FAQ – Corporate Voidable Transactions


Corporate Voidable Transactions


What is a voidable transaction?

Typically, a voidable transaction can arise where you receive monies for services rendered or goods supplied or you purchase an asset from a business, at a time when:

  • the business was insolvent
  • you knew, or should have reasonably known, that the business was insolvent

The responsibility of a Liquidator or Registered Trustee in Bankruptcy is to distribute a business’ assets, whilst ensuring that no creditors are being unfairly advantaged or disadvantaged. If a voidable transaction occurs and a detriment is suffered by the business or its creditors the Liquidator or Registered Trustee in Bankruptcy have the power to pursue these transactions.

What are the different types of voidable transactions?

  • Unfair preferences
  • Transactions where the consideration is given to a third party
  • Uncommercial transactions
  • Unfair loans to a company
  • Unreasonable director-related transactions
  • Transfer to defeat/defraud creditors
  • Related-party transactions
  • Related-party benefits
  • Circulating security interests registered within 6 months of external administration
  • Vesting of security interests registered outside time
  • Who can pursue me for a voidable transaction?

    Liquidators or Registered Trustee pursue voidable transaction claims in accordance with their statutory obligations under the Corporations Act or Bankruptcy Act. The Insolvency Law Reform Act 2016 extends this right to anyone that purchases the voidable transaction claim from a Liquidator or Trustee. For further information on this, please contact one of our Expert Advisors.

    When can I be pursued for a voidable transaction?

    A Liquidator or Registered Trustee can pursue you for a voidable transaction if you have received payments from the business within the prescribed period leading up to the date of the external administration. This can range from 6 months to 10 years, depending on the type of claim that is being pursued. For a summary of these different time periods, please see our diagram.

    What is the relation-back day and the relation-back period?

    Relation-back day is defined in s 91 of the Corporation Act or Part 6, Division 3 of the Bankruptcy Act and is determined based on the type of appointment. The relation-back day is used by Liquidator’s or Registered Trustee and the Courts to determine what date to relate-back from in determining the quantum of any potential voidable transaction claims incurred during the relation-back period. For more information please refer to our diagram.

    Relation-back period is the prescribed period of time dating back from the relation-back day where payments that were made by the business to you, may be clawed back as a voidable transaction. For a summary of these different time periods, please see our diagram.

    How long does the Liquidator or Registered Trustee in Bankruptcy have until the claim expires?

    A Liquidator has 3 years, and a Registered Trustee has 6 years, from the relation-back day (see FAQ 5) to file proceedings in court, otherwise their claim will be statutorily barred (subject to applying to court for an extension of time).

    What defences do I have available to me?

    Please refer to the following page on our website, which outlines the defences available – SV Partners website – defences.

    What is a running account?

    A running account can be defined as a timeline of transactions between two entities (eg invoices, payments and credit notes) and includes a running balance of the amount owed or owing between the two entities. This may be used as a defence to an unfair preference claim, by subtracting the peak debt owed to you during the relation-back period, and the debt owed to you on the relation-back day. Conditions apply, so we recommend contacting one of our Expert Advisors.

    I am a director – are there any personal consequences for me if the company is found to have paid a preference/voidable transaction?

    Where a director has personally guaranteed the debt of a company, he/she can be personally liable when the company is wound-up if payments towards that debt are found to be unfair preferences.

    Pursuant to s 588FGA of the Corporations Act, where the ATO is found to have received an unfair preference from a company in liquidation, the ATO can pursue the director to indemnify the ATO for the payments clawed-back by the Liquidator.

    When might a transaction be uncommercial or unreasonable?

    If a reasonable person would not have entered into the transaction, having regard to the benefit the business received, or the detriment the business may have suffered. For example, if you purchase a business for $10,000, but it turns out that the business is actually worth $100,000, then you may have received an uncommercial or unreasonable benefit.

    Can I still be pursued for a voidable transaction if I received the payment from a third party company on behalf of the company in liquidation?

    Yes, even if a payment is made by a third party, on behalf of the company that is in liquidation, it may still be clawed-back as a voidable transaction. It has been held by a number of Courts that a liquidator can recover payments made by a third party where the net effect of the transaction is to either create or extinguish a debt between the third party and the company.

    What if I am being pursued for a voidable transaction and I have an amount owed to me as an unsecured creditor? (ie can I still prove for my debt in the liquidation?)

    You have the option of potentially applying set-off, whereby your claim is deducted by the amount owed to you by the insolvent business. Our views on the application of set-off were stipulated in the following article – No Setting Off Unfair Preferences.

    In the event that the Liquidator or Registered Trustee is successful in clawing-back all, or part, of the voidable transaction, you may prove for that amount in the Liquidation or bankruptcy in addition to any other unpaid debt owed to you.

    What are my rights as a secured creditor when defending an unfair preference claim?

    Generally speaking, a Liquidator or Trustee cannot pursue you if you are a secured creditor, they can only pursue unfair preferences in respect of unsecured debts.
    However, this general proposition can be set aside where the value of that security at a point in time is worth less than the value of the credit owed.
    This point in time is subject to academic debate, based on 3 points of time: (1) date of entering into the security agreement; (2) date of the transactions; and (3) relation-back day.
    We have written an article about this in – Secured Creditors, unfair preferences and Liquidators.

    How can I be more careful moving forward as an unsecured creditor to avoid receiving an unfair preference claim?

    In order to reduce your chances of receiving a preference as a creditor you can employ the following techniques (this information is general in nature):
    a) Trade on a COD basis – In order to receive a preference, there must be a debtor/creditor relationship. Trading on a COD basis effectively removes the debtor/creditor relationship, meaning that the payments are not liable to be clawed-back as unfair preferences;

    b) Become a secured creditor – Payments made to a secured creditor cannot be clawed-back by a Liquidator or Registered Trustee in Bankruptcy as an unfair preference claim, subject to the value of the security. Refer to FAQ 13 for further information on this.

    c) Be aware – The principle requirement for most forms of voidable transactions is that the transaction is an insolvent transaction. Accordingly, it is important to be aware of the possible indicators that a business may be insolvent.

    Who can I talk to for more information about voidable transactions?

    If you or your client received a demand letter from a Liquidator or Registered Trustee seeking the repayment of unfair preference payments, then you have the option to contact SV Voidables.
    SV Voidables is a national first service offering, providing support services in recovering or defending voidable transactions.

    Our national presence and extensive experience at recovering voidable transactions, uniquely places us to provide specialist consulting services to recover or defend voidable transaction claims. Contact a member of SV Voidables on 1800 246 801 for a free first, and confidential, consultation from one of our experts or click here for more information.

    Are you concerned about your financial position? Contact us now for an obligation free consultation.