Some transactions with an insolvent company can be "attacked" by a liquidator. If the liquidator goes to court and succeeds on the claim then the recipient of the "benefit" may need to repay the benefit(s) or perhaps pay compensation to the liquidator. These transactions are known as voidable transactions.
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What are voidable transactions?
Basically, a voidable transaction is a transaction with an “insolvent” company that may render the person liable to pay compensation to the insolvent company.
Usually, the liquidator firstly writes a letter to the creditor and demands repayment of the amount received (as a preference) and failing that applies to the court to recover the relevant property. The letter from the liquidator (and response to it) is key as it sets the ground for any court dispute.
What is a voidable preference (aka unfair preference)?
An unfair preference is sometimes called a voidable preference.
The Corporations Act 2001 (Cth) defines an unfair preference and the intent is to cover:
- a transaction between the insolvent company and a creditor
- under which the creditor receives property
- beyond what the creditor would have received if a proof of debt was lodged.
What can the Court do once there is a voidable transaction?
Once a transaction is voidable, the court can order payment of:
- compensation to the “insolvent” company
- an amount equal to amount paid
- whatever was actually paid i.e. a re-transfer
- etc.
What is the relation back day?
The relation back day is a day defined under the Corporations Act 2001 (Cth).
The relation bay day is important as it is used to determine the time:
- limit for bringing an application
- period within which a transaction may be voidable.
The relation back day can differ but as a rule of thumb
- it is when the winding up application was filed, or
- when the external administrator was appointed e.g. voluntary administration.
However, check the legislation to be sure.
Other types of voidable transactions
Some of the other types of voidable transactions include:
- unfair loans
- unreasonable director related transactions
- transactions to defeat creditors
- etc.
Examples of voidable transactions
Examples can include:
- where the insolvent company pays a judgement debt to a creditor who would otherwise be entitled to less if a proof of debt was lodged.
- similarly, if the insolvent company pays a statutory demand in circumstances where the creditor would receive less in a winding up.
- etc.
Defences to voidable transactions
The defences to voidable transactions are contained in the Corporations Act 2001 (Cth). Simply stated they involve showing that, as a defendant, you were either not a party to a transaction (and received no benefit) or that if you were a party you received the benefit after providing valuable consideration and that you didn't have a clue the company was insolvent.
Recent Changes to voidable transactions
Recent changes to the Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 have limited the instances in which unfair preferences can be claimed.
This applies where:
- a company is subject to a simplified liquidation process
- the transaction was either entered into in the 3 months before the relation back day (or afterwards and was for less than $30K); and
- the creditor is not a related entity of the company being liquidated.
For more information see Regulation 5.5.04
Help with voidable transactions
If you are a liquidator or a defendant to a claim by a liquidator then:
- we can advise you on your rights
- the procedure for bringing a claim
- possible defence(s) to the voidable transactions claim.
Contact our commercial litigation lawyers to discuss.
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