How to protect your payment being clawed back by a liquidator

The Corporations Act 2001 allows, in certain circumstances, a liquidator to claw back payments made to an unsecured creditor where the payment was made during the ‘relation back period’ - commonly a six month period before the appointment of the liquidator.

To establish that an unsecured creditor has received an unfair preference, the liquidator must show that:

  • there was a transaction between the company in liquidation and the unsecured creditor; 
  • the transaction resulted in the unsecured creditor receiving more than it would have if it had provided a proof of debt in the liquidation;
  • the company was insolvent at the time of the transaction; and 
  • the transaction was during the ‘relation back period’.

For a person to have a defence to a claim of an unfair preference, they need to show that:

  • they received the benefit in good faith;
  • at the time of receiving the benefit they had no reasonable ground for suspecting the company was insolvent; 
  • a reasonable person in the creditor’s position would not have reasonable grounds for suspecting the company was insolvent; and
  • they provided valuable consideration under the transaction.

As such, electrical contractors are advised to call NECA Legal for advice as soon as an invoice becomes overdue. You  should be wary of granting any extension of time to pay a debt owed to you, and should take action to obtain payment at the earliest opportunity to prevent, to the greatest extent possible, payments falling within the ‘relation back period’ and potentially being clawed back by a liquidator.

NECA Legal (WA) Pty Ltd can assist clients with debt recovery.

Disclaimer: The above summary is not legal advice and for more information on unfair preferences, call NECA Legal (WA) Pty Ltd on (08) 6241 6129 or email necalegalwa@ecawa.org.au.