A Liquidator Is Demanding You Repay Money You Were Owed
Your customer paid you, eventually, after months of chasing. Then the customer collapsed, and now its liquidator has written demanding you hand the money back as an "unfair preference", often with interest, often with a deadline, often years after the event. It feels absurd. It is also, unfortunately, how the Corporations Act works.
Australia's record wave of liquidations is now producing a wave of these clawback demands, and they land on businesses that did nothing wrong except get paid. Here is what matters: a demand is not a judgment, the liquidator must prove insolvency at the time of each payment and the statutory defences, properly run, defeat or heavily discount a large share of claims.
Astris Law defends preference claims for businesses and directors. The first step is always the same: a fixed-scope assessment of the demand against your actual trading records, so you know your realistic exposure before you pay anyone anything.
How Preference Claims Work
Under s 588FA of the Corporations Act 2001 (Cth), a payment is an unfair preference if you received it while the company was insolvent and it gave you more than you would have received by proving in the winding up. Claims generally reach back six months from the relation-back day for arm's-length creditors and up to four years for related entities. The liquidator must commence proceedings within the time limits in s 588FF(3), and bears the onus of proving the company's insolvency when each payment was made.
The good faith defence (s 588FG(2))
You keep the payment if you received it in good faith, with no reasonable grounds to suspect insolvency and gave valuable consideration or changed your position. Liquidators argue that late payments and payment plans put you on notice; the answer lies in how your credit history with the customer is properly characterised. This defence is fact-heavy, and it is won or lost on your records.
The running account (s 588FA(3))
If you kept supplying while being paid, the whole continuing relationship is assessed as one transaction, so the claim is capped at the net reduction in indebtedness, not the gross payments. Since the High Court abolished the peak indebtedness rule in Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2, properly netted running accounts have cut many claims to a fraction of the demand or extinguished them entirely.
Insolvency: the liquidator's burden
No insolvency, no preference. Liquidators frequently rely on thin, report-level solvency analysis, particularly in bulk demand campaigns. Testing the insolvency case, what the company's position actually was on each payment date, is often the most cost-effective line of defence.
What does not work: set-off
In Metal Manufactures Pty Ltd v Morton [2023] HCA 1, the High Court held that statutory set-off is not available against a liquidator's preference claim. Amounts the failed company still owes you do not reduce the claim; they are a separate proof of debt. Negotiations must be built on the defences, not on mutual debts.
The First Three Moves When a Demand Arrives
1. Do not pay. Do not ignore.
Paying the demand converts an arguable claim into a closed one; ignoring it invites proceedings on the liquidator's timetable rather than yours. Diarise the deadline, acknowledge if appropriate and get the claim assessed before responding substantively.
2. Pull the trading records
Invoices, statements, payment history, credit correspondence and stop-supply decisions across the whole relationship, not just the relation-back period. The running account calculation and the good faith defence are both built from these documents, and what they show often differs sharply from the liquidator's spreadsheet.
3. Respond from an assessed position
A response that sets out the netted running account, the defence evidence and the holes in the insolvency case changes the negotiation. Liquidators weigh recovery prospects against costs; demonstrated resistance with reasons is what moves the settlement number, and a well-founded defence sometimes ends the claim outright.
Directors of the failed company face a related but different exposure: insolvent trading claims under s 588G. If that is your situation, start with our director liability hub and the insolvent trading guide.
Frequently Asked Questions About Preference Claims
What is an unfair preference claim?
When a company goes into liquidation, the liquidator can look back at payments the company made in the six months before the winding-up began (longer for related parties) and demand that creditors repay amounts they received while the company was insolvent, if the payment gave them more than they would receive in the liquidation. The mechanism is section 588FA of the Corporations Act 2001 (Cth), enforced through the voidable transaction provisions. The policy is equal sharing among creditors; the practical effect is that businesses that did nothing wrong are asked to hand back money they were lawfully owed and lawfully paid.
Do I have to repay the liquidator just because I received a demand?
No. A liquidator's demand letter is an opening position, not a court order. The liquidator carries the onus of proving the company was actually insolvent when each payment was made, which is often the weakest part of the claim, and several statutory defences may apply to you. Many demands are issued in bulk at inflated figures in the expectation that a percentage of recipients will simply pay. Paying reflexively and ignoring the letter until proceedings issue are both mistakes. The right response is an assessed one.
What is the good faith defence?
Under section 588FG(2) of the Corporations Act, you can defeat a preference claim if you received the payment in good faith, you had no reasonable grounds to suspect the company was insolvent (and a reasonable person in your circumstances would have had none) and you provided valuable consideration or changed your position in reliance on the payment. The battleground is usually the suspicion element: liquidators point to late payments, broken promises and payment plans as grounds for suspicion. How your trading history is characterised, and what your records actually show, frequently decides the claim.
How does the running account defence work?
Where payments were part of a continuing business relationship, such as a running trade account, section 588FA(3) requires all dealings in the relationship to be netted off and treated as a single transaction, so the preference is at most the reduction in net indebtedness across the period, not the gross sum of payments. The High Court's decision in Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 abolished the liquidator-friendly peak indebtedness rule, which often reduces claims dramatically, sometimes to nothing. If you continued supplying while being paid, this defence needs to be front and centre.
How long does a liquidator have to bring a preference claim?
Under section 588FF(3) of the Corporations Act, the liquidator must commence court proceedings within three years after the relation-back day (broadly, when the winding-up is taken to have begun) or twelve months after the liquidator's appointment, whichever is later, unless the court extends time. Demands often arrive late in that window as liquidators clear their books, which is itself useful context when assessing how committed the liquidator is to actually litigating.
Should I just settle?
Sometimes, but only from an assessed position. Liquidators are commercial actors: claims settle routinely at meaningful discounts once a creditor demonstrates a credible defence, weak insolvency evidence or a properly netted running account. One thing to know before negotiating: the High Court confirmed in Metal Manufactures Pty Ltd v Morton [2023] HCA 1 that you cannot set off amounts the company owes you against a preference claim, so the negotiation runs on the strength of the defences, not on mutual debts. Our first step is a fixed-scope assessment of the demand, your trading records and the realistic exposure, so the decision to fight or settle is made on numbers.
Received a liquidator's demand? Get it assessed before you respond.
A fixed-scope assessment of the demand against your trading records: your realistic exposure, your defences and whether to fight or settle. Then you decide.