Guide to Corporate Voidable Transactions
What is a voidable transaction?
A voidable transaction is a payment of money, transfer of property or other transaction from the company’s assets to a related or unrelated third party that either occurs at a time when the company was insolvent or otherwise causes a detriment to the company.
The responsibility of a liquidator is to distribute a company’s assets whilst ensuring that no creditors are being unfairly advantaged or disadvantaged. If a voidable transaction has taken place prior to the appointment of a Liquidator, then the Liquidator has the power to avoid these transactions under the Corporations Act 2001 (Cth), to ensure that assets are distributed fairly amongst creditors.
For all voidable transaction claims, the Liquidator has the later of 3 years from when first appointed as Administrator, Liquidator or the proceedings to wind-up the company are first filed (defined below as the relation-back day) or 1 year from when the Liquidator is first appointed as a liquidator to commence proceedings for a voidable transaction.
Our resources in the below Guide to Corporate Voidable Transactions will assist you with understanding the most important aspects of voidable transactions.
Unfair Preferences are the most common type of voidable transaction and occurs 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 company was insolvent.
An uncommercial transaction relates to transactions entered into by a company where it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, by having regard to its benefits and/or detriments to the company. Liquidators have the power under the Corporations Act 2001 (Cth) to void such transactions.
Unreasonable director-related transactions
Similarly, to an uncommercial transaction claim, an unreasonable director-related transaction arises when a transaction is entered into by a director or close associate of the company, in circumstances where it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction. Again, the court has regard to the benefits and/or detriments to the company by entering into the transaction. Liquidators have the power under the Corporations Act 2001 (Cth) to avoid such transactions.
The main differences between an unreasonable director-related transaction and an uncommercial transaction claim is that:
- For an unreasonable director-related transaction to arise, a director or close associate must be involved;
- The transaction does not have to have been entered into when the company was insolvent – meaning the Liquidator does not need to go to the effort of proving insolvency; and
- The relation-back period is 4 years.
Unfair Loans may arise in circumstances where a loan to a company is unfair and meets either of the following tests (as set out in s 588FD of the Corporations Act 2001 (Cth)):
- The interest on the loan was extortionate when the loan was made, or has since become extortionate because of a variation; or
- The charges in relation to the loan were extortionate when the loan was made, or have since become extortionate because of a variation, even if the interest is, or the charges are, no longer extortionate.”
A liquidator making a claim to a court under s 588FF of the Corporations Act 2001, for an unfair loan need not determine whether the company was insolvent at the time of entering into the loan and the claim depends upon the circumstances and facts of the case.
For a liquidator to successfully bring an unfair loan claim against a lender, the liquidator must show that the events leading up to, and during, the entering into the loan arrangement, the lender extorted the borrower.
In our experience, this is a very difficult claim to prove.
Defending voidable transactions
The main defences to a voidable transaction claim are:
- Good faith defence;
- Running account balance defence;
- The defendant creditor is a secured creditor; and
- The ultimate effect doctrine or “the landlord defence”.
Other arguments that we have faced against claims we have run are:
- Capacity to pay;
- Equitable liens;
- Set-off, following the recent case law commentary;
- Charging clauses; and
- Factoring agreements.
If you have any questions regarding these possible defences, please give our experts at SV Voidables a call on 1800 246 801.