At a recent meeting with a Shop fitter in the Inner West of Sydney, the owner explained that a large local Sydney Inner West business that they had done work for to the value of over $800K to date, went into liquidation. The company still owed the shop fitters $140K which was bad enough in itself. But then they received a demand from the liquidators demanding that the $660K that they had been paid from the liquidated company over the previous 6 months be paid back under the Claw Back provision in the Corporations Act.
Talk about rubbing salt into the wounds. The preferential payment provision can be invoked by the Liquidator if the insolvent company has paid a creditor within the 6 months prior to the Liquidator being appointed.
Fortunately for the Shop fitter, the Liquidator had made a fundamental error in their documentation, so with the aid of a Solicitor the Shop fitter managed to escape the Claw Back provision. In the end the shop fitter missed out on the $140K he was still owed and had an expensive legal bill to pay – but a lot less than the $660K they were up for if not successfully defended, which would have put them out of business.
The moral of the story is, whether you’re based in Sydney’s Inner West or elsewhere in Australia, talk to EC Credit Control about how to protect your business from a costly and painful Preferential Payment claw back scenario.