What are voidable transactions?
The Companies Act 1993 (the Act) provides that in certain circumstances, a transaction made by a company that is subsequently liquidated has the potential to be unwound by a liquidator. The Act defines an ‘insolvent transaction’ as one that is entered into when the company is unable to pay its debts and enables another person (a creditor) to receive more towards satisfaction of a debt owed by the company than the person would receive, or be likely to receive, in the company’s liquidation.
If a liquidator considers that a voidable transaction has occurred, it may issue a 'please explain’ letter giving that creditor the chance to explain the circumstances of the payment. If the creditor does not respond or if the liquidator is unsatisfied with the response, the liquidator may issue a formal notice which is filed with the High Court (VT Notice).
If the creditor wants to object to the VT Notice, they have 20 working days to respond or are otherwise deemed to have accepted it. If the VT Notice is accepted, the transaction is automatically set aside and the creditor is liable to return the payment back to the company in liquidation.
If the creditor believes it is entitled to the payment, responding to the VT Notice within the timeframe and in a robust manner is critical.
How should you respond as creditor?
First, consider whether the payment was within the applicable clawback period, and if the company could actually pay its due debts. That period is (generally) either six months prior to the liquidation date for third party creditors, or two years prior to the liquidation date for related party creditors.
Second, consider whether the payment resulted in a preference for you as a creditor. This requires a review of the circumstances of the transaction, and determining whether the creditor would have been entitled to receive the same payment in the company’s liquidation.
Third, consider the defences under the Act. The Act gives creditors a three-part defence to voidable transactions (and all parts must be met). Those defences are that the creditor:
- Gave value for the property in exchange for the payment, or altered its position believing that the transfer of property was valid and that the transaction would not be set aside.
- Acted in good faith with an honest belief that entering into the transaction would not result in a preference for the creditor. This requires an analysis of the circumstances and events surrounding the transaction.
- Did not suspect, or should not reasonably have suspected, the company was insolvent.
An analysis of the circumstances and events surrounding the transaction will be key in determining whether the defence is available.
Summary
The voidable transaction process can be a daunting one to navigate, and timing can be tight. We suggest that legal advice is sought from a lawyer that specialises in insolvency matters to help you prepare the response. We regularly deal with insolvency issues and are well positioned to assist with these kinds of matters. If you have any questions or need any assistance, you should get in touch.
Tom Corkill is part of our Corporate & Commercial team at Norris Ward McKinnon.
