Preferential Payments

Posted on 11th April 2016 by Christabelle Harris

Unfortunately, due to the current economic environment and the large number of businesses now facing liquidation, our office is seeing increased cases of liquidators contacting our clients in relation to the receipt of  ‘preferential payments’ .

Preferential payments involve transactions that favour one creditor at the expense of other creditors whilst the company making the payment is insolvent. The main pool of creditors that are affected by preferential payments are unsecured creditors. If you are an unsecured creditor and receive a payment from a company ahead of other creditors during a time that company was trading insolvent, the liquidators can demand the repayment of funds received.

For the liquidator to claim a preferential payment that has been made to your business, they must be able to prove the following:

• A transaction was entered between your business and the company during a time of insolvency;
• The transaction occurred during the statutory period (generally six months for non-related parties) before liquidation commenced;
• The transaction gives you an unfair advantage over other unsecured creditors and;
• You suspected, or had reason to suspect, the company was insolvent (i.e. extending trade terms or payment arrangements being offered).

The best way to avoid an unfair preference claim is to take out security where possible, demand Cash on Delivery (COD) or up-front payments. Unfortunately this isn’t always possible when doing business especially in the current environment of restricted cash flow.

If you are sent a preferential payment claim from a liquidator, please contact our office to discuss the options available.