Biz Talk: Preferential Payments

PREVIOUSLY (HERE) we started the conversation about preferential payments. These are a nasty trap that anyone in business can fall into, a deep hole of financial duress. This bites you when your client has paid you for work, and then later on they go broke. Months after, the liquidator sends you a violent letter demanding the payment be returned, because they’ve determined it was a ‘preferential payment’ or made within the provisions of ‘relation back’.

Why The Face? (WTF?)

This is how law firm Cornwall Stodart (Melbourne) describe it:

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(a) The company (now in liquidation) made payments to that creditor (that’s you) within the 6 months prior to the ‘relation back day’ (generally, the date of the appointment of an administrator or liquidator);

(b) the creditor’s debt was unsecured with respect to the company;

(c) at the time that the payments were made to the creditor, the company was insolvent (or became insolvent as a result of the payments); and:

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(d) the payments resulted in the creditor receiving from the company more than it would have if the payment was set aside and the creditor were to prove for the debt in the winding up of the company.

(e) If the requirements are met and the creditor does not have an available defence, the creditor will be required to disgorge the payments to the liquidator.

CX believes some liquidators (not all) shotgun a raft of preferential payment claims against most – or all – paid creditors of their liquidation case firm. They count on some creditors caving in and sending money, and will sometimes use that money to wage legal actions against the others.

Some liquidators operate on the fringes of their authority. By way of example, rogue NSW liquidator Stuart Ariff was finally held to account in 2011 by the regulator ASIC, after blatantly rorting various liquidations under his control.

There are good liquidators as well. CX mag blog reports the case of Jacksons Rare Guitars, where boutique insolvency firm Jamieson Louttit, Insolvency & Advisory, was appointed Liquidator.

Mr Louttit, the Liquidator obtained legal advice on the Personal Properties Securities (“PPS”) Act and thus agreed to return all of the guitars held subject to consignment. “It is the right thing to do and it is a good outcome for Consignors who have been patient while I have been sorting out the PPS mess”.

PPS itself is a nightmare that appears in this column from time to time, and never in a positive, uplifting or happy way.

Sadly we can’t find other good news stories about liquidators. Stay tuned, and we will return with ‘Mad Money – the Crazy Sequel’ at a future Roadshow!