Understanding Voidable Transactions in a Liquidation

The Corporations Act 2001 plays a crucial role in regulating business activity in Australia. One of its key functions is to prevent fraudulent or unfair business practices, especially during times of financial distress. Among its most important provisions are the rules concerning voidable transactions.

These are transactions that a company has made but may be undone (or “avoided”) by a liquidator if the company goes into liquidation. In simple terms, voidable transactions are like "bad deals" that can be reversed when a company is in trouble, but only under specific conditions.

These voidable transactions laws matter as they protect the rights of creditors, ensuring that companies do not make rash or unfair decisions right before they collapse. If left unchecked, a few creditors could take advantage of a struggling company, leaving others with nothing.

A voidable transaction is a transfer of property or assets owned by the debtor to a third party that causes detriment to creditors. By voiding these transactions, a Trustee can recover assets that would otherwise have been available to creditors, ensuring an equitable distribution of assets to all creditors.

Under the Bankruptcy Act 1966, there are five primary transactions which may be voided by the Trustee. These include:

• Section 120: Undervalued transactions

• Section 121: Transactions to defeat creditors

• Section 121A: Transactions with consideration to third parties

• Section 122: Unfair Preferences

• Section 128B and C: Superannuation contributions made to defeat creditors