Voidable transactions can occur in the context of both personal and corporate insolvency.
A voidable transaction (VT) is a transfer of assets to a third party (who can be related or unrelated to the transferor) when:
- in relation to corporate insolvency (e.g. liquidation), the company was insolvent, or the transaction was otherwise detrimental to the company;
- in relation to personal insolvency (e.g. bankruptcy), the transaction caused detriment to the bankrupt’s financial position.
A VT can be a transfer of property, a payment of money, or any other transaction moving assets owned by the insolvent entity to someone else.
There are various types of VT listed in the table below:
|Corporate Insolvency||Personal Insolvency|
The most common VT in corporate insolvency is an unfair preference payment. This is where a creditor has received payment from the debtor company for monies owed to the creditor in circumstances where the creditor knew, or ought to have known, that the debtor company was insolvent. For example, a creditor issues their invoice for work done, with payment being due 14 days after the date of the invoice. The debtor company fails to make payment by the due date. The creditor follows up the debtor company by phone and by email several times, each time being told that payment would soon follow, but the debtor company was experiencing cash flow issues and could not afford to pay straight away. A few months later, the debtor company makes payment of the outstanding invoice. Less than six months after the payment was made, the debtor company enters into liquidation and it becomes apparent that the debtor company had been trading while insolvent. This is an unfair preference payment.
The most common VT in bankruptcy is a transfer to defeat creditors. This is where a person who is, or thinks they may become bankrupt:
- transfers an asset to someone else with an aim to prevent that property from becoming available for distribution to creditors, or to hinder or delay the process of making that property available; and
- that property would probably have become part of the transferor’s estate or would probably have been available to creditors if it had not been transferred.
For example, John and Julia are married and own their home jointly. Each of them owns a 50% share of the home. John is experiencing financial problems and thinks he may become bankrupt at some point soon, so he transfers his 50% share of the home to Julia as a “gift”.
If a VT has occurred, then:
- in relation to corporate insolvency, a liquidator has the later of the following timeframes to commence proceedings under the Corporations Act 2001 (Cth):
- three years from the “relation-back day”, which is either the day of first appointment as administrator, liquidator, or first filing of winding-up proceedings; or
- otherwise, one year after a liquidator was first appointed in relation to the winding up of a company.
- in relation to personal insolvency, a bankruptcy trustee generally has six years from the first act of bankruptcy to commence proceedings under the Bankruptcy Act 1966 (Cth).
The aim of proceedings and laws relating to VT is to ensure that all creditors are treated fairly in the insolvency process and to make all possible assets available for distribution between the creditors.
If you are concerned that a transaction you have been involved in may be a VT, then our Litigation + Dispute Resolution team can assist.