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.
When a liquidator brings a claim for an unfair preference against a company or individual, there are a number of defences available to them. One of these defences is the good faith defence.
In order to establish a good faith defence, the creditor must establish the following:
- a) the creditor provided valuable consideration for the transaction or changed their position in reliance on the transaction; and
- b) the creditor received the benefit of the transaction in good faith; and
- c) at the time of the transaction:
- i) the creditor ‘had no reasonable grounds for suspecting that the company was insolvent’; and
- ii) A reasonable person in the creditor’s circumstances would have no reason for suspecting the company’s insolvency.
One of the most common and contentious elements in most cases is whether the creditor ought to have suspected that the company now in liquidation was insolvent at the time of the payments.
Each case turns on its own facts, however some of the common indicators of a suspicion that the company (now in liquidation) was insolvent at the time of the payments in question are as follows:
- actions such as receiving post-dated cheques, dishonouring cheques;
- entering into repayment agreements;
- defaulting on payment arrangements;
- knowing of other unpaid creditors;
- making demands for payment;
- refusing to provide credit or refusing to supply unless a payment is made;
- continuous lateness of payment; and
- issuing legal proceedings.
The good faith defence is one of the most common in unfair preference cases, however it is not successful in many cases. It is important to understand the factors and evidence which will put you in the best position to run this defence.