Liquidator unfair preference claim: funding a settlement against property

You did the work, sent the invoice and were paid. Months later a liquidator writes to say the customer was insolvent when it paid you, that you were paid ahead of other creditors, and that the money should come back for everyone’s benefit. For a small business, a claim like that can land like a second bad debt from the same customer.

Preference claims are common and often negotiable. Whether you defend, negotiate or pay is a legal decision, and it should be made with a solicitor. What this page covers is the money side: how to fund a settlement quickly, against property, without starving the business.

How much time do you have to respond?

The liquidator’s letter usually sets a response date. That is not a court deadline, but ignoring it rarely helps. Where you are in the process decides how fast you need funds.

Stage	Time pressure	First move
First letter of demand	Days to weeks to respond	Brief a solicitor; request the liquidator’s calculations and documents
Negotiating, no offer yet	Weeks	Line up funding so you can act when a sensible number appears
Settlement offer with a deadline	Often 14–30 days	Agree the deed terms; arrange a loan to settle before the date
Court proceedings issued	Court timetable applies	Your solicitor manages the defence; funding for any settlement can run alongside
Judgment entered	Enforcement can follow	See legal settlements and judgment debts

Funding is possible within 24–48 hours once documents are in, and property-secured amounts of $20k–$250k possible same day.

What is an unfair preference, in plain English?

ASIC’s information sheet for creditors (INFO 45) and ARITA’s creditor guide describe it this way:

• What it is. A payment to one creditor, ahead of others, that gave it more than it would receive as a dividend in the liquidation.
• When. Generally in the six months before the liquidation is taken to have begun, up to the liquidator’s appointment. That start date can be earlier than the appointment date.
• Insolvency. The company must have been insolvent when it paid you, or become insolvent because of the payment.
• Simplified liquidations. The look-back is three months, and a payment to an unrelated creditor is only recoverable if the total received in that period exceeds $30,000.
• No cap. ASIC notes there is no limit on the value a liquidator can recover.

What defences and reductions might apply?

Both ASIC and ARITA describe the main defence: you became a party to the transaction in good faith, you had no reasonable grounds to suspect the company was insolvent, a reasonable person in your position would not have suspected it either, and you gave valuable consideration (you supplied goods or services).

ARITA also explains that where you kept trading with the company during the period, the preference may be calculated differently to credit the ongoing supply you provided. And two points often surprise creditors:

• No set-off. You cannot reduce the claim by what the company still owes you.
• You can prove after repaying. If you repay a preference, you can claim your original debt plus the amount repaid in the liquidation.

The liquidator’s letter should set out the transactions, the period, the date it says insolvency began, its reasons, and the estimated dividend. Ask for anything missing.

What should you ask the liquidator for before you negotiate?

A preference figure is only as good as the workings behind it. Before you or your solicitor put a number on the table, ask for:

• The full schedule of payments the liquidator says are preferential, with dates and amounts.
• The date it says insolvency began and the evidence for it, such as overdue tax, unpaid suppliers or dishonoured payments.
• How any running account was treated, including the goods or services you supplied during the period.
• The estimated dividend to unsecured creditors, since a repaid preference may come back to you in part.
• Whether the liquidator is funded to sue. That affects how a lump-sum offer is likely to be received.

With those in hand, your solicitor can judge whether a settlement figure is fair, and we can size the loan to match it.

When must a liquidator bring the claim?

Under section 588FF(3) of the Corporations Act, the court application must be made during the period that ends at the later of three years after the relation-back day, or 12 months after the first liquidator was appointed. A court can extend that, but only on an application made within the period. Your solicitor will check whether a claim is in time.

How it works: funding a negotiated settlement

1. Get legal advice on the claim, any defences and a sensible settlement range.
2. Enquire early, before a deadline is set, with the property details and the likely settlement amount.
3. Agree the settlement in writing. Your solicitor and the liquidator sign a deed setting the amount and the date.
4. Letter of Offer and loan documents sized to the settlement, plus costs.
5. Settlement: funds go to the liquidator’s trust account, as the deed requires.
6. Lodge your proof of debt for the original amount and the repaid preference, if that is part of the deal.

A caveat loan is often the quickest structure for a mid-sized settlement. A second mortgage on your home for business suits owners whose main equity is in the family home.

How does this compare with the alternatives?

Option	Speed	Trade-off
Pay from trading cash	Immediate	Starves wages, suppliers and tax payments
Ask the liquidator for instalments	Depends on the liquidator	Often a higher total; some liquidators decline
Defend in court	Months	Legal costs both ways; uncertain result
Unsecured business loan	Days	Short terms and frequent repayments
Property-secured loan to fund a lump sum	24–48 hours possible	Property at risk; interest and costs for the term

A lump-sum offer is often worth more to a liquidator than a slow instalment arrangement, which is why ready funding can improve the deal you negotiate.

Who it suits

• Suppliers, contractors, transport operators and service businesses facing a preference claim from a failed customer’s liquidator
• Owners who have taken legal advice and decided to settle or pay
• Businesses or owners with equity in residential, commercial or industrial property
• Borrowers with a specific exit: trading cash flow, an expected dividend, an asset sale or a refinance

When this isn’t the right move

• You haven’t taken legal advice. Funding a claim you could have reduced or defeated is money you didn’t need to spend.
• The claim is small enough to absorb. If cash flow can cover it comfortably, borrowing adds cost for no gain.
• The business can’t repay. If the preference claim is one of many pressures and losses continue, see your accountant first.
• The settlement terms aren’t final. Don’t draw funds until the deed is agreed.

What it costs (without the guesswork)

We set pricing per deal from the security, the loan-to-value ratio, the term and the exit, and aim for the sharpest price your circumstances allow. Expect:

• Interest over the term, which can be paid upfront or capitalised into the loan
• An assessment fee, small and shown on the Letter of Offer
• Documentation and registration costs for the security

Weigh those against the cost of defending a claim and the leverage a ready lump sum can give you in negotiation.

Documents you’ll need

• The liquidator’s letter of demand and supporting schedule of payments
• The proposed or signed settlement deed
• Your solicitor’s contact details
• Identification for borrowers, directors, guarantors and property owners
• Address, ownership and current loan balance for each property offered
• Evidence of repayment: cash-flow forecast, debtor list, sale contract or refinance letter

How fast can a settlement be funded?

Property-secured amounts of $20k–$250k are possible the same day, and larger amounts within 24–48 hours, once documents are in. There’s no formal valuation required, so the main timing risk is the settlement deed itself. Send the liquidator’s letter and your property details and we will confirm whether the deadline can be met.

Illustrative example: settling a preference claim

Illustrative example: a Newcastle electrical contractor was paid $180k by a builder in the four months before the builder’s liquidation. The liquidator claims it all back. After advice, the contractor’s solicitor negotiates a settlement of $110k, payable within 28 days, with the contractor free to prove for its unpaid invoices and the repaid sum. The owner holds an investment unit worth about $550k with $240k owing. A second mortgage at an illustrative LVR band of 70% gives about $145k of headroom.

Step	Amount
Loan amount chosen	$125k
Less prepaid interest for six months (illustrative)	$9k
Less loan costs	$5k
Paid to the liquidator’s trust account	$111k

The settlement is paid on day 12. The loan is repaid over the following six months from progress claims on two new contracts. This illustration is not a client record.

Key terms

• Unfair preference: a payment that put one creditor ahead of others while the company was insolvent.
• Relation-back day: the date the law treats as the start of the liquidation for look-back purposes.
• Running account: an ongoing trading relationship that can change how a preference is measured.
• Proof of debt: a creditor’s formal claim in a liquidation.
• Settlement deed: the signed agreement fixing the amount and terms of a negotiated settlement.

Other urgent situations we fund

• Responding to a statutory demand
• A winding-up application against your company
• Funding a big contract with property security

In the Hunter? See our page for a private lender in Newcastle and the Hunter. Contractors may also find our construction and trades page useful, and the glossary entry on the Letter of Offer explains what you will sign.

Claim on the table? See if you qualify

Tell us the amount the liquidator wants, the figure you expect to settle at, the deadline, and the property you can offer with what is owing on it. Enquiring does not involve a credit check, your details stay with one direct lender, and a specialist reviews them personally.

Clear numbers let us confirm on the first call whether a settlement can be funded before the deadline, which strengthens your hand when you negotiate. Start the enquiry.