It can often be the case that a company who you have been trading with enters liquidation and you suddenly receive notification from a liquidator requesting that you pay back certain money. Below, we explain what a voidable transaction is, what defences are available to parties, and a liquidator’s powers. You may also see a voidable transaction referred to as a ‘claw-back’ provision.

Voidable Transactions

Under the Corporations Act 2001 (Cth) (‘the Act’), liquidators are allowed to recover certain transactions that an insolvent company made within a specific period before the liquidation. This is known as the ‘relation back period’. The provisions intend to avoid unfair advantages to certain creditors over the general pool of creditors.

Unfair Preferences

The most common voidable transactions are unfair preferences (section 588FA of the Act). To prove an unfair preference, a liquidator must show:

  • There was a transaction between the company (now in liquidation) and a creditor;
  • The company was insolvent at the time of the transaction;
  • The transaction occurred within the relation back period;
  • The creditor is receiving more than they would have under the liquidation (that is, they received a preference).

A key component is that the liquidator must show that the creditor knew or ought to have known, or suspected that the company was insolvent at the time they entered into the transaction.

What is the Relation Back Period?

The transaction needs to have occurred within the following dates of the company commencing liquidation:

  • Within six months for unrelated parties;
  • Within four years for related entities/parties; or
  • Ten years where the purpose of the transaction was to defeat creditors.

What Happens if you Receive a Letter From a Liquidator Requesting a Claw-back of Transactions?

There are several defences available under section 588FG of the Act, and you must show the following:

  1. You had no reasonable grounds for suspecting that the company was insolvent or would become insolvent at the time they entered into the transaction, and a reasonable person in the circumstances would not suspect;
  2. You entered the transaction in good faith; and
  3. You provided valuable consideration for the transaction.

The creditor bears the onus of proving the defence and it can be difficult to establish. The tricky part is showing that you had no reasonable grounds for suspecting that the company was insolvent or would become insolvent. You must also prove that a reasonable person in the creditor’s position would not have had grounds to suspect that the company was insolvent or would become insolvent.

What Types of Things will a Court Look at When Examining This Issue?

  • The company was not making payments as and when they became due and payable;
  • The company transferred to part-payments to pay off the debts;
  • Payments were made in round numbers (i.e., $10,000); and
  • Was there a running account in place between the parties?

Key Takeaways

There is, of course, a distinction between insolvency and short term lack of liquidity. You will then likely need to provide the court with evidence about the transaction and the surrounding circumstances. If you have concerns that a company that you are involved with is insolvent or if you receive a letter from a liquidator relating to unfair preferences, get in touch with our insolvency lawyers on 1300 544 755.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Emma George

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