An unfair preference payment is one that may be recovered to ensure that the assets of an insolvent company are distributed equally among the creditors and that no one creditor received preferential treatment unless legally mandated. As such, the law in this area reflects the important principle ‘pari passu’ principle in insolvency law.
Unfair preference payments are defined under section 588FA of the Corporations Act 2001 (Cth):
“(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.”
Payments that are found to be unfair preferences are subject to claw back actions in order to allow for the proper redistribution of an insolvent company’s remaining assets, to ensure that creditors are paid back in the correct order, as much as possible, as according to their priority at law.