A preference payment refers to a transaction where an insolvent company pays one or more of its creditors in a way that gives them an advantage over other creditors. This usually occurs shortly before the company enters insolvency. The law scrutinises these transactions because they can unfairly favour certain creditors over others. If identified as preferential, these payments may be reversed to ensure equitable distribution of assets among all creditors during the insolvency process. Preference payments are a key focus in insolvency proceedings to maintain fairness and legal compliance. 

If you receive a preference payment demand in Australia, it typically means a liquidator has identified that your company received payments from another company prior to its liquidation which are deemed unfair to other creditors. The liquidator is responsible for distributing assets equitably among creditors, and these demands are aimed at recovering funds from transactions considered ‘unfair preference payments’. You have the option to settle these claims without going to court, especially if you can establish that the payment was made in good faith or for a valuable exchange. There are defenses available, such as proving good faith or lack of knowledge about the company’s insolvency. To protect against future claims, consider registering security interests under the Personal Properties Securities Act 2009.  

If you receive an unfair preference payment demand in Australia, it’s important to consider your response carefully. To defend against the claim, you may utilise defenses such as: 

  1. Good Faith: Argue that you didn’t know or suspect the company was insolvent when you received the payment, and that you provided something in return for the payment. 
  2. Running Account: This applies if there’s a continuing business relationship with the company and involves assessing the net indebtedness over time. 
  3. Secured Creditor: Claim that you are a secured creditor, for instance, through ‘retention of title’ clauses in supply agreements. 

Be aware of any unusual payment patterns, such as late payments or lump sum payments, which might indicate insolvency. It’s also advisable to seek legal advice for a more tailored response to your specific situation.