Australia: Can the liquidator appointed to your customer demand the return of money your customer paid you?
An insolvent company's payments and transactions which are made within a relevant period prior to commencement of a formal insolvency proceeding are "voidable preferences", that is they should be set aside and returned to the liquidator for sharing amongst the creditors.
The most commonly challenged payments are those made six months prior to commencement of the liquidation. The liquidator must prove that the company was insolvent at the time of the payment, unless the creditor can prove that it received payment in the ordinary course of business and had no reason to suspect that the company was insolvent at the time.
Any liquidator's claim to recover a preferential payment must be brought within three years of the commencement of the liquidation unless granted an extension of time by the court.
Fortress Credit v Fletcher  HCA10 shows that the High Court accepted that courts have a discretion to extend the three-year period, provided the liquidator can show that an extension was reasonable in the circumstances. Complex insolvency administration where investigations have proven difficult are likely to be the only circumstances in which a liquidator would gain an extension.
The best defence is to ensure that customers pay strictly in accordance with your normal trading terms as payments outside these terms may be challenged. Finally, do not ignore a liquidator's demand as an early compromise resolution may be accepted.
By Nigel Watson
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