It often doesn’t come as a shock to a person when they are made bankrupt. A period of financial difficulty usually precedes bankruptcy. During that period, in some instances, the person has undertaken steps to dispose of their assets just before they are declared bankrupt.
In some circumstances, the trustee appointed to manage the bankrupt’s financial affairs can recover those pre-bankruptcy assets from people who received them. The Bankruptcy Act governs this action, also known as a ‘claw-back’.
Why A ‘claw-back’ Provision?
The rationale behind the ‘claw-back’ provisions is straightforward. A person who received full payment before the individual declared bankruptcy should not be at an advantage to someone who received payment after (and who may only receive part of his or her entitlement).
When Can a Trustee ‘claw-back’ a Transaction?
The trustee cannot ‘claw-back’ every transaction. It is dependent on several factors, including:
- Did the person transferring the asset do so in good faith?
- What was the bankrupt’s solvency when the transaction occurred?
- Was the transaction made for less than market value?
- Were the transactions undertaken with intent to defeat creditors?
- Were the payments ‘preference payments’? That is, do the transactions result in a party receiving a preference over the remaining unsecured creditors?
- When were the transactions made? There are different time limits for claw-backs.
Defending Payments Received From a Claw-Back
If you have received a payment from a bankrupt, you may now be asking whether you can defend these payments. Can the trustee claw-back everything? In short, yes and no.
For creditors who received pre-bankruptcy payments, they can, fortunately, rely on several available defences. For instance, if you received the payment in good faith, without notice or suspicion of the insolvency of the other party.
You will need to show the trustee, or potentially a Court if the trustee commences proceedings to claw-back the money, that you had no suspicion that the other party was in financial difficulty. What the trustee will look out for to try and prove that you had knowledge include:
- Defaulted payments;
- Requests for extended payment terms;
- Dishonoured cheques;
- Instalment payments;
- Payments of round numbers rather than payment of the actual invoice amount.
Of course, there are other ways that you can ‘promote’ yourself ahead of other creditors and avoid a possible claw-back. But this must be done before the bankruptcy. Where possible, you can try to secure your right to payment through a registered dealing on land and assets.
If you receive a claim from the trustee to repay some (or all) of the money you received via a bankrupt, you should seek immediate assistance from a lawyer. LegalVision’s specialist commercial lawyers can assist you, and answer any questions you may have. Get in touch with us on 1300 544 755.