Question

Question 4

With reference to relevant provisions of the Corporations Act 2001 (Cth), explain the differences between unfair preferences and uncommercial transactions.

Answer 1

Unfair preference claims

Trade suppliers need to be aware of the risks of potential unfair preference claims.

Unsecured creditors, in particular trade suppliers, need to be aware of the risks of potential unfair preference claims when dealing with a company they suspect may be insolvent.

If a customer's debt has ballooned and they pay down their debt in the six months before entering liquidation, those payments may be at risk. Steps you take to obtain payment from the customer such as legal demands, stopping supply and entering payment arrangements may be used by a liquidator to recover amounts from you if they can prove the company was insolvent at the time the payments were made to you and you had reasonable grounds to suspect the company was insolvent. Despite a liquidator's assertions, these can be very difficult to evidence and prove to the Court.

For related parties of a liquidated company, the liquidator can pursue unfair preference claims for payments the company makes up to four years prior to liquidation.

Uncommercial transactions

An uncommercial transaction claim may arise against you when:

• A company transfers property to you in the two years (four years for related parties) prior to it entering liquidation,
• At a time when it is insolvent, and
• Having regard to the benefit you receive or the detriment to the company, a reasonable person would not have entered into the transaction.

An uncommercial transaction may occur if you receive or purchase property or money from the company to the detriment of it and its creditors, i.e. for less than their fair value. If you are a party to such a transaction, a liquidator may recover from you the property you received, or an amount equal to the difference between the property's value and the price you paid to acquire it.

Uncommercial transaction claims seek to recover a company's property which it transfers when it is insolvent, for the benefit of creditors. However, the law seeks to protect those parties dealing with the company in scenarios where they:

• Became a party to the transaction in good faith,
• Did not have reasonable grounds to suspect the company was insolvent, or
• The transaction was reasonable, having regard to the benefit they received and the value of the consideration they provided for the transaction.