Preferential Payment Claims – Are You at Risk of a Liquidator’s Claim?

Are you owed money by a company which appears to be in financial difficulty?  Have you recently received payment for money owed by a company in financial difficulty?

If the answer to these questions is yes, then you need to be aware that if the company is subsequently wound up in liquidation, any payments you have received in the 6 month period prior (and in certain cases involving related parties, up to 4 years prior) may be “clawed back” by the liquidators of the company by what is known as an Unfair Preference Claim or Preferential Payments Claim.

What is a Preferential Payment?

A preferential payment occurs where:-

1. A transfer of property was made (this is usually a payment of money);
2. Something passed from the bankrupt to a creditor or on the creditor’s instructions;
3. It occurred at a time when the bankrupt was insolvent;
4. It occurred within the relevant time period before the bankruptcy;
5. The transaction gave the creditor an advantage over other creditors (usually determined as the creditor receiving more than they would have if they had proved for that amount in the estate); and
6. The creditor suspected, or should have suspected, that the bankrupt was insolvent at the time.

If a liquidator is able to prove each of these elements, a Court can order that the transfer of property or preferential payment be paid back to the insolvent company together with legal costs and interest.  This can result in significant and devastating adverse impact on a creditor’s own financial position.

How can the risk of a Preferential Payment Claim be avoided or limited?

While there may be defences which can be used to defend a Preferential Payment Claim, there are some good business practices that can be implemented so that you avoid or at least limit your exposure to the risk of such a claim.  These practices include:-

1. Asking customers for money up front for goods or services before supply;
2. Operating on a strict Cash on Delivery (COD) terms;
3. Taking security from the company where the security is equivalent to the amount of payment received;
4. Ensuring that any running accounts for major clients incorporate regular payments by the client and do not extend beyond an acceptable and manageable limit.

For more information and advice about preferential payment claims and the steps that can be taken in response please contact Steven Hayles.