Preference claim (or unfair preference)

Unfair preferences are the most common type of voidable transaction. They occur where a creditor has received payment (or another advantageous transaction) for something they are owed, giving them an advantage over other creditors. The funds from unfair preference payments will only be able to be clawed back where they were received by a creditor who knew, or ought to have known, that the company was insolvent.

Section 588FA of the Corporations Act 2001 (Cth) treats a transaction as an unfair preference where it meets certain criteria.

“(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian Court or direction by an agency”.

A preference claim is generally pursued by the liquidators of an insolvent company to claw back funds for the purpose of disbursing them among the creditors.