What You Need to Know
Understanding the Voidable Transaction Regime
The voidable transaction regime under Part 5.7B of the Corporations Act 2001 (Cth) allows liquidators to recover payments or property transferred by an insolvent company. This helps protect unsecured creditors and ensures equitable distribution of remaining assets.
Companies experiencing cash flow issues must carefully assess their transactions to avoid triggering voidable transaction provisions during future liquidation.
What is a Voidable Transaction?
Voidable transactions are those that:
- Unfairly favour certain creditors
- Occur while the company is insolvent or cause insolvency
- Undermine the fair distribution of company assets
The regime covers:
- Unfair preference transactions
- Uncommercial transactions
- Insolvent transactions
- Unfair loans
- Unreasonable director-related transactions
- Creditor-defeating dispositions
To explore the legal framework in more detail, [click here to read our full commentary on Voidable Transactions].
Types of Voidable Transactions
Unfair Preference
This occurs when a creditor receives more than they would during a liquidation, placing other creditors at a disadvantage. Even court-ordered or government-directed payments (such as from the ATO) can fall into this category if they meet the relevant criteria.
Uncommercial Transactions
A transaction may be voidable if it offers little or no benefit to the company or disproportionately benefits another party. Examples include asset transfers for no consideration or payments made to related entities without clear justification.
Insolvent Transactions
These include unfair preferences or uncommercial transactions made when the company was insolvent, or that caused insolvency. The effect of the transaction must be closely linked to the company’s deteriorating financial position.
Unfair Loans
A loan may be considered unfair if the interest or associated charges are extortionate. This can apply even when the company is not insolvent. Courts assess factors such as risk, repayment terms, and whether the charges are grossly excessive.
Unreasonable Director-Related Transactions
If a company makes payments or transfers property to a director or close associate without sufficient justification, the transaction may be reclaimed. The company does not need to be insolvent at the time. The test is whether a reasonable person in the company’s circumstances would have made the transaction.
Navigating Risk
Understanding the voidable transaction rules allows businesses to better manage:
- Transaction timing
- Documentation
- Deal structure
It also helps avoid exposing directors or third parties to future legal challenges from liquidators.
Need Advice?
If your company is facing an unfair preference claim or you’re planning transactions in the lead-up to a sale, restructure, or insolvency event, Corson Fiske can provide expert guidance. We offer practical, litigation-ready advice and help assess the defensibility of transactions under scrutiny.
Contact us today for strategic insolvency advice and transaction risk reviews.