Meaning
Liquidators must ensure that all unsecured creditors are treated equally and that no single creditor receives a disproportionate payout shortly before a company collapses. Under the rules of unfair preference, a liquidator can claw back payments made to a creditor if the payment gave that creditor an advantage over others. This remedy prevents creditors from putting pressure on a failing company to get paid first.
It restores the principle of equal distribution among creditors of the same class.
Creditor Advantage
The payment must put the recipient in a better position than they would have been in a liquidation. To prove an unfair preference, the liquidator must show that the creditor received more than their projected dividend in a winding-up. If the creditor would have been paid in full anyway, the claim will fail.
Statutory Period
The payments must have occurred within a set timeframe before the commencement of the winding-up. A claim for an unfair preference is restricted to transactions within the statutory look-back window, which is usually six months for unrelated creditors. This limit balances the need for recovery with the stability of transactions.
Insolvency Presumption
The company must have been insolvent at the time the payment was made. In establishing an unfair preference, the liquidator is assisted by statutory presumptions if the transaction occurred close to the liquidation date. This reduces the evidentiary burden on the liquidator.
