Corporate Voidable Transactions

19 August 2020
Commercial Law, Insolvency & Tax

Voidable transactions are generally transactions that relate to payments or assets that occur while the company is insolvent or are otherwise made against the company’s interest.  Part 5.7B of the Corporations Act 2001 (Cth) (the Act) provides the legislative framework for a liquidator to recover such payments or asset transfers made by an insolvent company within a specific period prior to its liquidation. The purpose of these provisions (commonly known as “clawback” provisions) is to avoid unfair advantages between creditors and ensure that the company’s assets are distributed fairly.  

Types of voidable transactions

A transaction entered into by a company may be voidable under Part 5.7B of the Act if it is:

  1. an unfair preference given by a company to a creditor in respect of an unsecured debt if the transaction results in the creditor receiving more than it would receive if the transaction were set aside and the creditor was to prove the debt in the winding up of the company;
  2. an uncommercial transaction, whereby a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to the benefits obtained or detriment suffered by the company and the respective benefits the other parties to the transactions obtained from entering into it;
  3. an insolvent transaction so that it is an unfair preference given by the company, or an uncommercial transaction of the company, when the company is insolvent, or it becomes insolvent as a result of entering into that transaction;
  4. an unfair loan made to the company, where the interest or charges on the loan was or has become extortionate because of a variation to that loan; or
  5. an unreasonable director-related transaction, such that the transaction involves a payment, issue of securities, a disposal of the company’s asses, or causes the company to incur an obligation to may such a payment, disposition or issue to a director or a close associate of the director and a reasonable person would not have entered into that transaction having regard to the benefit obtained or detriment suffered by the company.

Such transactions may only be voidable if they occurred during specific periods set out under section 588FE of the Act.

Defences

Section 588FG of the Act provides several defences to a person in receipt of the subject payment or asset transfer, the subject of a liquidator’s claim for voidable transactions.  These include:

  1. if the person became a party to the transaction in good faith;
  2. the person had no reasonable grounds for suspecting that the company was or would become insolvent by reason of the transaction;
  3. a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
  4. the person provided valuable consideration under the transaction or has changed his/her position in reliance on the transaction.

The onus of proving any such defence lies with the person who seeks to rely on it.

Court orders

The Court may make various orders under s588FF of the Act with respect to voidable transactions.  For example, the Court may make orders: 

  1. for the receiving entity to pay monies or transfer property back to the company;
  2. to release or discharge a debt incurred by the company or a security or guarantee given by the company;
  3. if the transaction is an unfair loan and such a debt, security or guarantee has been assigned, to direct a person to indemnify the company in respect of some or all of its liability to the assignee;
  4. declaring an agreement (or part of it) constituting, forming part of, or relating to, the transaction void or unenforceable; and
  5. varying such an agreement.

Our litigation team at Lionheart Lawyers offer a unique breadth of experience and expertise in respect of voidable transaction claims. We can readily assist you in both making voidable transactions claims as a liquidator or defending such claims made against you.

Contact us today for more information.

Important Disclaimer: The material contained in this publication is of general nature only. It is not, nor is it intended to be legal advice.

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