Impact of legislation changes to preference claims

In the past, companies may have been  able to avoid losses because their customers paid before becoming insolvent, or because they claimed under their credit insurance policy when the debtor became insolvent but it  could become more difficult for creditors to recoup their money with new legislation that has recently been passed.

What is the new legislation?

The Insolvency Law Reform Act 2016 (Cth), which took effect 1 March 2017, affects creditors, administrators, and company directors. The amendments make it possible for liquidators to go further into the past to identify voidable preference transaction claims, which are payments that are deemed unfair and, therefore, invalid. [1] This lets liquidators claw back monies from creditors.

This new legislation creates an ongoing risk for creditors that extends well beyond the date of liquidation. Applications for voidable preference transactions can currently be made to the court up to three years after the relation-back day. This creates a potential nightmare for some small- to medium-sized enterprises (SMEs) which are not prepared for that risk nor fully aware of the consequences to the business. Larger organisations may have the time and money to fight these preference claims but not all businesses have the financial capacity to do so.

Liquidators are increasingly relying on preference claims to get the best outcome for creditors. However, that can mean that a business may be caught with an unexpected preference claim and this unexpected potential loss could impact the business.

What are we currently seeing in the market?

Daniel Turk, partner, Turks Legal, said, “There are some interesting developments around preference claims. We are seeing more ‘mothership proceedings’ where one proceeding covers a whole number of preference debtors. It’s cheaper in filing the application and, as a result, creditors may be brought in who wouldn’t normally be chased in a single action. And, as of this year, liquidators are allowed to sell preference claims to a third party who can run the claim against a creditor. This will be an interesting area to watch going forward.

“There are creditors in the market who believe that because they have a Personal Property Securities Act (PPSA) registration that they won’t be the subject of a preference claim. This is not necessarily true. The fact that a creditor has a PPSA registration gives them the opportunity to argue that they are a secured creditor if they can prove that they had sufficient security at the time the payments were made. However, just having a registration does not necessarily mean that creditors are secured against all unfair preferences.”

What can you do to protect yourself?

We often see customers unprepared for preference claims. Under a credit insurance policy, suppliers can insure against insolvencies that eventuate from preference claims even up to three years later.

Atradius clients can submit a claim under their policy in the event that they are subjected to a preference claim and have to repay the money paid to them by the buyer before becoming insolvent. The policy is flexible and lets customers claim preference payments as long as it’s a valid claim, even if, at the time of the preference claim, they no longer credit insure their receivables.A credit insurance policy helps protect you getting caught off guard and not having sufficient cash flow to cover the preference claim, which is difficult to budget for.