Understanding Unfair Preferences: A Recent Case

An unfair preference is a payment made by a company in the six months leading up to its liquidation (if unrelated) when a creditor receives more money than it should have fairly received under the liquidation process.

An unfair preference claim is a legal action made by a liquidator appointed to the company with the goal of ensuring that all creditors are treated equally.  Unfair preference claims would be the most common form of voidable transactions pursued by liquidators.

If an unfair preference claim is successful, the money is placed into a pool from which the liquidator pays out all creditors.

The case of Pacific Plumbing Group Pty Ltd

In Pacific Plumbing Group Pty Ltd (in liquidation) [2024] NSWSC 525, the Supreme Court of NSW considered the issue of unfair preference payments in the context of third party payments.  More specifically, it examined whether a payment made by a third party to a creditor on behalf of the Company could be considered as being "from the Company" for the purposes of an unfair preference claim.

When inspecting the company’s books and records, the liquidator appointed to handle the Pacific Plumbing Group liquidation identified a payment of $13,724.55 made to a creditor called Syfon Systems Pty Ltd prior to liquidation, however there was no corresponding transaction recorded in the company’s bank statements.  There was however another transaction on the same day, made by Mainbrace Constructions to the company for the exact same amount.  This transaction was recorded as an invoice payment received from Mainbrace.

The liquidator characterised the transactions as a payment made by Mainbrace to Syfon Systems on behalf of the company, alleging that Mainbrace was a debtor of the company and the effect of the Syfon payment was to reduce the size of the debt payable to the company at the relevant time.

The liquidators then made a claim against Mainbrace and Syfon for recovery of the Syfon payment, on the grounds that it was an unfair preference payment.

The court found that a transaction can be made up of related dealings including the third parties, however for a payment to be "from the Company," it must involve the Company’s own money or assets and diminish the Company’s assets available to creditors.

Ultimately, the Court decided that there was insufficient evidence to conclude that Mainbrace was a debtor of the Company or that the transaction reduced the Company's assets, and as a result the claim of unfair preference failed.

What does this result mean?

This case highlights that a liquidator should establish each element of an unfair preference claim with clear evidence, including evidence of a payment arrangement and its impact on the Company’s financial position if the payment was made by a third party. 

If you or your client receives an unfair preference demand, your first step would be to check that this evidence has been provided, as its absence may indicate a flaw in the claim, and contact Smith Hancock for advice and assistance.

To further assist in understanding what constitutes an unfair preference payment ARITA has released an updated information sheet on unfair preferences:

https://arita.com.au/common/Uploaded%20files/Information%20sheets/Understanding%20Preferences_1.pdf

This information sheet includes what information should be provided by the Liquidator when making an unfair preference claim, the common defences available, and an overview of the creditor’s options.

If you have any questions about unfair preference payments, or the liquidation process in general, contact Smith Hancock on 02 9689 2266.