Voidable transactions are transactions that relate to payments or assets that occurred whilst the Company was insolvent or made against the Company’s best interest. In accordance with Part 5.7B of the Corporations Act 2001 (‘Act’) within a specific period of time, a liquidator can recover such payments or asset transfers.
You might inadvertently become involved in a transaction of this nature. Such dealings may be legally reversed under ‘claw-back’ provisions, these are to avoid unfair advantages between creditors and to ensure that Company assets are distributed fairly.
This article outlines the types of reversible transactions and the potential defences against such claims.
Types of Voidable Transactions
These types of transactions relate to where a Company pays a creditor, of an unsecured debt, and the creditor ultimately receives more than they would have if the transaction was set aside and\ they proved as a creditor in the liquidation.
A transaction is deemed uncommercial if a reasonable person wouldn’t have agreed to enter into it after having regards to the benefits obtained and / or detriment suffered by the Company and other involved parties.
A transaction is categorised as insolvent if it exhibits unfair preferences, is uncommercial when the Company was insolvent, or if the Company became insolvent as a direct result.
Unfair Company Loans
A loan becomes unfair if its interest or charges were extortionate at its inception or if they became so due to modifications.
Unreasonable Director-Related Transactions
These are transactions that wouldn’t be approved by a reasonable person given the advantages and disadvantages to the company and other parties. They involve payments or transfers to the company’s director, their close associates, or on behalf of them and can include payment of debt, issuing securities and the disposal of Company assets.
A Liquidator can only claim these transactions as voidable if they occurred during the specific periods set out in Section 588FE of the Act.
The Liquidator commence proceedings through the Courts to make orders under Section 588FF of the Act. If the Court deems a transaction voidable, it can make the following types of orders:
- For the monies to be repaid to the Company;
- For property to be returned to the Company;
- The release or discharge of debt, or a security or guarantee given by the Company;
- In relation to unfair loans, which have been assigned, a person may be directed to indemnify the Company in respect to some or all of its liability;
- Declare an agreement, or part thereof, void or unenforceable; and
- Varying an agreement.
Defences Against Voidable Transaction Claims
Before initiating legal action for voidable transactions, a Liquidator will likely send a notice demanding repayment of funds or return of assets. When replying to such demands, one might argue various defences as outlined in Section 588FG of the Act:
- The transaction was entered in good faith;
- There was no reason to suspect the Company’s was insolvent or likely to become insolvent due to the transaction;
- A reasonable person in the same situation wouldn’t have either;
- You offered substantial consideration for the transaction or adjusted your stance based on it; and
- You are a secured creditor.
If you seek to rely on any defences outlined in Section 588FG of the Act, the onus of proof lies with you.
We are here to help
As outlined above, there are a range of potential voidable transactions that a Liquidator can rely on and clawback for the benefit of creditors of the Company. There are also a range of defences available for those who receive these claims.
If you’ve received communication from a Liquidator regarding a potential voidable transaction claim, seek advice by reaching out to Rodgers Reidy.