Insolvent or ‘voidable’ transactions are payments or transfers from a company’s asset pool to a third party that are made while the company was insolvent or at a time/in a manner that otherwise causes detriment to the company.
Voidable transactions are provided for in the Corporations Act 2001 (Cth) at section 588FE. Under the Act, liquidators can recover transactions that an insolvent company made within a specific ‘relation back’ period before the liquidation. This seeks to even the playing field and ensure no creditors get an unfair advantage over others.
The most common voidable transactions are unfair preferences (section 588FA). These are determined to have occurred where there was a transaction between a then insolvent company and a creditor during the relation back period, and the creditor received more than they would have been assigned by the liquidator.
Other types of voidable transactions include:
• Uncommercial transactions – occur where it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to its benefits/detriments. Insolvency should be proved at the time of the transaction.
• Unreasonable director-related transactions – occur when a director or close company associate enters into a transaction where a reasonable person in the director/associate’s circumstances would not have entered into the transaction, having regard to its benefits/detriments. Insolvency need not be proved.
• Unfair loans – occur where:
o The interest rate was/is extortionate; or
o The charges in relation to the loan were/are extortionate.
o N.B. Insolvency need not be proved.
There are several defences that can be mounted against an attempt to claw back a voidable transaction:
• Good faith
• Running account balance
• Secured creditor status
• Ultimate effect doctrine (a.k.a. landlord defence)
Read more about insolvent trading in our article Insolvent Trading: Complete Explanation for SMEs.