Voidable/Insolvent Transactions

Undoubtedly one of the most controversial aspects of the statutory powers provided to Liquidators is the ability in certain circumstances claw back money by setting aside past company transactions or a charge as being voidable. The voidable transaction regime aims to ensure that unsecured creditors in a liquidation are able to share equally (on the pari passu basis) in the distribution of the realised assets of the company without any particular creditor obtaining an unfair advantage or preference. Voidable transactions and charges legislation recognise that a company is normally insolvent for some time prior to it being formally placed into liquidation, and that to treat unsecured creditors equally, the period immediately prior to the formal liquidation must also be treated as part of the liquidation period. The Act details the “specified period” as up to two years prior to the liquidation commencing, and the “restricted period” as being up to 6 months prior to the liquidation commencing. A liquidation commences at the time the directors / shareholders vote on the resolution to appoint a Liquidator (subject to approval having been provided first by that Liquidator to the appointment) regardless of when the resolution is actually completed. Liquidators are empowered by the Act to claw back payments for the general benefit of unsecured creditors.

Section 292 of the Act provides that a transaction is voidable by the Liquidator if:

• It was made by the company at a time when it was unable to pay its due debts;
• It enables a creditor of the company to receive more towards the satisfaction of a debt than what the creditor would receive in the company’s liquidation;
• It was made within the two years prior to the company’s liquidation or the application to liquidate the company.

The definition of “transaction” under the Act is broadly defined and includes the payment of money, the transfer of assets, and also the incurring of an obligation. There is also an unarguable presumption that the company was unable to pay its due debts if the payment was made within the six month period (the restricted period) to the company’s liquidation (or prior to the filing of the application to liquidate the company).

The Companies Amendment Act 2006 no longer provides that a transaction will not be voidable if it was made in the “ordinary course of business”. This makes a significant change from the earlier law and makes it considerably easier for a Liquidator to challenge a transaction as being voidable.

Where a transaction is for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between the company and the creditor, and in the course of the relationship the level of the company’s net indebtedness to the creditor fluctuated from time to time as a result of a series of transactions, the Liquidator must treat the series of transactions as a single transaction. This principle recognises that in considering whether the real effect of a payment was to work a preference, its actual business character must be considered, and when it forms part of an entire transaction which if carried out to its intended conclusion will leave the creditor without any preference, priority, or advantage over other unsecured creditors, the payment cannot be isolated and considered as a preference. This principle was inserted into the Act by the Companies Amendment Act 2006, although it has been a feature of Australian insolvency law for some time and an extensive body of case law has emerged there.

A Liquidator who intends to set aside a transaction as being voidable is required to serve a notice on the creditor complying with the requirements set out in the Act. The notice must also comply with the High Court Rules and be filed with the High Court prior to serving the notice on the creditor. The creditor has twenty working days from being served to oppose in writing to the Liquidator the decision to set aside the transaction. If the creditor fails to object within that period, the transaction automatically is set aside. This is the statutory time period which the Court has no power to extend retrospectively. If the Liquidator receives a valid notice of opposition, he or she can then elect whether to issue an application in the High Court seeking the Court to set aside the transaction as being voidable.

There are a number of grounds on which a creditor may oppose a notice to set aside a transaction, however the previous defence available was also amended by the Companies Amendment Act 2006, and therefore it is generally harder now for creditors to present a defence and argue than before.

Section 293 of the Act provides a similar provision in respect of voidable charges. Essentially a Liquidator may set aside a charge as being voidable if it was made within the two years prior to the company’s liquidation (or the filing of the liquidation application) and there is not a fresh consideration provided from the charge, or the charge is not in substitution for a charge given before the two year period. The section prevents a company indirectly granting a preference to an unsecured creditor by elevating them to the status of a secured creditor (and therefore ahead of unsecured creditors).

It must be remembered that insolvency law, particularly in relation to voidable charges or transactions, is constantly evolving as creditors and Liquidators go head to head to maximise returns for their respective interests, and generally from insufficient assets of the company in liquidation, in a multitude of differing factual situations which can arise during the course or leading up to the liquidation of a company.