In some instances, liquidators pursue claw backs of transactions from insolvent companies. These are known as voidable transactions.
During the insolvent period of the company, it often happens that directors make preferential payments to creditors. Those creditors are usually connected to the director, hold some commercial power or the director has a personal guarantee. The purpose of introducing voidable transactions is to give the liquidator power to unwind payments if the liquidator considers that a payment has given the one creditor a better result than what could be achieved in a liquidation.
For any transaction to count as insolvent, and in turn voidable, the liquidator must investigate the transaction and determine that the transaction enabled one party to receive more towards satisfaction of a debt owed by the company than the party would receive, or would be likely to receive, in the company’s liquidation.
What transactions can be voidable?
A transaction that can be considered voidable is one that meets the following criteria:
– Providing credit (any transaction where payment is not immediate)
– The company which received the payment is placed in liquidation within two years.
Many transactions in the ordinary course of business fit the above criteria, however, are not necessarily voidable.
Three defenses to voidable transactions
The three ways to defend a liquidator against a voidable transaction are:
1. Act in “good faith”
– If the transaction was made in an honest, open fashion without hidden motives or pressure.
2. No suspicion of insolvency
– If a reasonable person in the position of the party which received payment could not suspect insolvency or financial distress, then the transaction is possibly defendable.
3. Fair consideration
– If fair consideration (payment in exchange for goods/services) was provided, then the transaction is defendable.
For a company to effectively dismiss the challenge of a curious liquidator, all three of the elements must be met.
Timings of transactions which can be deemed voidable
There are two periods in which transactions can be voided.
– Restricted Period – The period of six months before the date of liquidation or six months before the date of making of the application to the court to liquidate a company.
A transaction that is entered into within the restricted period is presumed, unless the contrary is proved, to be entered into at a time when the company is unable to pay its due debts.
– Related party period – The related party period is two years before the date of liquidation or two years before the date of making of the application to the court to liquidate a company.
A transaction between related parties that is entered into within two years of the date of liquidation or liquidation applications are made, unless the contrary is proved, are entered into at a time when the company is unable to pay its due debts.
Voidable transactions are designed to even the playing field for creditors within a liquidation and ensure that no one creditor jumps the queue to receive a preference over other creditors. Liquidators do look to investigate and recover where possible, but the defense does make this very difficult (or impossible) in some cases.