monies for creditors, this is insufficient to justify demands being made in the hope that a third party will effectively accept the demand as a ‘fair cop’. If this is a common practice then, in my view, it should be deprecated. A demand should only be made by a liquidator if the liquidator believes, on reasonable grounds, that there is a proper legal and factual basis to make such a demand.

See ASIC’s list for defending Preference Claims

The comments highlight that a demand for a voidable preference should only be made by a liquidator where they believe, on reasonable grounds, that there is a proper legal and factual basis to make such a demand.

ASIC has recently updated Information Sheet 45 Liquidation: A guide for creditors to include an overview of defences available to creditors who receive a demand.

See more about Preferential Payments here