A customer or debtor of yours has gone into liquidation. Months, sometimes years, later, you receive a letter from the liquidator alleging that a payment you were properly entitled to was an unfair preference, and demanding you repay it. This is one of the most common and most misunderstood claims in Australian insolvency law.

Received a preference claim demand? Do not pay or ignore it before getting advice.

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What Is an Unfair Preference Claim?

Under section 588FA of the Corporations Act 2001 (Cth), a transaction is an unfair preference if it was made between a company and an unsecured creditor, the company was insolvent at the time (or became insolvent because of it), and the creditor received more from that payment than they would have received as a dividend in the company’s winding up. The purpose of the regime is to ensure unsecured creditors are treated equally rather than one being paid out ahead of the rest in the lead-up to a collapse.

Liquidators can typically claw back payments made in the six months before the relation-back day, extending to four years for transactions involving a related party. The amounts pursued range from a few thousand dollars to sums running into the millions, and the claim usually arrives as a demand letter well after the event, when the recipient has long since moved on from the relevant invoices.

The Defences Available to You

Receiving a demand letter alleging an unfair preference is not the same as owing the money. Several statutory defences exist, and recent case law shows they are genuinely contestable, not a formality.

The good faith defence (section 588FG(2))

This defence applies where you received the payment in good faith, you had no reasonable grounds to suspect the company was insolvent at the time, and you provided valuable consideration or changed your position in reliance on the payment. It sounds straightforward, but it is harder to make out than most creditors assume.

In Kirk (in his capacity as liquidator of ARG Workforce Pty Ltd (in liq)) v Commissioner of State Revenue, in the matter of ARG Workforce Pty Ltd [2026] FCA 192, the Federal Court rejected a good faith defence raised by a government revenue office, finding it could not establish it had no reasonable grounds to suspect insolvency at the relevant time. The decision is a reminder that the defence requires more than a genuine subjective belief that the company’s difficulties were temporary; it requires the absence of reasonable grounds for suspicion, assessed against everything a reasonable business person in your position would have known at the time.

The running account defence (section 588FA(3))

Where payments formed part of a continuing trading relationship, rather than a one-off transaction, the running account defence allows the relevant payments and supplies to be assessed as a single, ongoing course of dealing rather than each payment in isolation. This can significantly reduce, or in some cases eliminate, the net preference amount. Whether it applies depends on whether new value, in the form of further goods or services, was genuinely supplied after each payment, and on the precise pattern of the trading relationship.

Other available arguments

• Disputing that the company was actually insolvent at the time of the relevant payment.
• Disputing that the payment placed you in a better position than you would have been in the winding up.
• Challenging whether the transaction falls within the relevant six-month or four-year window.
• Where relevant, arguing the payment was not truly a transaction to which the company was a willing party, as distinct from a unilateral act by a third party.

What to Do When the Demand Letter Arrives

How you respond in the first few weeks materially affects your negotiating position and your costs exposure if the matter proceeds further.

• Do not ignore the letter. Liquidators who do not receive a response often proceed to commence proceedings, and a default position is harder to unwind than an early, properly considered response.
• Do not assume you must pay simply because the letter is from a liquidator. The onus is on the liquidator to establish the elements of the claim.
• Gather your records early: invoices, delivery records, correspondence, and anything showing the nature and timing of the trading relationship. These records are often the difference between a viable defence and an indefensible position.
• Get advice on whether the good faith defence, the running account defence, or both are realistically open to you before you respond substantively.

For Liquidators: We Act on Both Sides

Boyle Litigation also advises and acts for liquidators and other insolvency practitioners investigating and pursuing voidable transaction claims, including unfair preferences. That dual experience gives us a clear, realistic view of how these claims are actually assessed, negotiated, and litigated, which sharpens the advice we give whichever side of the letter you are on.

Whichever side of the demand letter you are on, get advice before you respond.

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Frequently Asked Questions

Q: How far back can a liquidator claw back payments?

A: Generally, a liquidator can pursue payments made in the six months before the relation-back day. Where the recipient was a related party of the company, that period extends to four years. The relation-back day is usually the date proceedings to wind up the company were filed, or the date administration began if the company went through voluntary administration first.

Q: Is the good faith defence easy to establish?

A: No. As confirmed in the 2026 Federal Court decision in Kirk v Commissioner of State Revenue, the defence requires more than genuinely believing the company’s financial troubles were short-term. You must show you had no reasonable grounds, objectively assessed, to suspect insolvency at the time you received the payment. Indicators such as late payments, requests for extended terms, or dishonoured cheques can all work against the defence.

Q: What is the running account defence and when does it apply?

A: It applies where payments and supplies of goods or services formed part of a single, continuing commercial relationship, rather than being assessed payment by payment. If you kept supplying genuine new value after receiving each payment, the running account defence can treat the whole pattern of dealing as one transaction, which often reduces the recoverable amount substantially.

Q: Should I pay the amount the liquidator is demanding to avoid legal costs?

A: Not automatically. Many demand letters overstate the claim, do not properly account for available defences, or are sent as an opening position expecting negotiation. Paying before assessing your defences can mean paying more than you are legally required to. Get advice on the merits first.

Q: Can a liquidator force me to pay if I do not respond?

A: If a demand goes unanswered, liquidators commonly proceed to commence court proceedings to recover the amount. Once in court, your defences are still available, but you lose the practical advantage of resolving the matter early and on better terms. Early engagement, not silence, protects your position.

Q: Do I need a lawyer to respond to a preference claim demand letter?

A: You are not legally required to, but these claims turn on technical defences and the specific facts of the trading relationship. A response that does not properly engage with the good faith or running account defences can weaken your position before negotiations even begin.