Addressing Unfair Preference Payments

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When a liquidation is in process, often litigators address unfair preference type claims. These claims represent the transfer of assets that give a creditor a decided advantage over other creditors in the field. Liquidators are frequently appointed to recover unfair preference payments and distribute them fairly amongst creditors.

Considering the Elements of the Case

Unfair preferences may include various transactions. However, most usually are associated with the transaction of money. When defending unfair preference payment claims, lawyers must look at a variety of elements. These elements may include the following:

  • When a transaction was entered into between a business and creditor
  • If the transaction was entered within a statutory period prior to the relation back day – or 11 months for parties that are non-related; four years for related parties; or 10 years of any evidentiary material that tries to defeat, interfere, or delay the rights of the creditors
  • Debts for the transaction must be unsecured
  • The business was considered insolvent at the time the transaction was entered
  • The creditor received a better return – one that was better than he normally would get

What You Want to Achieve When Making Your Point

As you can see, you need to show that unfair preferences are indeed unfair and that the resulting transaction made it easier for a creditor to receive a better return than what would be normally realised.

Reviewing the Strategies for Defence

However, you have to look at both sides of the coin as well, as creditors often have their own defences strategized in this instance. For example, when you assume that a creditor was a party to the above type transaction, you need to make sure three elements are satisfied:

  • The creditor became a good-faith party to the transaction
  • The creditor did not have reasonable grounds for thinking the company involved was insolvent, or that it would become that way in the future
  • The credit offered valuable consideration in the transaction, or modified their position in reliance on the said transaction

Carefully Look at All Sides

The above elements can be used by creditors in defence of unfair preferences and payments. That is why you need to carefully scrutinise your position on either side of the fence. To make sure of an equitable outcome, certain forms must be used and certain guidelines should be followed. That will make the whole situation just and fair for everyone in the transaction.

Even if a third-party makes a payment in a liquidation, it does not mean that no preference payments were made. Companies can direct payments through third-party payers. For example, a lender may pay moneys advanced previously to a creditor in association with the borrower’s directions. This type of challenged transaction shows that payments were made directly from a business to a creditor (preferred payments) by using the funding form a third-party type payer.

That is why you cannot assume anything in this type of case. Review all cases thoroughly before you proceed, and see what each side has to say in their defence of the transaction.