Zombie Bite #2 – Can you fight your way out of this Trap?

Don’t get caught in the (Zombie Company) Preference Payments trap!
Bear Trap

How many times do we see it in a zombie movie? Our heroes seem to find refuge with a small group of survivors, but there is something not quite right. There is the doubt that behind the welcoming smiles, the new community is just as deadly …

One of the risks of the downturn are  Zombie Companies propped up by short term stimulus. The threat posed by preference payments from these and other failed businesses is just as deadly, but you can take steps to try to protect yourself. 

What to watch out for and traps to avoid? To find out we’ve asked Solicitor Bruce Pasetti of Thesolvers.com.au, and the Insolve Panel members Liquidator Stephen James and Liquidator/Bankruptcy Trustee Bill Cotter.

What is the Trap?

“A preference payment is payment (or payments) made by an insolvent company to an unsecured creditor thereby causing disadvantage to the remaining unpaid creditors. Effectively that payment means others miss out on a ‘fair’ share,” says Stephen. In other words, the failing Zombie Business pays their mates, or whoever is screaming the loudest rather than paying something to everyone equally.

Some ways a payment qualifies as a Preference are:

  • A reasonable person in the creditor’s shoes should have suspected insolvency.
  • It was made within 6 months of the company liquidating, or 4-10 years prior to the liquidation if the payment was made to a ‘related party’.

How can I avoid the Zombie Company-Preference Payments Trap?

One trick is to become a secured creditor through having strong terms and conditions in your business supply contracts and by registering on the PPSR before giving credit or accepting payment on terms.

Bruce warns “Secured Creditors are not impacted by Preference Claims. But be aware, it’s vital to get your PPSR registration absolutely accurate and correct. You must invest time in it, or alternatively, engage a specialist. An incorrect registration is useless if defeated by the liquidator because your entire investment is very likely to be lost.”

Even if you have a Retention of Title clause in your terms, or on your invoice, it needs to be registered on the PPSR in order to have full effect, especially in the event that your customer collapses.

Can I fight my way out of The Trap?

“Yes, you can, but like any scenario with Zombie Companies, you have to minimise your risk,” says Stephen.

Business owners should consider the following when chasing outstanding debts:

  1. Follow a standard debt collection process previously communicated to the customer.
  2. Keep written communication to a minimum.
  3. Enter installment arrangements early.
  4. Try to avoid having round figure payments from debtors. Instead have specific invoice amounts paid.

Says Stephen, “If you have taken early advice you will know whether you should stand and fight a preference claim if it comes, or fold. Dealing early is usually the best.”

Do any of the temporary Covid-19 Business Measures impact Preference Payments?

For six months from 24th March 2020:

  • Insolvent trading rules were relaxed.
  • The minimum debt amount required to issue a Bankruptcy Notice or liquidation proceedings (such as making a Creditor’s Statutory Demand) was raised to $20,000.
  • The time allowed to respond to a Bankruptcy Notice or Creditor’s Statutory Demand has been increased from 21 days to 6 months.

Bill Cotter takes up Stephen’s point. “Even in these times, the liquidator still has to prove you suspected a company was insolvent when you received the challenged payment. If you chase a late payment, or accept part payments, the circumstances could be argued as being related to the general economic crisis, and short term cash flow challenges, but not necessarily a reason for you to suspect that the creditor was insolvent”.

Bill also suspects that his fellow insolvency practitioners will take an industry by industry view. “A tourism operator whose business has been in hibernation, if it were a Zombie Business that was wound up, it is unlikely it will have made too many preference payments over the six months preceding it falling over. Other businesses still trading in some form that were propped up by Job Keeper and other stimulus – only to fail afterwards when these supports are removed,- then a liquidator may well be looking closely at where its payments have been made”.

Avoid The Traps

In zombie movies, the traps are easy to spot, that way we squirm in our seats, we get outraged at our heroes for being so stupid and more than anything we can’t believe they didn’t see the obvious. 

Preference Payment traps aren’t obvious, but there are ways to avoid them if you stay alert– don’t get caught, and even if you do – get specialist advice on how to respond, because there is often more than one way out of the trap!

For additional information on preferences see Stephen, Bruce and Bill’s Article: https://insolve.com.au/preference-payments/

For additional information on collecting debts, see Bruce’s article:


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Any or all of these reasons for business owners with a Pty Ltd company who:

  • have closed or are likely to close their business without any money left 
  • cannot afford $15,000 but want to place their company into liquidation  
  • want to do the right thing and inform their creditors properly about the business closing down 
  • want to draw a line in the sand so they can get on with their future.

If you have personal assets you want to protect, like a family home or director’s guarantees, this may not be for you, but you should ask us.

Cheryl Stainsby

Cheryl is a Director’s Advocate specialising in Crisis Management; Business Health Checks, Asset Protection and Exit Strategy  Find out more or Email Cheryl.

Niall Coburn

Niall Coburn

Niall is a Litigator, Prosecutor and Corporate Investigator. Find out more or Email Niall.

Bruce Pasetti portrait photo

Bruce Pasetti

Bruce Pasetti is the ‘go-to’ for actions for Windup (or to defend companies and directors against similar actions). Bruce is a Solicitor with over 20 years legal and specialist Insolvency experience. Find our more or Email Bruce.

Stuart Craig

Stuart is a Business Transformation Specialist and Certified Practicing Accountant, specialising in business turnaround and restructure, business management and business ownership transfer. Find out more or Email Stuart.

James Flaherty

James Flaherty

James is a business consultant and accountant. He specialises in sales and marketing for the business and finance sectors. Find out more or Email James.


Ginette Muller

Ginette is a Business Crisis Advisor and Accountant specialising in Safe Harbour, refinancing, litigation funding, restructure and business crisis advice. Find out more or  Email Ginette.