Liquidator Demanding Money Back? How to Respond to an Unfair Preference Claim in Victoria

Say a building company owed your business $40,000. In March, after a few reminder emails, it paid $25,000 off the oldest invoices. In August it went into liquidation. Then in October a letter arrives from the liquidator asking you to repay the $25,000.

It feels wrong. You did the work, you sent the invoice and you got paid. But this is how Australian insolvency law is meant to work. The idea is that creditors who were paid shortly before a collapse shouldn’t jump the queue ahead of everyone who wasn’t.

These letters are not rare. ASIC reports that 14,153 companies entered external administration for the first time in the 2025-26 financial year, and about one in four of those appointments (24.5%) were in construction. Each of those collapses can mean liquidators reviewing what the company paid its suppliers and contractors in the months before.

This guide explains how unfair preference claims work, how far back a liquidator can go, the defences that may be open to you, and what to do if a customer of yours has gone into liquidation.

What is an unfair preference claim?

An unfair preference is a payment (or other transaction) between a company and one of its unsecured creditors that leaves that creditor better off than it would have been if it had waited and claimed in the liquidation along with everyone else.

What the liquidator has to show

In broad terms, a liquidator has to establish that:

• you were an unsecured creditor of the company (if you held security, the claim generally only reaches the unsecured part of the debt);
• the payment left you with more than you would have received as an unsecured creditor in the winding up;
• the company was insolvent when it paid you, or became insolvent because of the payment; and
• the payment was made within the relevant period before the liquidation (usually six months, see below).

The claim is brought by the company’s liquidator. It usually starts with a letter of demand. If it isn’t resolved, the liquidator can apply to court for an order that the money be repaid.

A simple example

Go back to the $40,000 debt. Suppose the liquidator expects unsecured creditors to receive 5 cents in the dollar. If the company had not paid you, you would eventually have received 5 per cent of what you were owed. Because you were paid $25,000 in March, you did much better than that, so the payment has the hallmarks of a preference.

If you do repay it, you can then lodge a proof of debt in the liquidation for the amount you repaid, as if the payment had never happened. In practice, that means joining the queue for whatever dividend unsecured creditors receive, which is often small.

How far back can a liquidator go?

The usual look-back period is the six months before the “relation-back day”. Payments made after that day but before the winding up began can also be caught.

The relation-back day is the reference date the law uses for the look-back. For a company wound up by the court, it is generally the day the winding-up application was filed, not the day the order was made. If the company went into voluntary administration first, it is often the day the administrator was appointed. The liquidator’s letter should tell you which date they are relying on, and it’s worth checking.

A few other timing points:

• Related parties. Longer periods can apply to payments made to people or companies related to the insolvent company, such as a director’s other business.
• Simplified liquidation. Some small companies are wound up through a streamlined process called “simplified liquidation”. ASIC’s guidance says different preference rules apply there for unrelated creditors, including a shorter window and a minimum amount. Ask the liquidator which process applies.
• The liquidator’s deadline. A liquidator generally has until the later of three years after the relation-back day or 12 months after the first liquidator was appointed to start court proceedings, and can ask the court for more time. So a claim can arrive well over a year after a customer collapsed.

There is no minimum dollar amount for an unfair preference claim in an ordinary liquidation. A reform setting a $30,000 floor was announced in 2022 but never became law. In August 2026 the Federal Government said the Productivity Commission may look at the issue as part of a wider inquiry. For now, the rules have not changed.

Got a letter from a liquidator? What to do

Defences to an unfair preference claim

There are several ways to answer a claim. Which ones fit depends on the facts, and it’s up to the creditor to prove them.

The good faith defence

Under section 588FG(2) of the Corporations Act, a court will not order repayment if you can show all three of these things:

• you received the payment in good faith;
• you had no reasonable grounds to suspect the company was insolvent, and a reasonable person in your position would have had no such grounds either; and
• you gave value for the payment (for example, you supplied the goods or services the invoice was for).

The middle point is where most of these cases are won or lost. It isn’t enough that you personally didn’t think the customer was in trouble. The court asks what a reasonable business person in your shoes would have suspected, based on what you knew at the time.

Courts have treated things like these as warning signs, depending on the whole picture:

• months of late payment, or payments stopping altogether;
• round-sum part payments instead of payment of specific invoices;
• a customer asking to pay off old debt by instalments;
• bounced cheques or failed direct debits;
• your own letters of demand, statutory demand or winding-up application; and
• knowledge of tax debts or other creditors chasing the customer.

None of these on its own decides a case. Two reported decisions show how the same kinds of facts can go either way.

The lesson from both is the same. If you ever need this defence, you will need records that show what you knew and why you kept trading.

The running account (continuing business relationship) defence

If you kept supplying the customer on credit while it was paying you, the law can treat the whole relationship over the period as a single transaction (section 588FA(3)). The question then becomes whether your overall position improved, not whether individual payments were made.

Say that over the six months you were paid $60,000, but you also supplied another $50,000 of goods on credit as part of the same ongoing trade. Your overall exposure dropped by $10,000. Under the running account rules, that net reduction is generally what is at risk, not the full $60,000.

In 2023 the High Court decided Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2. It confirmed that a liquidator can’t pick the date when the customer’s debt to you was at its highest and measure the claim from there. The court looks at the whole continuing relationship within the period. For suppliers who kept trading with a struggling customer, that decision can make a real difference.

This only applies to payments that were part of an ongoing trading relationship. A one-off lump sum to clear an old debt, after you had stopped supplying, is unlikely to qualify.

Set-off no longer works

Many suppliers assume they can simply offset what the company still owes them against the liquidator’s claim. The High Court said no in Metal Manufactures Pty Ltd v Morton [2023] HCA 1. The liquidator’s right to recover a preference only arises once the winding up begins, so there is nothing to set it against. The usual result is that you repay and then lodge a proof of debt for what you are owed.

Other ways to answer the claim

• The company wasn’t insolvent at the time. The liquidator has to establish insolvency at the date of each payment, and that can be tested.
• You weren’t better off. If you held security that covered the debt, such as a properly registered security interest, the payment may not have given you any advantage.
• The payment falls outside the period. Check the relation-back day and the payment dates against the liquidator’s schedule.
• The figures are wrong. Liquidators work from the company’s records, which may be incomplete.

Defence or answer	What you need to show	Useful evidence
Good faith (s 588FG(2))	Good faith, no reasonable grounds to suspect insolvency (for you and a reasonable person in your position), and value given	Emails, credit notes, call logs, credit reports, why you kept trading
Running account (s 588FA(3))	Payments were part of a continuing supply relationship; your net position over the period	Full account statement for the relationship, invoices and delivery records
No insolvency	The company could pay its debts as they fell due when it paid you	The company’s financial position at the time (often needs expert evidence)
Not better off	You were secured, or the payment did not improve your position	PPSR registrations, security documents
Timing	The payment is outside the look-back period	Payment dates, the relation-back day

Can you negotiate with the liquidator?

Often, yes. A liquidator has to weigh the cost, delay and risk of going to court too, so there is usually room to talk. Creditors sometimes agree to repay a reduced amount, or to pay by instalments, in exchange for a release from the claim.

Get advice before you make an offer. The strength of your defences is what gives you room to negotiate, and how you frame the offer matters. Any settlement should be properly documented.

If your customer goes into liquidation: a creditor’s checklist

Sometimes the problem is the opposite one. Your customer has gone under owing you money and you want to know where you stand.

• Lodge a proof of debt. The liquidator will notify creditors and send a proof of debt form with a deadline. ASIC says liquidators must give at least 14 days’ notice of that deadline. Attach your invoices, statements and any contract or credit application. Claims can be rejected for lack of evidence, so be thorough.
• Check your retention of title clause and the PPSR. If your terms say you own goods until they are paid for, that interest generally needs to be registered on the Personal Property Securities Register (PPSR). Under section 267 of the Personal Property Securities Act 2009 (Cth), an unregistered interest generally passes to the company when it goes into liquidation, and the goods become part of the pool for all creditors. If you think you own goods on the customer’s site, tell the liquidator in writing straight away.
• Deal with the liquidator, not the company. Once a company is in liquidation, chasing it directly generally won’t get you anywhere. Your claim goes through the liquidator.
• Expect a dividend, not full payment. Unsecured creditors are paid after the costs of the liquidation and the creditors the law ranks ahead of them. What’s left is often a small percentage of the debt, and sometimes nothing.
• Look back at your own payments. If the customer paid you anything in the six months before the collapse, keep your records together in case a preference claim follows.

For the future, the best protection is set up before a customer gets into trouble: clear terms of trade, a signed credit application, any security you’re entitled to registered on the PPSR, and a habit of keeping notes when an account starts to slip. If you’re owed money by a company that is still trading, our guide to the creditor’s statutory demand explains one of the main recovery tools.

A note for directors

If your own company is struggling, paying one creditor ahead of the others can create problems later. A future liquidator may claim those payments back from the creditor, and payments to related parties can be looked at over a longer period.

Directors can also have personal exposure. If the ATO has to repay a preference it received, the directors in office at the time of the payment may have to indemnify it. In a September 2026 case the Commissioner of Taxation consented to orders to pay a liquidator $4.2 million, including interest and costs, and the Federal Court noted the directors’ possible liability to indemnify the Commissioner (Hodgson v Commissioner of Taxation (No 2) [2026] FCA 1266). If your company has received a statutory demand, read what to do if you receive a creditor’s statutory demand and get advice early.

Common questions about unfair preference claims

This is general information, not legal advice, and reflects the law as at October 2026. Every situation is different, so get in touch about yours.