Unfair preference payment reforms – Aiming for a simpler and fairer process

Regular readers will be familiar with the notion of an unfair preference payment in a liquidation setting. For those unfamiliar with the concept, in simple terms, an unfair preference is a payment or transfer of assets by an insolvent company that gives one creditor an unfair benefit over other creditors.

Payments that are deemed by a Liquidator to be preferential can be recovered, or ‘clawed back’ within certain timeframes before the insolvent company was placed into liquidation. The objective of recovering a preference payment from a creditor in isolation is to impose comparable treatment amongst the greater body of creditors. In other words, it is not just the assets that were on hand when the Liquidator is appointed that are available for distribution, but also those assets that were unfairly dissipated whilst the company was insolvent.  

The unfair preference payment regime has come under scrutiny in recent years, particularly from the construction industry in which sub-contractors work hard to recover amounts owed to them, only to have a Liquidator demand that the funds be repaid at a later point in time.  

In March 2022, the Morrison Government released the details of its intentions to simplify the unfair preference payment regime, aiming to protect creditors who act honestly and at arm’s length prior to a company entering liquidation.

Under the proposed reforms, transactions that either amount to less than $30,000 or are made more than three months prior to the company entering external administration will no longer fall within the reach of a Liquidator to pursue, on the basis that the creditor is unrelated and payments were made in the ordinary course of business. These changes align with the rules applied under the Simplified Liquidation process that commenced in January 2021.

These changes, if picked up by the Albanese Government and ultimately enacted, will allow smaller operators to avoid the distraction and stress of defending a preference recovery action from a Liquidator for, relatively speaking, small amounts of money received during a company’s final months.