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Unfortunately, you may unknowingly find yourself a party to a transaction undertaken by a company while it is insolvent. Such transactions and other transactions that a company makes that were otherwise made against its interest may be voidable at law under the claw-back provisions.

A company under liquidation that is in the process of being wound up, will have an appointed liquidator. Further, the liquidator will investigate the affairs of the company and may identify any transactions the company has entered into that may be voidable. These transactions must be within a prescribed period of time before entering into liquidation. In those circumstances, the liquidator will be able to recover from you such payments or asset transfers made by the insolvent company. The objective of such powers is to avoid unfair advantages between creditors. And additionally, to ensure that the company’s assets are distributed fairly. This article will explain the types of voidable transactions and the defences to claims for voidable transactions.

Types of Voidable Transactions 

There are various types of transactions that may be voidable at law.  These include:

Unfair Preferences

A company’s transaction, regarding an unsecured debt owed by the company, may be an unfair preference given by that company to its creditor. This occurs if the transaction results in the creditor receiving more than they would have received in other circumstances. For instance, if the transaction were set aside and the creditor had to prove for the debt in a winding up of the company

In making this claim, the liquidator must show that the creditor either knew, ought to have known, or suspected that the company was insolvent when they entered into the transaction.  

Uncommercial Transactions 

A transaction of an insolvent company is an uncommercial transaction of that company if a reasonable person in the company’s situation would not have entered into the transaction having regard to:

  1. the company’s benefits (if any) as a result of entering into the transaction; 
  2. the detriment suffered by the company as a result of entering into the transaction; 
  3. the respective benefits the other parties to the transactions of entering into it; and
  4. any other relevant matter. 

Insolvent Transactions

A company’s transaction is an insolvent transaction if: 

  • it is an unfair preference the company gives;
  • it is an uncommercial transaction of the company when the company was insolvent; or
  • the company otherwise became insolvent as a result of entering into that transaction.  

Unfair Loans to a Company

A loan to a company is considered unfair if the interest or charge on the loan was extortionate when the loan was made. Or alternatively, if it has since become extortionate because of a variation. 

Unreasonable Director-Related Transactions

Firstly, a company’s transaction is an unreasonable director-related transaction if the transaction is:

  • a payment made by the company; 
  • a transfer, conveyance or other disposition by the company of its property;
  • the issue of securities by the companies; or
  • the incurring of an obligation by the company to make such a payment, disposition or issue.

Secondly, a company’s transaction is an unreasonable director-related transaction if the payment, disposition or issue is, or is to be, made to a:

  • company’s director;
  • close associate of a company’s director; or
  • person on behalf of, or for the benefit of a company’s director or a close associate of such director.

Thirdly, a company’s transaction is an unreasonable director-related transaction if it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

  • the benefits (if any) to the company of entering into the transaction; 
  • the detriment suffered by the company as a result of entering into the transaction; 
  • the respective benefits the other parties to the transactions of entering into it; and
  • any other relevant matter.  

Court Orders

On the application of a company’s liquidator, and where the court is satisfied that a transaction of a company is voidable at law, the court may make various orders. Including for: 

  • a person to pay an amount to the company equal to some or all of the money paid by the company under the transaction; 
  • an individual to transfer to the company property that the company has transferred under the transaction; 
  • a person to pay an amount to the company that the court views as fairly representing some or all of the person’s benefits they have received because of the transactions;
  • the release or discharge of any debt incurred by the company or guarantee given by the company; or
  • a variation of an agreement, or a declaration that an agreement, or a provision of such an agreement, is void or unenforceable. 

Defences to Voidable Transactions

Before a liquidator commences proceedings against you for voidable transactions, they will likely issue you with a letter or notification. This will request that you pay back certain monies or transfer certain properties back to the company.  

When responding to a liquidator’s demand or in defence to proceedings made against you, you may be able to argue:

  1. that you became a party to the transaction in good faith; 
  2. you had no reasonable grounds for suspecting that the company was or would become insolvent by reason of the transaction. Further, that a reasonable person in your circumstances would not have suspected that the company was so; and
  3. you provided valuable consideration under the transaction or that you have changed your position in reliance on the transaction.

As the person who is attempting to rely on the above defences, you would bear the onus of proving them. 

Key Takeaways

There are various types of voidable transactions and defences to claims for voidable transactions. If you have concerns that a company that you may be involved with is insolvent, or if you have received a letter or notification from a liquidator relating to any claim for voidable transactions and want advice, contact LegalVision’s insolvency lawyers on 1300 544 755 or fill out the form on this page.   

Frequently Asked Questions

What are unfair preferences?

An unfair preference is a company’s transaction given to a creditor that results in the creditor receiving from the company more than they would have usually received in other circumstances such as if the transaction were set aside.

What are uncommercial transactions?

An uncommercial transaction is a transaction of an insolvent company that a reasonable person in the company’s situation would not have entered into. Regard is had to the company’s benefits or detriment suffered as a result of entering into the transaction, the respective benefits the other parties to the transactions of entering into it and other relevant matters.

What is an insolvent transaction?

A company’s transaction is an insolvent transaction if it is an unfair preference the company gives, it is an uncommercial transaction of the company when the company was insolvent or if the company otherwise became insolvent as a result of entering into that transaction. 

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