Unfair Preference Claims: Section 588FA Guide

When a Payment is an Unfair Preference

Section 588FA requires the company and creditor to be parties to the transaction, even when another person also participates. The creditor must receive more for its unsecured debt than it would receive if the transaction were reversed and it proved in the winding up. A debt secured only in part is treated as unsecured to the extent the security’s value does not cover it.

Consider a hypothetical supplier paid $20,000 for an overdue debt. If reversing that payment would leave the supplier with a $2,000 liquidation dividend, the payment satisfies the better-recovery comparison, assuming the other elements hold. Payment of a genuine invoice does not, by itself, answer the preference claim.

Section 588FC adds the insolvency requirement. The company must be insolvent when the transaction is entered into or given effect, or become insolvent because of it. Section 588FE supplies the period in which that insolvent transaction becomes voidable. The Corporations Act’s preference provisions separate these tests, so a payment shortly before liquidation is not automatically recoverable.

Where payments support further supplies, section 588FA(3) can require the continuing relationship to be assessed as one transaction. Preserve the invoices as well as the receipts. The running account defence explains that separate calculation. Other voidable transaction claims can arise from the same records under different tests.

Time Limits and the Relation-Back Day

The ordinary preference window is six months ending on the relation-back day under section 588FE(2). It also covers transactions entered into or given effect after that day, up to the start of winding up. Under section 588FE(4), the look-back is four years where a related entity is a party to an insolvent transaction.

The relation-back day anchors the calculation. It is not necessarily the liquidator’s appointment date, particularly when an earlier administration or winding-up application forms part of the history. Establish the relation-back day before filtering the bank records. Keep the appointment documents with the payment schedule so each included transaction has an explained basis.

The proceedings deadline is a different clock. Section 588FF(3) generally requires the liquidator’s application by the later of three years after the relation-back day or twelve months after the first liquidator appointment. The court can allow a longer period if the liquidator applies for the extension within that original period. A demand letter alone does not commence the court application.

Simplified Liquidation Has a Separate Exclusion

Simplified liquidation changes recovery from unrelated creditors. Regulation 5.5.04 excludes preferences under section 588FE(2) entered into or given effect more than three months before the relation-back day. Within the shorter window, a transaction or series of related transactions is excluded when the creditor receives no more than $30,000 in value. That rule also covers the period after the relation-back day up to the start of winding up.

These exclusions require the company to be in simplified liquidation and no creditor under the transaction to be a related entity. They do not create a general $30,000 minimum for all preference claims. The Corporations Amendment (Corporate Insolvency Reforms) Act 2020 introduced the simplified-liquidation framework, with the preference exclusions made through regulations. Identify which liquidation process applies before assessing a small payment.

Defences Under Section 588FG

Section 588FG(2) protects a creditor that proves the statutory good faith defence. It combines good faith with both a personal and an objective test for grounds to suspect insolvency. Consideration or a change of position is also required.

The three limbs in section 588FG(2) read:

(a) the person became a party to the transaction in good faith; and

(b) at the time when the person became such a party:

(i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(ii) a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and

(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

A statement that the supplier did not know about insolvency addresses only part of the defence. Build a record of what the supplier knew when it became a party to each transaction. Compare earlier payment delays with those in the claim period. Keep credit applications and correspondence explaining why trading continued.

Repeated broken payment promises, dishonoured payments or an admission that debts cannot be paid can undermine the no-suspicion case. An isolated overdue invoice needs its commercial context. Delivery records and contracts help establish consideration, while evidence of reliance supports a claimed change of position. ASIC’s creditor guide explains the defence and the supporting information a creditor can request from the liquidator.

A Separate Debt Cannot Be Set Off

In Metal Manufactures v Morton, the High Court rejected section 553C set-off against a liquidator’s unfair-preference recovery. The recovery obligation and the company’s separate debt to the creditor lack the required mutuality. A creditor can lodge a proof of debt, but that separate claim is not a defence reducing the preference repayment.

For example, assume a recoverable preference of $30,000 and a separate unpaid invoice of $12,000. The preference recovery remains $30,000. Subtracting the invoice to demand only $18,000 would incorrectly apply the rejected set-off. The invoice is addressed separately through the creditor’s proof of debt.

Third Party Payments and Preferential Payments From Other Sources

A director or related entity paying a company’s creditor can participate in a preference transaction. The payment must still meet section 588FA, including the requirement that the creditor receives from the company. The name on the sending account does not decide that question alone.

In Cant v Mad Brothers Earthmoving Pty Ltd, the Victorian Court of Appeal required the payment to diminish company assets available to creditors. Justice Black’s discussion of third-party payments explains that company authorisation alone did not meet that requirement. The discussion also records the court’s treatment of that reasoning in Re Western Port Holdings Pty Ltd.

Trace the payment’s funding and legal basis. A director using the company’s money differs from a director making a gift from personal funds without recourse to company assets. A payment using money owed to the company raises another issue: whether the transaction applies the company’s receivable to its creditor. Loan documents and payment instructions help distinguish those arrangements.

Compare the outgoing debit with the creditor’s incoming receipt, then trace any funding transfer into the paying account. Preserve account-holder details, payment references and source pages. The bank records show the movement of money. The surrounding agreements establish who owned it and what obligations changed.

Building the Claim From Bank Records

A categorised ledger isolates payments to the creditor within the relevant period and connects each payment to its source statement. Start with the creditor’s legal name, trading names and known bank references. Filter each supplied account, then reconcile the results against the creditor’s statement of account.

For each payment, record the sending account and recipient alongside the amount and source page. Match it to invoices or the allocation shown by the creditor. Reconstruct overdue balances before and after each payment, keeping disputed allocations visible. Include reversals and refunds so the schedule does not count money the creditor returned.

A Worked Payment Schedule

This fictional schedule uses elapsed days within the relevant period. Assume insolvency throughout, an unsecured creditor and no successful defence. The opening debt is $50,000.

The creditor receives $50,000 and supplies $30,000. If all entries form one qualifying continuing business relationship, its net debt reduction is $20,000. That is the amount tested for preference under section 588FA(3), subject to the winding-up comparison and remaining statutory requirements.

Bryant v Badenoch rejects choosing peak indebtedness as the starting point. Starting at the $70,000 peak would wrongly produce a $40,000 reduction here. Identify the legally relevant relationship and period before calculating the net effect. Payments outside that relationship require separate assessment.

Place that schedule beside the solvency evidence. A low bank balance is one observation, while overdue liabilities and available funding affect the company’s ability to pay debts. Source-cited findings let both sides test whether a payment preceded the asserted insolvency point and whether receipts changed as financial pressure increased.

FinTrace saves lawyers and forensic accountants hours of statement review by consolidating the supplied PDFs into a searchable Excel ledger and a readable findings report. Findings cite the PDF filename and page, so the evidence behind a payment or transfer is already at hand. Accountants can filter the ledger for the creditor and use it alongside invoices, correspondence and their solvency analysis.

Before preparing a demand or response, bring the payment schedule and defence documents together. Identify which elements each record supports and which payments remain disputed. For a statement-heavy matter, Request a matter assessment with the approximate pages, accounts and required timeframe. FinTrace assesses the scope and provides a quote before statements are supplied.