It's an unfortunate situation that those who provide a product or service often find themselves in. They’ve done the work, provided a product, invoiced for the work or product and are therefore entitled to be paid. It can therefore be quite a shock to receive a letter from a liquidator demanding back payment of the money due to an unfair preference.
Madgwicks is pleased to be presenting our eight-part series on unfair preferences as we delve into the practical realities of dealing with an unfair preference. You can find the other articles in this series here.
There are various elements a liquidator has to prove to successfully claim transactions are unfair preferences. One element is that the payment must be made to an unsecured creditor.
Creditors whose interest is registered on the Personal Property Securities Register (PPSR) are secured creditors and therefore are usually immune from an unfair preference claim.
There are some matters to consider in determining whether the creditor is secured or unsecured. Although the law is not fully settled, depending on the factual circumstances the following arguments may apply to your defence.
Is the level of indebtedness at the time of the payment greater than the security?
Take the example where the security is in the form of a retention of title clause. A retention of title clause is often one which means that the seller retains legal title to the goods until the seller has been paid for the goods (even if the purchaser has taken possession of the goods).
If the amount owed is greater than the value of the goods, then the retention of title (and hence the security) arguably only applies to the value of the goods. The remainder is therefore arguably unsecured and may be subject to an unfair preference claim.
Is the PPSR registration perfected?
There is an argument that:
- An unperfected PPSR registration does not automatically make the debt unsecured for the purpose of unfair preferences.
- The relevant time is when the payments were made (not at the appointment of the external administrator).
- When the payment is made, even if their PPSR registration isn’t valid, the creditor may fall within the definition of a “secured creditor” in the Personal Property Securities Act 2009.
As such, if the documents granting the creditor security are in order they may still be a secured creditor and therefore a liquidator may not be able to pursue an unfair preference claim against them.
This is a complicated area which turns on the specific facts of each case. New case law comes out regularly and you should always seek legal advice with respect to unfair preference claims.