There are many ways to skin a cat (poor cat I know), but when it comes to unfair preferences the best way to defend against a claim is to use some simple maths.
Meet Zoey’s Design.
Zoey’s has a $50k trade credit account with Harry’s Hardware Store.
Zoey’s carries on a home decorations business, but goes into Liquidation a few years later after falling on hard times.
Zoey’s account with Harry’s looks something like this:
30 January, total debt = $50k
15 February, payment = $50k
31 March, total debt = $50k again
1 June, payment = $25k
30 June, Zoey’s goes into Liquidation owing Harry’s $25k
The Liquidator sues Harry’s for the two payments totalling $75k.
Now here is the maths:
Peak debt owed to Harry’s = $50k
Less debt on the Liquidation date= $25k
Less set-off of debt owing on the Liquidation date = $25k
Claim = $nil
In this example, Harry’s would use sections 588FA(3) and 553C of the Corporations Act to firstly apply what is called the ‘running account balance defence’ and then secondly the ‘set-off defence’.
Moral of the story: if you are being pursued for an unfair preference or trading with a customer that you think might be insolvent seek help from a voidables expert.
