In many cases, companies are aware of their money problems long before they seek a solution. This creates situations where an individual or company will attempt to circumvent insolvency account proceedings by making transactions that need to be recovered by the Liquidator or Trustee. These types of deals are known as Voidable Transactions, and they can create serious problems for anyone who is attempting to avoid their financial responsibilities.
What are Voidable Transactions?
A voidable transaction is any payment, transfer or transaction that causes detriment to a company or that is made while a company is insolvent. In many cases, voidable transactions are made specifically to defeat creditors and prevent them from recovering the money they are owed.
Voidable transactions are a relatively common impediment to the liquidation process. Part of the Liquidator’s job is to make sure the company’s assets are divided fairly and that no creditors receive an advantage over the others. Voidable transactions are often designed to disadvantage some (or all) of the creditors, and so Liquidators are given the power to recover these transactions.
Types of Voidable Transactions
Voidable transactions come in many shapes and sizes. Some types of transactions are intentional, while others may be inadvertent. In any case, the Liquidator has the power to wind back the transaction and recover the money or assets involved. There are a few major types of voidable transaction:
- Unfair Preferences – The most common type of voidable, unfair preferences occur when a creditor is given preference over the others. If a creditor benefits from a payment (or other transaction) at a time when they knew the company was insolvent, the transaction may be deemed an unfair preference and voided.
- Uncommercial Transactions – Uncommercial transactions are any transfers that disadvantage the company in some way. That often occurs when a company sells an asset for less than its market value, overpays for an asset or enters into an unfair payment agreement.
- Insolvent Transactions – Trading while insolvent is illegal in Australia. Uncommercial transactions that are made while insolvent, or transactions that cause the company to become insolvent, may be considered voidable.
- Unfair Loans – If a company enters into a loan agreement with unfair interest rates, charges or loan repayments, it may be considered extortionate and therefore voidable. A loan may also be considered unfair if it is modified and the new terms are extortionate.
- Unreasonable Director Transactions – This is a category of transactions that involve the company making a payment or transfer to a director, the associate of a director or to another entity that represents the director. If the transfer is illegal, uncommercial or disadvantages the company, it may be voided.
Recovering Voidable Transactions
Liquidators are empowered by the Corporations Act 2001 to identify and recover voidable transactions while winding up a company. If the Liquidator identifies voidable transactions during their investigations, they begin the recovery process by issuing a letter of demand to the beneficiary of the transaction. The beneficiary may elect to reverse the transaction, or they can dispute it and take the matter to court and seek a judge’s ruling.
It’s important to seek professional advice if you receive a letter of demand for a voidable transaction. An insolvency professional will be able to assess whether the transaction is voidable, your rights and whether there are any viable defences available. Remember that ignoring a letter of demand can result in your company being placed into liquidation or administration, so act quickly if you receive a notice.
Defending Potentially Voidable Transactions
Defending against a claim that you were involved with a voidable transaction can be challenging. Liquidators perform thorough investigations into the insolvent company’s assets and finances, so they have a solid picture of whether each transaction was legal, fair and commercial. Consult with an insolvency practitioner immediately upon receiving a demand from a Liquidator in regards to voidable transactions.
If you’ve received a letter of demand then you may be able to defend your position with one of the following legal arguments:
- That your part of the agreement was made in good faith. Many types of voidable transactions require that both parties were knowingly and intentionally defeating a company’s creditors. If you acted in good faith, you may not be required to reverse the transaction.
- That you had no grounds for knowing (or suspecting that) the company was insolvent. The test for this defence is whether a “reasonable person” in your position would have known the company was insolvent.
- That you provided equal consideration, making the transaction legal and binding.