How PPSR Protects Creditors From Unfair Preference Claims (Preferential Payments)

What Is A Preferential Payment (Unfair Preference Claim)

Liquidators have a duty to investigate creditor payments. If they determine that a creditor was  “preferred” in the lead up to the liquidation, an unfair preference claim can force the return of the funds.

Summarised,  section 588FA of the Corporations Act 2001 (cth) defines an unfair preference as:

• a transaction between a company and a creditor,
• in relation to an unsecured debt, and
• where the creditor receives more than they  would have in the normal course of liquidation.

The aim is to ensure unsecured creditors are treated equally.

There are four key elements to a claim:

1. The business was insolvent at the time of  payment
2. The debt is unsecured
3. The payment gave the creditor an advantage over the other unsecured creditors
4. The payment occurred within (normally) 6  months of liquidation

If an unfair preference claim is successful, the creditor must return the money and the liquidator adds it to the pool of funds to be distributed.

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How Does PPSR Protect Against An Unfair Preference Claim

There are several defences available but the simplest to prove is that the debt was secured. As above, the definition of an unfair preference under the Corporations Act is that the claim must be in relation to an unsecured debt.

The Personal Property Securities Register (PPSR) allows creditors to record their security  interests. Registering on the PPSR against your customers makes you a secured creditor. Thus, you are not an unsecured creditor and an unfair preference claim should not apply.  

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Best Practices for Creditors Using PPSR to Protect Against Preferential Payments

Register your  security interests on PPSR. At best you’ll receive  full payment as a secured creditor with a Super Priority Purchase Money  Security Interest, at worst you have an excellent negotiating position.  If you don’t register, your status is as an unsecured creditor exposed to  potential unfair preference claims.

Best  practices include:

• Register on time – Register within the  required timeframes to ensure the strongest position.
• Ensure registration accuracy – Common mistakes  like grantor identification errors, profile errors (ticking the incorrect  boxes) and errors in VINs for serial numbered goods can invalidate your security.
• Maintain records – Keep copies of credit applications (including signed terms and conditions of trade) registration  details, invoices, etc. to support your claim if challenged.
• Review regularly – Ensure registrations are up  to date, especially if customer details change. And make sure you renew your  registrations. Our Access PPSR product helps you stay on top of expiring  registrations with alerts displayed in our dashboard.
• Monitor for signs of risk – Our Access Monitor software continuously monitors your customers for signs of risk. Be alerted to red flags like loss of license, ATO business tax debt defaults, court  actions and more. Manage your exposure accordingly.

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This is just one of the many benefits of registering on PPSR. Book a meeting with one of our experts to discuss whether PPSR is right for your business.