With construction insolvencies continuing to climb – more than 2,600 companies went under in the past year – construction companies are increasingly wary about unfair preference claims. These claims can sting: you finally get paid, only to be told later you have to give that money back.
So, can you and should you still chase unpaid debts without opening yourself up to risk?
What is an unfair preference claim?
When a company goes into liquidation, its liquidator can claw back payments made to unsecured creditors in the six months prior to the ‘relation-back day’. The idea is to stop one creditor from getting a better deal than others (particularly secured creditors), just because they got in first.
If you were paid while the company was insolvent (or nearly insolvent), and that payment left you better off than other unsecured creditors, a liquidator may demand repayment.
It’s not about whether the work was done or the debt valid – it’s about the timing.
Why chasing debt can raise flags
You’re expected to chase payment in construction, since cash flow is critical. But here’s the catch: being diligent can undermine some of your available legal defences if an unfair preference claim arises.
To defend such a claim, you need to show that:
- you had no reason to suspect the company was insolvent; and
- a reasonable person in your position wouldn’t have suspected it either.
This becomes tricky if you sent reminders, offered payment plans, or even threatened a statutory demand. Courts may say you had reason to suspect something was wrong.
Ironically, those who are best at debt collection may have the hardest time proving they had no idea that the debtor company was in financial strife.
So, should you still chase payment?
Absolutely.
Getting paid is always better than not getting paid – even if there’s a slight risk you’ll need to return the funds. In practice, liquidators often send unfair preference demand letters as a fishing exercise. Whether the liquidators follow through depends on how strong the case is, and how much hassle they expect.
So, if you’ve been paid and receive a demand: don’t panic.
You might still have valid defences, and in many cases, negotiation or legal assistance can resolve it quickly. What matters is how you chase payment and how you position yourself before problems arise.
Tips to minimise risk
- Secure the debt: If you have security (e.g. PPSR registration, retention of title clause, or a director’s guarantee), you’re not just an unsecured creditor. In most cases, payments made on secured debts can’t be clawed back, subject to the value of your security.
- Keep a running account: If you are:
-
- a supplier;
- continue to supply goods or services; and
- receive payments as part of an ongoing relationship where the overall debt fluctuates,
you may only be at risk for the net benefit you received – not the full payment.
- Be consistent: Apply your debt collection processes uniformly across clients. If your reminders and follow-ups are routine, they’re less likely to be seen as signs you suspected insolvency.
- Act early: If a client is frequently paying late or offering vague excuses, don’t ignore the warning signs. You may want to shorten payment terms or tighten credit limits to reduce your exposure.
But What if I Have Done That and Still Receive a Demand?
If a liquidator demands repayment, ask for details such as:
- When was the debtor allegedly insolvent?
- What’s the relation-back date?
- How was insolvency assessed?
If the liquidator hasn’t done a proper insolvency analysis, that weakens their case or at least delays it. And if they don’t have funding to pursue the matter, they may abandon it if you push back early and firmly.
There may be defences available to you – we recommend speaking to a lawyer to see what might apply.
Final Word
Unfair preference claims are always a risk when you’re dealing with a company having financial issues, but they shouldn’t stop you from chasing what you’re owed.
Use smart practices, secure your position where you can, and act early. If a preference claim does arise, reach out to us and we can assist you to defend it.
At the end of the day, getting paid is still better than being left in line with all the other creditors, cap in hand.