In the course of conducting your business, it is important to ensure you are not dealing with an insolvent company. Many do not consider the implications of the Corporations Act 2001 (Cth) (“the Act”)and their liability to repay amounts under transactions with companies that have fallen into liquidation.
Division 2 of the Act outlines the criteria for voidable transactions for which the court may make an order to repay under 588FF of the Act. If you have entered into a transaction with a company during the 6-month period up until the day the company began winding up (in this case by insolvency), then you are at risk of having to repay any money received from said company during that period. For example, if you were contracted to provide marketing services to a company that was insolvent and payment or actions that gave effect to the transaction occurred during the aforementioned period, you may be ordered to re pay these amounts.
This is because, payments (under like transactions) are generally considered ‘unsecured debt’ and, therefore, it is likely that you would have received less than this amount had this transaction been set aside until the winding up of the company once the secured creditors had been paid. Sections 588FA, 588FB and 588FE of the Act define these types of transactions.
Whilst the legislation may seem to be providing Liquidators with the power of, “robbing Peter to pay Paul,” it is necessary to preference debt owed by insolvent companies to its creditors. This is to protect the validity of secured interests within business dealings otherwise, in practice, there would be a lack of security in receiving back your interest.
It is important to know that there are defences to claims of voidable transactions specifically unfair preference payments in both statute and case law. Whether you are an appointed Liquidator, a company that is winding up, a company to which an unfair preference payment claim has been made or a company engaging in business in Australia, it is important to understand your rights and obligations under the Corporations Act 2001 (Cth).
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Please note that this article does not constitute legal advice and Straits Lawyers will not be legally responsible for any actions you take based on this article.