Guide to Bankruptcy Voidable Transactions
A voidable transaction under the Bankruptcy Act 1966 (Cth) can be very similar to those under the Corporations Act 2001 (Cth). A voidable transaction is a payment of money, transfer of property or other transaction from the Bankrupt’s assets to a related or unrelated third party that effectively causes a detriment to the Bankrupt.
The main distinction between the Bankruptcy Act 1966 (Cth) and the Corporations Act 2001 (Cth) is that in most circumstances you do not have to prove that the Bankrupt was insolvent at the time of the transaction.
The responsibility of a Bankruptcy Trustee is to distribute a Bankrupt’s assets, fairly and evenly to all creditors. If a voidable transaction has taken place prior to the appointment of a Bankruptcy Trustee, then the Bankruptcy Trustee has the power to avoid these transactions under the Bankruptcy Act 1966 (Cth).
For all voidable transaction claims, the Bankruptcy Trustee has 6 years from the first act of Bankruptcy (as defined below) to commence proceedings for a voidable transaction under the Bankruptcy Act 1966 (Cth).
These are the most common type of voidable transactions in Bankruptcy’s and commonly take place when a debtor is aware that they will soon be declared bankrupt. They transfer their valuable assets or money to a related party at an undervalue in attempt to conceal it from becoming part of the Bankrupts’ estate. Examples of such transactions include purchasing assets for greater than market value in order to transfer money to a related party and selling valuable assets for less than market value.
SV Voidables are well experienced in recovering and defending these types of transactions. See the following article as an example.
Elements of uncommercial transactions
Avoidance of preferences
Preferences occur where a creditor has received an advantage over other creditors, by receiving payment (or other type of transaction) for their outstanding liabilities and does so in circumstances where they knew, or ought to have known, that the Bankrupt was insolvent.
Elements of unfair preferences:
Transactions where consideration given to a third party
This is where a transfer of property has taken place between two parties (the Bankrupt and the transferee) and subsequently, the transferee gives some or all of the consideration for that transfer to a third party.
Under ss 120 and 121 of the Bankruptcy Act 1966, the third party can be the subject of recovery actions by a Bankruptcy Trustee where that consideration should have been paid to the Bankrupt.
Transfers to defeat creditors
This is where a person (who is subsequently declared bankrupt) transfers property to another person with an intention to protect that property from becoming a part of their Bankrupt Estate and subsequently being distributed to creditors or with an intention to defeat or delay the proper distribution of that property to creditors.