When a construction company goes broke, the subcontractors and suppliers often receive letters from the liquidator demanding repayment of so-called ‘unfair preferences’.
When an ongoing business relationship has existed between the creditor company and the company in liquidation, liquidators have historically worked out the amount of the ‘unfair preference’ on a ‘running account’ basis by reference to the so-called ‘peak indebtedness principle’. For example, if the following transactions took place:
|1 May 2012
|31 May 2012
|7 June 2012
|30 June 2012
Then the liquidator would say that ‘peak indebtedness’ occurred when the amount owed was $1,416,563.31 and that the ‘unfair preference’ was the difference between that figure and the sum of $1,365,321.00.
This did not take into account the fact that the creditor company might have carried out work or supplied services during the relevant time period.
The High Court has now made it clear that such an approach is incorrect. The accounting compares only goods/services provided and amounts paid during the relevant period.
Using the above table, the creditor company has handed over goods/services totalling $1,365,321.02 (the total of the two invoices), and they have been paid $1,339,277.41. As such, they have not received any preference at all (as they have handed over more in terms in value, than they have received).
This is important for subcontractors and suppliers, as they often perform work and hand over goods during the relevant period.
Now, we understand that a number of subcontractors and suppliers will not be overly concerned in circumstances where the new project trust regime is due to be rolled out in Queensland this year, however a few words of warning, first, that regime has not yet ‘kicked in’, second, the regime won’t affect jobs outside of Queensland, and, third, the regime won’t cover all aspects of the industry. As such, this issue remains very much alive and relevant.
If you receive correspondence from a liquidator, we urge you to obtain legal advice urgently. A ‘running account’ style defence can be complicated and requires detailed consideration.
Cornwalls’ Building and Construction practice groups have experience in acting for and advising on all aspects of the construction industry, including solvency issues.
For further information regarding the above, please contact the author or any member of our Building & Construction team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.
 The later of the date of insolvency and (usually) the date which is six months prior to the appointment of the liquidator, and the date of the end of the ongoing business relationship.
 Bryant v Badenoch Integrated Logging Pty Ltd  HCA 2 (‘Bryant case’).