Insolvency Litigation Lawyers Melbourne

Unfair preference demands generally target trade creditors and suppliers paid in the 6 months before the relation-back day (and related entities paid within 4 years). Not every payment made during that period is an unfair preference; the statutory elements must be established.

To succeed, the liquidator must establish that the payment related to an unsecured debt, was an insolvent transaction (made while the company was insolvent, or by which it became insolvent), and resulted in you receiving more than you would receive in the winding up (sections 588FA and 588FC, Corporations Act 2001 (Cth)).

Most cases turn on two key issues:

1. Whether the payments form a single continuing business relationship under section 588FA(3), so the account is assessed on its net effect across the whole relationship (the running account principle). Following Bryant v Badenoch Integrated Logging Pty Ltd HCA 2, the liquidator cannot use a 'peak indebtedness' starting point to inflate the claim.

2. Whether you can establish the good-faith defence under section 588FG(2). The onus is on you to show you became a party in good faith, had no reasonable grounds to suspect insolvency (assessed objectively), a reasonable person in your position would have had none, and you gave valuable consideration or changed your position in reliance.

   Learn more from our experienced liquidation lawyers.

Purchasers of assets, counterparties, and related entities are the usual targets here. The window is 2 years (extended to 4 years for related parties, or 10 years if intended to defeat creditors).

• What the liquidator must prove: A reasonable person in the company’s position would not have entered the transaction, weighing detriment against benefit.

• What decides these claims: Contemporaneous evidence of value. Independent valuations, sales data, and the recorded commercial logic from the time of the transaction.

• Phoenix Activity: Liquidators and ASIC pay close attention to assets moved into a new or related company that leaves the old company’s creditors and employees behind. A transaction that fits this pattern strengthens a related-entity uncommercial transaction claim, and can expose both the company and the individuals who arranged it to separate action.

Targets directors and close associates who received payments, loan repayments, bonuses, or property transfers within a 4-year window.

Crucial Distinction: Because these claims arise under section 588FDA of the Corporations Act 2001 (Cth), the liquidator does not need to prove the company was insolvent, so a solvency argument does not answer the claim.

• What decides these claims: the statutory defences under section 588H (including a reasonable expectation of solvency, or reasonable reliance on a competent person); the safe-harbour protection under section 588GA; and the date of insolvency. Safe harbour is not a general immunity; it applies only where the director develops or takes a course of action reasonably likely to lead to a better outcome than immediate administration or liquidation, and it is unavailable where employee entitlements and tax lodgements have not been substantially met (section 588GA(4)). Directors who sought early advice or restructured are in a much stronger position.

Targets current, former, shadow, or de facto directors, as well as holding companies. Liquidators have 6 years from winding up to file.

• What the liquidator must prove: You were a director when the debt was incurred, the company was insolvent (or became insolvent by incurring it), and a reasonable director would have suspected insolvency.

• What decides these claims: Defences under section 588H, Safe Harbour protection under section 588GA (directors who take genuine, timely steps to restructure while insolvent can be shielded from personal liability), and the exact date of insolvency. Directors who sought early advice or restructured are in a vastly better position.

• The ATO indemnity: Where the court orders the Commissioner of Taxation to repay an unfair preference involving certain tax payments (such as PAYG withholding), section 588FGA provides the Commissioner with an indemnity, and directors may be liable for the resulting loss, subject to the procedure and defences in sections 588FGB–588FGC.

Explorebusiness restructuring,voluntary administration, or speak with ourdirector penalty notice defence team.

Targets directors, officers, employees, and accountants. An examination is compulsory, on oath, and transcribed. The scope to conduct public examinations is broad, but the power must be exercised for a proper purpose: in Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) HCA 3, the High Court confirmed a summons may be set aside as an abuse of process where its predominant purpose is foreign to the statutory purpose (though assisting contemplated litigation is not, of itself, improper).

• Public Examinations: You cannot refuse to answer on the ground of self-incrimination. However, where you object before answering, the use of your answers against you in later criminal or penalty proceedings is restricted (section 597(12), Corporations Act 2001 (Cth)). The court also has broad powers to give directions about the conduct of an examination under section 597.

• Books and Records (Section 530A): Officers must deliver up the company's books and records. A failure to keep or retain adequate financial records (as required by section 286) gives rise to a rebuttable presumption of insolvency (section 588E(4), Corporations Act 2001 (Cth)).

• What decides these matters: Thorough preparation before testifying. Never walk into an examination cold.

Targets directors and officers under formal ASIC scrutiny, separate from a liquidator’s own examination powers. ASIC can investigate under the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth)." (In the Areas of Expertise section, cite the same two Acts by their full titles.)

• What ASIC Can Do: Compel production of books and records, conduct formal examinations, and refer conduct for prosecution or director disqualification.

• Books and Records: The same duty to keep and produce adequate records applies here as it does with a liquidator, and gaps can be used against you.

• What decides these matters: Getting legal representation before you respond to a notice, understanding what is and isn’t privileged, and managing what gets produced and said from the first request onward.

These claims target directors and officers (often paired alongside insolvent trading claims), alleging a failure of care, improper use of position, or misuse of information that cost the company money.

• What decides these claims: The business judgment rule under section 180(2) and the board records. A successful defence generally depends on showing the decision was a genuine business judgment made in good faith and for a proper purpose, without a material personal interest, on an informed basis, and in the rational belief it was in the company's best interests — assessed as at the time, not with hindsight. Note the rule does not apply to insolvent trading claims under section 588G.

Often overlaps with broader shareholder disputes in Melbourne.

Targets secured lenders and related-party financiers.

• Circulating Security Interests (section 588FJ): A circulating security interest created within the 6 months ending on the relation-back day may be void against the liquidator, except to the extent it secures amounts actually advanced or paid to, or at the direction of, the company (and prescribed amounts). It may not apply if the company was solvent immediately after the interest was created.

• PPSR Registration and Vesting: An unperfected security interest may vest in the grantor on insolvency under section 267 of the Personal Property Securities Act 2009 (Cth). Separately, certain security interests registered outside the prescribed period may vest under section 588FL of the Corporations Act 2001 (Cth), subject to an extension of time under section 588FM. In either case, the security can be lost.

• What decides these claims: Registration timelines and clear financial evidence showing exactly what funds were advanced and when.