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Preferential Payments

Accepting payments from a company in Liquidation

When a company goes into liquidation, it is the obligation of its liquidators to inspect the financial records of the company. They have the right to investigate payments made by the company and to determine whether any of these payments are unlawful or otherwise unauthorised. An example of an unlawful payment is where the payment is a “voidable transaction” under the Corporations Act.

What is a Voidable Transaction?

Put simply a voidable transaction is where you received:

  • Payment at the time the company was insolvent,
  • An “unfair preference” because of this payment;
  • Payment during the 6 months ending on the date the winding up began. For example if the company was wound up on 1 January 2015, payments received between 1 July 2014 and 1 January 2015 will be vulnerable.

If the liquidators suspect a payment is a “voidable transaction”, they have the power to commence recovery action against you for the repayment of monies received.

Defending Recovery Proceedings

You may be able to defend the proceedings in some circumstances, for example if you can establish that you:

  • Received the payments in good faith; and
  • Did not suspect (or know) that the company was insolvent at the time payments were received; and
  • That a reasonable person in your position would not have suspected (or known) that the company was insolvent at the time the payments were received.

Risk Reduction

The best ways to minimise the risk of liquidators pursuing an action against you is to:

  • Refuse to accept payment if you know or suspect that the debtor company is insolvent; or
  • Make your own enquiries as to the solvency of the company before deciding whether to accept payment. Ensure all documents as to these enquiries are retained.

If payment is accepted, you are also accepting the risk of the liquidators commencing recovery proceedings against you or at least demanding repayment.

At Watkins Tapsell, we have had a lot of experience in dealing with liquidators on a variety of different issues and claims, including “voidable transactions” and “preferential payments”.

Should you require any assistance in your dealings with debtors and/or liquidators do not hesitate to contact the Commercial Litigation team.