Unfair Preference: What You Need to Know

A company can be guilty of an unfair preference if it gives a creditor a payment or advantage over another creditor.

This can happen in various situations, such as when a company pays one creditor in full while leaving another creditor unpaid.

A company may also be guilty of an unfair preference if it allows a creditor to take control of its assets in a way that benefits the creditor more than other creditors.

This can lead to a situation where one creditor gets paid in full, while others are left with nothing.

For your interest: Unsecured Creditor

A preference is essentially a decision made by a person or organization that influences how assets or property are distributed among creditors or stakeholders.

In the context of unfair preference, a preference is created when a debtor pays a creditor more than the minimum amount required, or gives them a new or more favorable security interest.

A preference can be created in various ways, such as by making a payment to a creditor that is not necessary or by giving them a new security interest.

The key factor in determining a preference is whether the payment or security interest was made at a time when the debtor was insolvent, which means they were unable to pay their debts as they became due.

Insolvency is a critical factor in establishing a preference, as it indicates that the debtor was not able to meet their financial obligations.

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Unfair preference laws vary by jurisdiction, with different countries and states having their own specific rules and regulations.

In Australia, for example, the Corporations Act 2001 governs unfair preference claims.

The court will examine the transaction in question to determine if it was a preference or not.

In the UK, the Insolvency Act 1986 and the Enterprise Act 2002 regulate unfair preference claims.

The court will consider whether the transaction was a genuine transaction or a sham to avoid paying creditors.

In the US, the Bankruptcy Code governs unfair preference claims, with Section 547(a) outlining the conditions under which a preference may be avoided.

The trustee must prove that the preference was made within 90 days of the bankruptcy filing.

In Canada, the Bankruptcy and Insolvency Act governs unfair preference claims, with Section 95 outlining the conditions under which a preference may be avoided.

The court will consider whether the transaction was a preference and whether it was made in bad faith.

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To determine if a transaction is an unfair preference, we need to look at the elements involved. A transaction is considered an unfair preference if it was entered into between a company and an unsecured creditor.

There are four key elements to consider: the transaction itself, the company's insolvency at the time, the creditor's gain, and the timing of the transaction.

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The transaction typically involves the payment of funds or the transfer of an asset. This can include any form of payment or transfer made by the company to an unsecured creditor.

To establish insolvency, the Liquidator must show that the company was unable to pay its debts as they fell due. This can be a complex issue, and the Liquidator must gather evidence to support their claim.

The creditor must have received more from the transaction than they would have in the liquidation of the company. This is a critical factor in determining if the transaction was an unfair preference.

The timing of the transaction is also crucial. The Liquidator must show that the transaction occurred within 6 months prior to the relation back day. However, if the creditor is a related entity of the company, the timeframe is extended to 4 years.

Here are the key elements of an unfair preference transaction:

The relation back day is the key date in determining the timeframe for unfair preference transactions. It is the date of liquidation for a creditors' voluntary liquidation, the date of the Administrator's appointment if the company was in administration, or the date of the filing of the winding up application for a court-appointed liquidation.

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If a creditor is facing a claim for an unfair preference, they may be able to rely on certain defences to avoid liability.

The Good Faith Defence is one such defence, which a creditor must prove under Section 588FG of the Corporations Act 2001 (Cth). To rely on this defence, the creditor must establish that they provided valuable consideration for the transaction, received the benefit of the transaction in good faith, and had no reason to suspect the company was insolvent at the time of the transaction.

A creditor who has an ongoing commercial relationship with the company may be able to rely on the running account defence, as outlined in Section 588FA(3) of the Corporations Act 2001 (Cth). This defence takes into account the net effect of all transactions between the parties during the relevant period, rather than considering each individual transaction in isolation.

Here are the key elements of the Good Faith Defence:

If you're considering making an unfair preference claim, it's essential to know the process involved.

First, you should contact a lawyer, such as Pearce & Heers Brisbane or Gold Coast office, who can assist you with your circumstances.

To initiate the claim process, you'll need to discuss your situation with the lawyer, who will be able to guide you through the necessary steps.

If you're unsure about the claim process, it's a good idea to seek advice from a professional.

You can discuss your circumstances with experienced staff at Pearce & Heers Brisbane or Gold Coast office, and they'll be able to assist you.

If you wish to discuss your claim, don't hesitate to contact Pearce & Heers.

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Recent high court decisions have clarified the process for making claims, making it easier for individuals to navigate the system.

The High Court has ruled that claimants must provide evidence of their claim within a reasonable time frame, typically 12 months from the date of the incident.

This decision emphasizes the importance of keeping detailed records and gathering evidence promptly after an incident occurs.

In one notable case, a claimant was denied compensation due to their failure to provide sufficient evidence within the allotted time frame.

Court decisions have also highlighted the significance of following the correct claims procedure, which can impact the outcome of a case.

Claimants who follow the procedure correctly are more likely to have their claims processed efficiently and effectively.

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The legislative framework surrounding unfair preference is outlined in the Corporations Act 2001.

A key aspect of this framework is the definition of an unfair preference, which is a transaction that benefits a creditor at the expense of other creditors.

Specifically, an unfair preference occurs when a creditor receives more than they would have in a winding up of the company, as stated in section 588FA of the Corporations Act 2001.

This means that if a company pays a creditor more than they would have received in a winding up, the transaction may be considered an unfair preference.

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In the United States, the legislative framework is established at the federal and state levels. The federal government is composed of three branches: the legislative, executive, and judicial.

The legislative branch is divided into two houses: the House of Representatives and the Senate. The House of Representatives has 435 members, each representing a district in one of the 50 states.

The Supreme Court, the highest court in the land, is responsible for interpreting laws and ensuring they align with the Constitution. It's composed of nine justices, who are appointed by the President and confirmed by the Senate.

In addition to the federal government, each state has its own legislative branch, known as the state legislature. State legislatures are responsible for creating and enforcing state laws.

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The Corporations Act 2001 has a specific section that deals with unfair preferences. This section, 588FA, states that a transaction is void if it results in a creditor receiving more than they would have in a winding up of the company.

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A key point to note is that this applies to unsecured debts. This means that if a company owes money to a creditor without any collateral or security, the transaction must be scrutinized to ensure it's not unfair.

The Act specifies that a transaction is void if it results in the creditor receiving more than they would have if the transaction were set aside and they were to prove for the debt in a winding up of the company. This is a critical consideration for companies and creditors alike.

Unfair preference can affect anyone who has dealings with a company that's in financial trouble.

Individuals who have provided credit to the company may be affected.

Creditors who have received a dividend from the company's assets may be entitled to a further payment.

Shareholders who have not been paid their dividends may also be affected.

Employees who have not been paid their wages may be entitled to a preferential payment.

Businesses that have supplied goods or services to the company may also be affected.

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