When a company goes into insolvency, it can be a stressful time not just for the directors, but creditors too. Once liquidation is declared, it is the job of the liquidator to scrutinize the company’s financial records. In this process, liquidators have the right to inspect payments made to determine the legality of said payments and whether they were authorised.
Voidable transactions, as defined by the Corporations Act, are a good example of an unlawful payment. It is worth noting that a payment may be defined as ‘voidable’ if it meets any of the below criteria:
- Payment was made in the 6 months prior to when winding up began.
- The debtor was insolvent at the time payment was made
- The creditor was allowed ‘unfair preference’ by receiving payment
As a creditor receiving an unlawful payment, you may face the commencement of recovery (or at least a demand for repayment) from the liquidators. For this reason, creditors must be wary should they suspect a debtor is facing insolvency. Likewise, should there be suspicion surrounding the debtor’s solvency, payment should be refused.
In the event that a creditor does face recovery proceedings there can be a defence. In order to defend such a position it must be established that the payments were received in good faith. Furthermore it must be assured there was no suspicion that the debtor was insolvent at the time payment was received and that a ‘reasonable person’ would have no reason to have suspected the debtor was insolvent.
If you have any questions regarding insolvency and liquidation or wish to make an appointment, feel free to email Allyson Richards at Allyson@gpla.com.au or call 07 5444 1022.