Unfair preference claims: responding to a liquidator’s demand

Q: Can I set off what the company still owes me against the claim?

No. In Metal Manufactures Pty Limited v Morton [2023] HCA 1, the High Court held that s 553C set-off does not apply. The liquidator's claim arises only on the winding up and is held for creditors generally. There is no mutuality with the debt the company owes you. You can still lodge a proof of debt for that debt.

An unfair preference claim is a liquidator’s demand that a creditor repay money received from a company before its liquidation. The liquidator must prove each element of the claim, and the creditor may have defences. Get advice before you pay or respond, as the amount claimed may be open to challenge.

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Key points

Liquidators can challenge payments made in the six months before the relation-back day, or longer for related entities.
The liquidator must prove the company was insolvent, although some statutory presumptions can help.
For a running account, the High Court has held that a liquidator cannot choose the point of peak debt.
A creditor that acted in good faith, without reasonable grounds to suspect insolvency, may have a defence.
Liquidators must start court proceedings within strict time limits.

General guidance only – not legal advice. Please obtain independent legal advice before relying on any of this information. The law is stated as at September 2026.

What is an unfair preference?

The Corporations Act 2001 (Cth) defines an unfair preference in s 588FA(1). It is a transaction that gives a creditor more than it would receive in the winding up. The typical example is payment of an unsecured trade debt.

The payment must also be an “insolvent transaction”, made while the company was insolvent or causing its insolvency (s 588FC). A company is insolvent if it cannot pay all its debts as and when they fall due (s 95A).

Secured debts are generally excluded to the extent the security covers them (s 588FA(2)). The company must also be a party to the transaction. A payment from a third party’s own funds may fall outside the definition.

Which payments can a liquidator recover?

An unfair preference is voidable if made in the six months ending on the relation-back day (s 588FE(2)). Later payments, up to the winding up, are also caught. The relation-back day is usually the day a court winding-up application was filed. If the company first entered administration or voluntary liquidation, it is usually the day that began (s 91).

Longer periods apply in some cases:

four years where a related entity, such as a director, is a party (s 588FE(4))
ten years where the company intended to defeat, delay or interfere with creditors’ rights (s 588FE(5)).

Narrower rules apply in a simplified liquidation, where smaller or older payments to unrelated creditors generally cannot be recovered.

The liquidator must prove insolvency. Some presumptions can help, such as where the company failed to keep proper financial records (s 588E(4)).

How does the running account principle affect a claim?

Suppliers often trade on a running account, with supplies and payments continuing over time. If a payment is an integral part of a continuing business relationship, the transactions are treated as one (s 588FA(3)). The test is their ultimate effect over the relevant period. In broad terms, only the net reduction in the debt may be recoverable.

In Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2, the High Court rejected the “peak indebtedness rule”. A liquidator cannot choose the point when the debt was highest as the start. The start is generally the later of:

the beginning of the relevant period, such as the six months
the date the company became insolvent
the start of the trading relationship.

Whether a payment is part of the running account is assessed objectively. A payment aimed at clearing old debt, rather than securing further supply, may fall outside it.

Is there a good faith defence?

Yes. A court must not make an order that materially prejudices a creditor if the creditor proves that (s 588FG(2)):

it became a party to the transaction in good faith
it had no reasonable grounds to suspect the company was, or would become, insolvent
a reasonable person in its circumstances would also have had no such grounds
it provided valuable consideration, or changed its position in reliance on the transaction.

The creditor must prove the defence, so evidence of what you knew at the time matters. Long overdue accounts, payment plans or dishonoured payments may suggest grounds for suspicion.

What should you do if you receive a demand?

Seek advice. Engage a lawyer to review the claim and provide advice.
Do not pay straight away, but do not ignore it. Note any response date.
Check the dates against the relation-back day and the relevant period.
Gather your records, including credit applications, invoices, statements, payments and correspondence.
Test the calculation. Check the running account start point, any security, and whether the company made each payment. Ask for the liquidator’s evidence of insolvency.
Check your insurance. Notify any trade credit insurer promptly.
Negotiate. Claims can be resolved at any stage. Record any settlement in a deed of release.

Weigh the claim against the cost and risk of litigation. If a claim goes to court, the unsuccessful party is usually ordered to pay part of the other side’s costs. Interest may also be awarded.

How Taylor David can help

Our Brisbane insolvency and litigation lawyers act for suppliers, creditors, financiers and directors facing unfair preference claims. We can:

review the demand, your records and the liquidator’s calculation
assess the running account position and any defences
negotiate with the liquidator and document any settlement
defend court proceedings if the claim does not resolve.

We also act for liquidators pursuing unfair preference and other voidable transaction claims. Directors facing a wider restructure can see our reconstruction and turnaround page.

Frequently asked questions

Questions we are often asked

Can I set off what the company still owes me against the claim?

No. In Metal Manufactures Pty Limited v Morton [2023] HCA 1, the High Court held that s 553C set-off does not apply. The liquidator’s claim arises only on the winding up and is held for creditors generally. There is no mutuality with the debt the company owes you. You can still lodge a proof of debt for that debt.

How long does a liquidator have to bring a claim?

A liquidator has three years from the relation-back day to apply to court. If later, the deadline is 12 months after the first liquidator was appointed (s 588FF(3)). The court can extend the period if the liquidator applies in time. A demand letter is not a court claim, but proceedings may follow. Check for any extension order before relying on a time limit.

If I repay, can I recover anything from the liquidation?

Yes. A creditor that restores the company’s position may prove in the winding up as if the preference had not occurred (s 588FI(3)). You can lodge a proof of debt for the amount repaid. Any return depends on the dividend to unsecured creditors, which may be small or nil. Settlement terms should address your proof of debt.

Are directors affected by unfair preference claims?

They can be. Payments to directors or other related entities can be challenged over four years (s 588FE(4)). The ATO may have to repay certain tax payments as preferences, such as withheld PAYG amounts or superannuation guarantee charge estimates. If so, each person who was a director at the time must indemnify the Commissioner (s 588FGA).

Is the law on unfair preferences changing?

In 2023, a parliamentary joint committee recommended a comprehensive review of insolvency law, with unfair preferences as a core issue. In August 2026, the Government supported this in principle. It noted the Productivity Commission may consider these matters in its business dynamism inquiry. It also generally deferred near-term actions pending that inquiry. The current rules apply until Parliament changes them.

General guidance only – not legal advice. Please obtain independent legal advice before relying on any of this information. The law is stated as at September 2026.

Related expertise

Insolvency →Litigation →Reconstruction & Turnaround →

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To discuss your situation in confidence, call Scott D. Taylor on +61 7 3229 9800, email [email protected] or send us an enquiry online.

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