Can Subbies in Queensland defeat unfair preference claims?

The Subcontractors’ Charges Act 1974 (Qld) (Act) allows an unpaid subcontractor to obtain a charge over monies which would otherwise fall due to their contractor upstream by issuing a notice under the Act.

The Act can be powerful and, by issuing notices, elevate the subcontractor from an ordinary unsecured creditor to, in substance, a secured creditor.

The Act imposes strict deadlines upon a subcontractor to give those notices, and if they do fail to do so, they will lose the ability to claim the charge.

This raises an interesting problem where:

1.  The subcontractor demands payment from its insolvent contractor;

2. The subcontractor is paid;

3. The contractor goes into liquidation; and

4. The liquidator demands that the subcontractor repay its payment on grounds that the payment is an unfair preference.

The subcontractor could defend the claim on the basis that it received payment in respect of a secured debt, had it issued the notices under the Act within time.  Unfortunately, that deadline has now expired.

In order for a liquidator to succeed in such an unfair preference claim, the liquidator needs to establish that the payment resulted in the subcontractor receiving from the company more than the subcontractor would receive from the company if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company.

On one view, this may invoke a hypothetical consideration of what would have occurred if the payment had not been made, the subcontractor issued a notice under the Act within time, and the company’s superior contractor made payment directly to the subcontractor under the Act from monies otherwise due to the contractor.

This may result in the liquidator being unable to satisfy the Court that the subcontractor was preferred by reason of the payment, and the liquidator’s claim would be dismissed.

Unfortunately, there has no been reported judicial consideration of the above issue.

Subcontractors dealing with insolvent contractors should always act quickly, and if facing a potential unfair preference claim, take legal advice as they may have a defence to the claim on the above grounds.