Top Tips to Minimise your Risk of Preference Payments

What are preference payments?

Preference payments are payments made by an insolvent company that give one creditor an unfair advantage over other creditors. Basically, in the lead up to liquidation, one creditor is paid more than another. If this is the case, a liquidator may be able to recover (claw back) these payments, provided they fulfil the criteria under section 588FA of the Corporations Act 2001 (Cth).

To protect yourself, we have compiled the following top tips:

1. Have your fees pre-paid, particularly if dealing with a potentially insolvent client
   Since preference payments need to be between a company and a creditor, you won’t be at risk if you are paid in advance. This can be done either upfront or in monthly instalments.
2. Keep notes on the running account
   If you have an ongoing business relationship with a company that becomes insolvent, the liquidator will look at your net position with that company.
   What does this mean?
   Keep your accounts current. Send friendly reminders and use stop credit if payment is outstanding for more than 30 days or over a certain dollar value.
3. Ensure that you are a secured creditor
   Secured creditors cannot be subject to preference payments.
   Seek advice on how you can become a secured creditor.
   What does this involve?
   Having a contract that allows you to register your interest on the Personal Property Securities
   Register (PPSR); and
   Make sure you register your interest on the PPSR.
4. Stay on top of your debtor’s position
   Preference payments only apply where there were reasonable grounds for you to suspect the impending or actual insolvency of the debtor.

However, these are just general tips. For advice specific to your circumstances, we strongly advise seeking legal advice. For more information, please contact us.