Unfair Preference Claims Australia 2026: How Liquidators Claw Back Payments and How to Defend Them

Unfair preference claims australia have become one of the most active fronts in insolvency recovery in 2026, as liquidators pursue payments made to creditors in the lead-up to a company’s collapse. If you are a director, a trade creditor or in-house counsel and a liquidator’s demand letter has landed on your desk, the stakes are immediate: money you were legitimately paid for goods or services may be clawed back into the insolvent estate. This guide explains what these claims are, how liquidators calculate the amount they can demand, and, critically, the practical defences that can reduce or defeat a claim.

It is written for parties who need answers now, not a theoretical overview, and it maps each step from receiving a demand to litigation and settlement.

Quick answer (TL;DR): if you have a demand, what to do first

Time matters. The single most damaging thing a creditor can do is ignore a liquidator’s letter or repay money before understanding its rights. Before you do anything else:

• Do not ignore the demand. Silence forfeits negotiating leverage and can lead to default judgment if proceedings follow.
• Preserve every document. Retain invoices, statements of account, bank records, emails and internal notes, including electronic records, from the entire trading relationship.
• Do not make voluntary repayments until you have taken advice. Payment can be treated as an admission and undermines available defences.
• Request particulars. Ask the liquidator to identify the specific payments, dates and legal basis for the claim.
• Engage an insolvency lawyer early. The running account defence and other statutory defences turn on evidence that must be assembled and characterised correctly from the outset.

The detailed 14-day response checklist appears later in this article. First, it helps to understand how the claim works.

How unfair preference claims work in Australia (statutory framework)

An unfair preference is a species of “voidable transaction”, transactions that a liquidator can challenge and unwind under the voidable transaction provisions of the Corporations Act 2001 (Cth), principally the provisions at and around section 588FA. The purpose of these provisions is fundamental to Australian insolvency policy: to uphold the principle of equal distribution among creditors of the same class (pari passu). When an insolvent company pays one unsecured creditor in full while others go unpaid, the paid creditor has received more than its fair share of a limited pool. The law allows a liquidator to recover that excess so it can be redistributed equitably.

In broad terms, an unfair preference arises where a company and a creditor were party to a transaction, the creditor was an unsecured creditor, and the transaction resulted in the creditor receiving more than it would have received if the transaction were set aside and the creditor were left to prove for the debt in the winding up. The comparison is central: the question is whether the payment put the creditor in a better position than it would occupy as an ordinary unsecured creditor sharing in the liquidation dividend.

Two further requirements underpin most unfair preference claims australia. First, the transaction must have occurred while the company was insolvent, or the company must have become insolvent because of it. Insolvency is generally assessed on the cash-flow test, an inability to pay debts as and when they fall due. Second, the transaction must fall within the relevant look-back period measured from the “relation-back day,” the date fixed by reference to the events that triggered the winding up.

The Australian Securities and Investments Commission (ASIC) publishes practical guidance for creditors on voidable transactions, explaining the regulator’s expectations and the general framework within which liquidators operate. The Australian Restructuring Insolvency and Turnaround Association (ARITA) also issues practice guidance for insolvency practitioners on how these claims should be investigated and pursued. Together with the statute and the case law repository at AustLII, these are the authoritative reference points for any creditor assessing exposure. Because provision numbering and thresholds can change through amendment, exact section references and numeric periods should always be confirmed against the consolidated Act before relying on them.

How liquidators calculate clawback and what they can demand

The liquidator clawback australia process begins with the liquidator identifying every payment received by a creditor during the relation-back period. In a simple case, a single lump-sum payment to an unsecured creditor by an insolvent company shortly before liquidation, the calculation is straightforward: the whole payment is potentially recoverable because the creditor received value that other creditors did not.

Most trade relationships, however, are not that simple. Where there was an ongoing account with multiple debits and credits, the liquidator cannot simply add up every payment. The running account principle requires the account to be viewed as a whole, so that later supplies of goods or services (new value) are offset against payments received. Following the High Court’s decision in Bryant v Badenoch Integrated Logging Pty Ltd (2023), the “peak indebtedness rule” is no longer available to liquidators: the recoverable amount is generally measured by comparing the balance at the start of the single continuing business transaction with the balance at its end, the net reduction in the company’s debt to the creditor over the course of that relationship.

This is why the same payment history can produce dramatically different clawback figures depending on how the account is characterised, and why the correct starting and ending points matter so much.

Worked example: calculating a preference

Consider a trade creditor supplying stock to a company during the relation-back period. The account moves as follows:

Total payments received were $110,000. But where the dealings form a single continuing business relationship, the recoverable preference is generally measured by the reduction in the balance owed across the relationship, here, from the opening balance of $100,000 to the closing balance of $60,000, a net reduction of $40,000. The continued supply of new goods significantly reduces the exposure compared with treating each payment as a standalone preference. Note that, following Bryant v Badenoch, a liquidator can no longer take the highest (“peak”) balance during the period as the starting point.

This is the single most important reason to reconstruct the full ledger and identify the correct start and end of the continuing business relationship, rather than concede to a claim based on gross payments alone.

There are also hard limits on what a liquidator can demand. Genuinely secured creditors are generally protected to the extent of their security, because they would have been paid from the secured asset regardless. Where mutual dealings exist, a creditor may be entitled to set off amounts owed to it against amounts claimed, subject to the statutory conditions on set-off. And a liquidator can only pursue the creditor to the transaction, the claim is against the recipient of the payment, not automatically against the directors personally.

Time limits and who is a “related entity”

The look-back period is calculated backwards from the relation-back day. For ordinary unsecured trade creditors dealing at arm’s length, the standard relation-back period for unfair preferences applies. For creditors who are “related entities”, associated companies, directors, their relatives, or entities under common control, a substantially longer look-back period applies, reflecting the greater risk that insiders will be favoured. Because the exact periods are set by statute and have been the subject of amendment, the precise durations should be verified against the consolidated Corporations Act 2001 before you rely on them.

The relation-back day itself is fixed by reference to the triggering events for the winding up, for example, the filing of a winding-up application or the passing of a resolution to wind up. Identifying the correct relation-back day is a threshold task in any defence, because a payment falling outside the relevant period is simply not recoverable as a preference. Separately, liquidators are subject to limitation periods for commencing recovery proceedings once appointed. Given the interaction of these timeframes, prompt advice is essential; a creditor who can show a payment sits outside the look-back window has a complete answer to the claim.

Common defences: how to defend an unfair preference claim step-by-step

Knowing how to defend an unfair preference claim is where value is won or lost. The available defences fall into distinct categories, and most defended claims deploy more than one. The evidence supporting each defence must be assembled early, because the persuasiveness of a defence depends almost entirely on contemporaneous records.

No preference established

The first line of defence is to test whether a preference exists at all. The statutory question is objective: did the transaction put the creditor in a better position than it would occupy as an unsecured creditor in the winding up? If the company was solvent at the time of the payment, no preference arises. If the creditor was in fact secured, or the payment was in exchange for contemporaneous new value rather than reduction of an existing debt, the essential element may be missing.

Challenging insolvency itself, requiring the liquidator to prove the company could not pay its debts as they fell due at the relevant date, is frequently the strongest ground, because the burden of establishing the elements of the claim rests with the liquidator.

The good-faith defence and the running account principle

The statutory good-faith defence in section 588FG of the Corporations Act 2001 is one of the most important protections available to a creditor. It applies, broadly, where the creditor received the payment in good faith, had no reasonable grounds to suspect that the company was insolvent (and a reasonable person in the creditor’s circumstances would have had no such grounds), and provided valuable consideration or otherwise changed its position in reliance on the transaction. Making out this defence requires evidence about what the creditor knew and did at the time of each payment.

Separately, the running account principle in section 588FA(3) is the most commonly relevant concept for trade creditors and often the most valuable. It applies where the payments were not isolated events but formed part of a continuing business relationship of mutual credit and supply, the classic trading account where the company orders goods, incurs debt, and makes payments while further goods continue to flow. Where such a continuing business relationship exists, the account is treated as a single transaction and viewed globally: individual payments are not picked off as preferences, and new value supplied is set against payments received, as illustrated in the worked example above.

To rely on the running account principle, a creditor must show:

• A continuing business relationship. There was an ongoing account, not a series of discrete, unconnected transactions or a relationship reduced to mere debt collection.
• Mutual assumption of continuing dealings. Both parties expected trading to continue, with debits and credits flowing over time.
• Connection between payments and supply. Payments were made to keep the account current and to secure further supply, rather than simply to reduce an old, static debt.

The evidence required is granular. You should be prepared to produce a full, reconciled ledger for the entire relationship; bank statements corroborating each payment; invoices and delivery dockets showing continued supply; and correspondence demonstrating the parties’ mutual expectation of continued trading. A critical pitfall is the point at which the relationship stops being a genuine trading account and becomes a debt-recovery exercise, for example, where supply ceases and payments are made only under pressure or under a repayment arrangement. From that point, the running account protection may fall away and later payments can be exposed as preferences.

Because this analysis carries the largest financial impact and turns on detailed factual assessment, it is the area where forensic accounting and contemporaneous documentation are most decisive.

Value given and new consideration

The provision of new value, fresh goods or services supplied in exchange for or after the payment, can reduce or extinguish the recoverable amount, because to that extent the estate has not been depleted. This operates both within the running account calculation and as part of the good-faith defence, which requires the creditor to have given valuable consideration. The key is to demonstrate genuine, measurable value flowing back to the company, evidenced by delivery records and invoices contemporaneous with the payments.

Transaction on ordinary commercial terms

A creditor who dealt at arm’s length on ordinary commercial terms and received payment in the normal course, consistent with the parties’ prior dealings and industry practice, strengthens both the good-faith position and the running account analysis. Payments made in accordance with agreed credit terms, at usual intervals and amounts, are far more defensible than irregular, escalating or “catch-up” payments extracted under pressure once solvency concerns emerged.

Set-off and security: why secured creditors are different

Where there were mutual dealings between the company and the creditor, the creditor may, subject to the statutory set-off provisions, set off sums owed to it against the liquidator’s claim, reducing the net amount payable. The availability of set-off can be affected by whether the creditor had notice of insolvency, so this defence must be assessed on the facts. Secured creditors occupy a distinct position altogether: to the extent a debt was genuinely secured over company property, the creditor would have been paid from that security in any event, so recovery of such payments as preferences is generally unavailable.

Establishing the existence, validity and registration of security, for example under the Personal Property Securities regime, is therefore an early and important step in assessing exposure.

Limitation and procedural defences

Finally, there are the procedural defences. A payment falling outside the relevant look-back period is not recoverable. A claim commenced after the liquidator’s limitation period has expired may be statute-barred. In narrower circumstances, equitable arguments may be available where the liquidator’s conduct has induced detrimental reliance. These defences are fact-specific and should be assessed alongside the substantive grounds rather than relied on alone.

Practical step-by-step response checklist (first 14 days)

A disciplined response in the first fortnight protects your position and preserves every defence. The following checklist structures the critical early tasks.

Days 0–3: preserve and acknowledge

• Preserve all documents immediately, including electronic records, and suspend any routine destruction policy that might delete relevant emails or accounting data.
• Acknowledge receipt of the demand in writing without admitting liability.
• Request full particulars: the specific payments relied on, the dates, the alleged relation-back day and the statutory basis of the claim.
• Do not make any voluntary repayment.

Days 4–14: reconcile, investigate and engage

• Reconstruct the complete ledger for the trading relationship and reconcile it against bank statements.
• Assemble invoices, delivery dockets and correspondence evidencing continued supply and mutual expectation of ongoing trade.
• Assess whether the running account principle, the good-faith defence and other defences are available on the reconstructed record.
• Verify the relation-back day and whether any payments fall outside the look-back period.
• Engage an insolvency lawyer and, where the account is complex, instruct a forensic accountant to prepare a running-account analysis identifying the correct start and end of the continuing business relationship.
• Budget for costs and consider early settlement leverage based on the strength of your defences.

When to brief counsel: as soon as the liquidator signals it will issue proceedings, or where the claim is substantial and the running account analysis is contested. When to instruct a forensic accountant: whenever the account has multiple debits and credits over time and the recoverable figure turns on the net-reduction calculation across the relationship.

If the liquidator sues: litigation strategy and settlement options

If negotiation fails and the liquidator commences proceedings, the defence strategy should be planned from day one. A well-pleaded defence will squarely put the liquidator to proof on insolvency and on the elements of preference, plead the running account and good-faith defences, and particularise the reconciled ledger relied upon. Because the liquidator bears the onus of proving the claim’s elements, a defendant creditor who forces genuine proof of insolvency at the relevant dates can significantly raise the liquidator’s litigation risk.

Interlocutory steps may be available in appropriate cases, for example, applications to strike out inadequately particularised pleadings or, where the claim is clearly unsustainable, summary disposal. More commonly, the parties will be directed toward mediation. Preference disputes are well suited to commercial settlement: both sides face cost and time exposure, the recoverable figure is often uncertain until the running account is fully analysed, and liquidators frequently prefer a certain recovery to the expense of a contested trial. Settlement is expected to remain a common outcome in 2026 as liquidator recovery activity increases and courts continue to encourage early resolution.

Costs exposure is a real consideration on both sides. A creditor with strong running account evidence can use that strength to negotiate a substantial discount early, avoiding the compounding costs of a full defence. Conversely, a creditor who has failed to preserve records finds itself negotiating from weakness. This is why the evidentiary groundwork done in the first fortnight so often determines the commercial outcome months later.

Comparison: unfair preference vs uncommercial transaction

Unfair preferences are one type of voidable transaction; uncommercial transactions are another. Liquidators sometimes plead both in the alternative, so understanding the distinction helps a creditor identify which defences apply.

For a deeper treatment of the distinction, see the forthcoming guide on uncommercial transactions versus unfair preferences, and for the detailed evidentiary requirements of the most important defence, the dedicated running account defence resource.

Creditor rights and exposures in 2026

Trade creditors should not assume a liquidator’s demand is automatically correct. The liquidator carries the burden of proof, and many demands are opening positions in a negotiation. At the same time, creditors have genuine exposures: money received in the relation-back period is at risk, and the practical reality is that defending a claim costs time and money. The balance of advantage typically lies with creditors who kept clean records, traded on consistent commercial terms, and continued to supply new value throughout the relationship.

Directors face a separate set of concerns. An unfair preference recovery is a claim against the creditor who received the payment, not against the director personally. However, the same insolvency that gives rise to a preference claim may expose directors to distinct causes of action, including insolvent trading and breach of duty. A director who caused the company to prefer a related creditor may face parallel scrutiny. These are separate claims with their own tests and defences, and they should be assessed together where a company has failed.

Where to get help

Facing a liquidator recovery claim is not the moment for a generalist. The interaction of statutory tests, look-back periods, running-account calculations and the good-faith defence rewards specialist experience. Global Law Experts maintains a curated network of specialist practitioners; you can find qualified Insolvency lawyers Australia through the directory, and creditors based in Victoria can find an insolvency lawyer in Melbourne through the same listing. The network approach means you can identify a practitioner with the specific voidable-transaction experience your matter requires rather than relying on directory rankings alone.

Conclusion: what to do now

Unfair preference claims australia will remain a prominent feature of insolvency recovery through 2026, and the difference between a full clawback and a defensible position is almost always decided in the first two weeks after a demand arrives. Do not ignore the letter, do not repay voluntarily, and preserve every document from the trading relationship. Reconstruct your ledger, test whether the running account principle and other statutory defences apply, and take specialist advice before you respond. A creditor with clean records and continued supply frequently has a strong answer to a preference claim, but only if the evidence is captured and characterised correctly from the outset.

If you have received a demand or anticipate liquidator recovery activity, act now: Contact GLE for insolvency disputes for an urgent review of your position, or connect with a specialist through the GLE network.

Sources

1. Corporations Act 2001 (consolidated), Federal Register of Legislation
2. Australian Securities & Investments Commission (ASIC)
3. Australian Restructuring Insolvency & Turnaround Association (ARITA)
4. AustLII, Australasian Legal Information Institute
5. Federal Court of Australia, Judgments
6. Law Council of Australia