Key Takeaways
- A liquidator’s demand is a claim, not an automatic repayment order: the liquidator must prove the statutory elements of an unfair preference under s588FA (identify the payment, prove insolvency at the time, and show the creditor was better off than in a winding up).
- Running account defence: payments made in a genuine continuing business relationship may be treated as part of a single transaction rather than isolated preferential payments—Airservices v Ferrier remains relevant and Bryant v Badenoch (2023) abolished the peak indebtedness rule, requiring assessment of the whole relationship under s588FA(3).
- Good faith defence under s588FG depends on what the creditor knew or ought to have suspected about the company’s insolvency when receiving payment; evidence such as invoices, account statements, communications, credit holds and dishonoured arrangements is central to this defence.
- Courts decide preference claims on evidence and commercial context, considering timing, the legal character of transactions, continuation of supply, and objective indicators of insolvency knowledge; demand letters alone are not determinative and factual chronology is critical.
- Practical response: do not concede or settle prematurely—assemble and organise business records into a clear chronology, test whether the liquidator’s analysis reflects the whole trading relationship, require particularisation if needed, and seek legal advice before negotiating or paying.
What is an unfair preference claim in Victoria?
An unfair preference claim Victoria issue arises when a liquidator alleges that a creditor received payment before liquidation in a way that gave them more than they would have received in the winding up. A liquidator’s demand is not automatically payable. The claim must be tested against section 588FA of the Corporations Act, the payment history, insolvency evidence, any continuing business relationship, and possible defences such as the running account defence or good faith defence under s588FG.
Receiving a liquidator’s demand to repay money does not mean the amount is automatically recoverable. For a business owner, director, supplier, creditor or professional services firm in Victoria, an unfair preference claim in Victoria usually requires close scrutiny of the payment history, the trading relationship and what the creditor knew, or reasonably should have suspected, about the company’s solvency at the relevant time. These claims are commonly framed as a liquidator clawback under section 588FA of the Corporations Act 2001 (Cth), but the statutory elements must still be proved.
The defence position often turns on evidence. A payment may have formed part of a continuing business relationship, been received without insolvency knowledge, or been made in circumstances where the creditor continued supplying goods or services rather than securing an improper advantage. For businesses facing recovery action, the key questions are whether the running account defence applies, whether the good faith defence under s 588FG can be supported, and how Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 affects the claim following the abolition of the peak indebtedness rule.
What is the Legal Test for an Unfair Preference Claim in Victoria?
An unfair preference claim in Victoria is governed by the voidable transaction provisions in Part 5.7B of the Corporations Act 2001 (Cth). For businesses dealing with recovery action after liquidation, it is useful to understand how preference claims sit within the wider framework of voidable transactions and clawbacks.
The central provision is section 588FA of the Corporations Act 2001 (Cth), which asks whether, because of a transaction between an insolvent company and a creditor, the creditor received more than it would have received if it had proved for the debt in the winding up. In practical terms, the liquidator must identify the payment, prove insolvency at the time, and show that the payment improved the creditor’s position compared with other unsecured creditors.
The statutory framework does not make every pre-liquidation payment recoverable. Section 588FA distinguishes between an isolated payment and a payment made as part of a continuing business relationship, often described as a running account defence. Where the accounts genuinely involve ongoing supply and fluctuating indebtedness, the Court may treat the dealings as a single transaction rather than assessing each payment separately. This matters because a supplier that continues to provide goods or services may not have received a preference in any real commercial sense.
The earlier High Court decision in Airservices Australia v Ferrier (1996) 185 CLR 483 remains relevant to the running account defence because it recognised that payments in an ongoing supply relationship must be assessed in their commercial context.
Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 is now the central modern authority on section 588FA(3). The High Court confirmed the peak indebtedness abolition, meaning a liquidator cannot choose the point of highest debt within the relation-back period to maximise the alleged preference. Instead, the whole continuing business relationship must be assessed under the statutory test.
A separate defence may arise under section 588FG of the Corporations Act 2001 (Cth). The good faith defence under s588FG focuses on what the creditor knew, or ought to have suspected, about insolvency. Evidence relevant to insolvency knowledge may include payment delays, dishonoured arrangements, credit holds, cash-flow communications, and the creditor’s ordinary course of dealing with the company. For that reason, defending a liquidator clawback is usually an evidence exercise as much as a legal one.
How Do Courts Assess Defences to an Unfair Preference Claim in Victoria?
What does the court examine first?
In an unfair preference claim in Victoria, the Court usually starts with section 588FA of the Corporations Act 2001 (Cth) and asks whether the creditor received more than it would have received if the payment were set aside and the creditor proved in the winding up? That question is not answered by the payment amount alone. The Court considers the timing of the payment, the company’s solvency, the legal character of the transaction, and the commercial relationship between the parties.
For a creditor defending a liquidator clawback, the demand letter is not determinative. The liquidator must still prove the statutory elements. The creditor’s task is to test the assumptions behind the claim and identify whether the payment was truly preferential, or whether it formed part of an ongoing trading relationship.
When does the running account defence matter?
The running account defence is most important where the creditor and the company had a continuing supply relationship. This may include suppliers, contractors, logistics providers, consultants, or professional firms that kept providing goods or services while receiving payments on account.
The Court asks whether the dealings were part of a genuine continuing business relationship, rather than a sequence of isolated debt reductions. In Airservices Australia v Ferrier (1996) 185 CLR 483, the High Court recognised that payments made to maintain ongoing supply may need to be assessed differently from payments made only to discharge past debt.
That distinction remains important after Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2. Following the abolition of the peak indebtedness rule, a liquidator cannot choose the highest point of debt in the relation-back period to maximise the claim. The continuing relationship must be assessed according to section 588FA(3).
What evidence do courts require?
Courts approach preference claims as evidence-driven disputes. Relevant material may include invoices, account statements, supply terms, payment plans, collection notes, email correspondence, credit hold records, internal file notes, and communications about cash flow.
For the good faith defence under s588FG, the focus is what the creditor knew, or should have suspected, when receiving the payment. A creditor does not lose the defence merely because a debt was overdue. However, repeated broken promises, dishonoured payments, urgent requests for further supply despite arrears, or direct statements about cash-flow difficulty may be relevant to insolvency knowledge.
When will a court scrutinise a defence closely?
A court is likely to scrutinise a defence where the evidence suggests the creditor was no longer trading in the ordinary course but was pressing for payment because insolvency was suspected. This issue may arise where supply was suspended, legal demands were issued, payment terms were tightened, or internal records show concern about solvency.
The practical point is that defending an unfair preference claim is not only legal exercise. It requires a disciplined reconstruction of the relationship, supported by documents that show why the payment should not be treated as preferential.
What Practical Issues Commonly Arise in Unfair Preference Claims?
A liquidator’s demand may present the alleged preference as a fixed repayment obligation, but that is not always the legal position. In an unfair preference claim in Victoria, the demand often relies on selected account entries, payment dates, and insolvency assumptions. For directors, suppliers, and business creditors, the first practical issue is whether the claim reflects the whole trading relationship or only the parts most favourable to recovery.
This is particularly important where payments were made during ongoing supply. A creditor that continued delivering goods, performing services, or extending credit may have improved the company’s position, not merely reducing its own exposure. That distinction is central to the running account defence and should be tested before any commercial response is made.
The strongest responses to a liquidator clawback are usually built from ordinary business records: account statements, tax invoices, remittance advices, supply terms, email correspondence, credit notes, payment plan discussions, and internal credit-control records. For high-value creditors, the issue is often not whether documents exist, but whether they are organised into a coherent chronology. The defence should show when supply continued, when payments were received, what credit decisions were made, and whether there was any real insolvency knowledge at the time.
Do Not Assume a Liquidator's Demand Is Automatically Recoverable
If you have received an unfair preference demand, the payment history, trading relationship, insolvency evidence and available defences should be reviewed before you respond or negotiate. Pentana Stanton Lawyers can help assess the legal and commercial strength of the claim.
Ordinary credit control does not, by itself, mean a creditor suspected insolvency. Businesses routinely chase overdue accounts. The position becomes more sensitive where the creditor has issued a formal demand, placed the account on stop supply, required cash on delivery, rejected further credit, or recorded concern that the debtor could not meet its debts. Those facts may affect the good faith defence under s588FG because the question is not whether the creditor wanted to be paid. The sharper question is whether, objectively, the creditor had reason to suspect insolvency when the payment was received.
A premature settlement offer may affect the commercial position if it is made before the claim has been thoroughly tested. Relevant considerations include the section 588FA Corporations Act issues, the effect of the peak indebtedness abolition, and whether the evidence supports a running account or good faith defence.
What Should a Business Consider Before Responding to Liquidator’s Unfair Preference Demand?
Before responding to an unfair preference claim in Victoria, a business will usually need to distinguish between the commercial pressure created by the demand and the legal question of whether the amount is recoverable. The claim must still be assessed against the statutory requirements in section 588FA of the Corporations Act 2001 (Cth), together with any available running account defence, good faith defence under s588FG, or other answer to the facts.
The evidentiary position is often decisive. Account statements, invoices, supply records, emails, payment arrangements, credit notes, internal credit-control notes, and communications with the debtor may all affect the analysis. Those records are most useful when arranged into a chronology showing what was supplied, when payment was received, whether credit continued, and what the creditor knew about the debtor’s financial position. That chronology may determine whether the liquidator’s calculation withstands scrutiny.
Care is also needed with early concessions. A response that accepts insolvency, acknowledges insolvency knowledge, or treats the demand as commercially inevitable may narrow the defence position before the claim has been thoroughly tested. This is particularly relevant after the peak indebtedness abolition because liquidators can no longer frame a continuing relationship claim by selecting only the highest point of debt.
A strategic response separates legal exposure from commercial resolution. In some cases, negotiation may be sensible. In others, the creditor may need to require the liquidator to particularise the alleged liquidator clawback, produce the account analysis, and address the creditor’s evidence before any settlement position is advanced.
Frequently Asked Questions
u003cstrongu003eDo I have to repay a liquidator’s unfair preference demand?u003c/strongu003e
No, not automatically. A liquidator’s demand is a claim, not a court order. In an unfair preference claim in Victoria, the liquidator must prove the statutory elements under section 588FA of the Corporations Act 2001 (Cth), including insolvency and preferential effect. Before a repayment or settlement position is taken, the payment history, trading relationship and available defences will need to be assessed.
u003cstrongu003eWhat is the running account defence in an unfair preference claim?u003c/strongu003e
The running account defence may apply where payments were made as part of a continuing business relationship, rather than as isolated reductions of old debt. This is common where a supplier continued providing goods or services while receiving payments on account. After Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2, the whole continuing relationship must be assessed, and the peak indebtedness abolition prevents a liquidator from selecting only the highest point of debt to maximise recovery.
u003cstrongu003eWhat is the good faith defence under s588FG?u003c/strongu003e
The good faith defence under s588FG focuses on the creditor’s state of knowledge when the payment was received. A creditor may have a defence if it acted in good faith, gave value, or changed position, and had no reasonable grounds to suspect the company was insolvent. The issue is not simply whether the debt was overdue. The more important question is whether the creditor had actual or constructive insolvency knowledge at the time.
u003cstrongu003eWhat evidence helps defend a liquidator clawback claim?u003c/strongu003e
The most useful evidence is usually found in ordinary business records. Account statements, invoices, supply records, payment arrangements, emails, credit notes, and internal credit-control notes can all affect the defence. In a liquidator clawback claim, those documents should show whether supply continued, whether the account remained active, and what the creditor knew about the debtor’s financial position. Clear chronology is often more persuasive than isolated documents.
u003cstrongu003eCan a liquidator recover every payment made before liquidation?u003c/strongu003e
No. A liquidator cannot recover every payment made before liquidation simply because the company later failed. The liquidator must establish that the payment was an unfair preference within the meaning of the Corporations Act. The creditor may also have a defence based on continuing supply, good faith, lack of insolvency knowledge, or the proper calculation of the alleged preference.
What should you do if you receive an unfair preference claim in Victoria?
An unfair preference claim in Victoria should be assessed before any repayment or settlement position is advanced. The strength of a liquidator’s demand will depend on the statutory elements under section 588FA of the Corporations Act 2001 (Cth), the account history, available defences, and the creditor’s evidence concerning insolvency knowledge. For businesses, directors, and creditors, the immediate priority is to understand whether the claim is legally sustainable and commercially negotiable.
For advice on defending a liquidator clawback or assessing exposure under the running account defence or good faith defence under s588FG, speak with Pentana Stanton Lawyers’ commercial litigation or insolvency team and book a consultation.
This article is general information only and not legal advice. For advice specific to your circumstances, please contact our team.
