Voidable Transactions and Unfair Preference Claims in Liquidation

A company’s later liquidation does not make every earlier payment voidable, as each transaction must satisfy the relevant statutory conditions. Corporations Act provisions governing voidable transactions allow certain dealings to be challenged when conditions concerning their type, timing, and effect are satisfied.

Voidable transactions and unfair preference claims can affect directors, creditors, and transaction counterparties differently. During the insolvency and liquidation process, a liquidator may examine payments or transfers that reduced the property available to creditors or placed one unsecured creditor in a better position than others.

Depending on the transaction, the liquidator may seek a court order requiring money or property to be returned. The applicable test can involve insolvency, the parties’ relationship, the consideration exchanged, and the period before the relation-back day.

The article explains how each category operates, how the relation-back period affects the review, and what steps follow when a liquidator raises a claim. 

What Makes a Transaction Voidable Under the Corporations Act

A transaction becomes voidable when it falls within a statutory category and satisfies the conditions attached to that category. Part 5.7B of the Corporations Act 2001 (Cth) governs property recovery for creditors of an insolvent company.

The court, rather than the liquidator acting alone, decides whether to make recovery orders under section 588FF. After an application by the liquidator, the court may order repayment or transfers, release a debt, or grant another authorised remedy.

The transaction must meet a statutory test

The main types of voidable transactions have separate definitions, timeframes, and connections to insolvency:

• Unfair preferences: Payments or benefits that place one unsecured creditor in a better position than the creditor would occupy during liquidation.
• Uncommercial transactions: Dealings that a company in the same circumstances would not reasonably have entered into after considering the benefits and detriments involved.
• Unfair loans: Loans carrying interest or charges that were extortionate when imposed or became extortionate after a variation.
• Unreasonable director-related transactions: Payments, transfers, or other benefits involving a director or close associate on terms that were unreasonable for the company.
• Creditor-defeating dispositions: Property transfers below market value or the best reasonably obtainable price that prevent, hinder, or delay access by creditors.

For unfair preferences and uncommercial transactions, the insolvency requirements for transactions are satisfied when the company was insolvent or became insolvent because of the dealing. Corporate insolvency means an inability to pay debts as and when they become due and payable.

Timing and parties change the analysis

Section 588FE applies different statutory look-back periods according to the transaction and the parties involved. An uncommercial transaction has a two-year period when it is also an insolvent transaction and meets the timing requirements in section 588FE.

An unfair loan made before winding up is voidable regardless of how long before liquidation the company entered the arrangement.

Unfair Preference Claims Explained

An unfair preference claim concerns a transaction that placed one creditor in a better position than the creditor would occupy in the company’s winding up. The statutory meaning of an unfair preference requires the company and creditor to be parties to a transaction concerning an unsecured debt.

A secured debt may be partly unsecured when the security’s value does not cover the amount owing. The liquidator must also establish the insolvency and timing requirements that make the preference an insolvent transaction and then a voidable transaction.

What a liquidator must establish

An ordinary unfair preference claim requires evidence supporting each of the following statutory elements before recovery can proceed:

• Transaction involving the creditor: The company and creditor were parties to the transaction, even when another person also participated in the payment arrangement.
• Payment concerning unsecured debt: The creditor received money or another benefit relating to an unsecured debt owed by the company.
• Preferential financial effect: The creditor received more than the amount available if the transaction were set aside and the debt were proved in liquidation.
• Company insolvency: The company was insolvent when the transaction occurred or became insolvent because of the transaction.
• Applicable statutory period: The transaction occurred within six months before the relation-back day, or four years when a related entity participated.

Third-party payments require closer analysis because the company and creditor must be parties to the relevant transaction. Evidence must connect the payment arrangement to company value that would otherwise have remained available to creditors.

Continuing business relationships affect the amount

Section 588FA(3) treats payments and supplies as one transaction when they form an integral part of a continuing business relationship.

The preference amount depends on the net change in debt during the period when both parties intended the business relationship to continue. A liquidator can’t select the highest debt point solely to increase the amount claimed.

Invoices, payment records, delivery documents, and correspondence help establish when the continuing relationship began, whether supply continued, and when debt recovery became the main purpose.

Creditor protections require supporting evidence

Section 588FG protects a creditor that received payment in good faith without grounds for suspecting the company’s insolvency.

A reasonable person in the creditor’s circumstances must also have had no grounds for suspecting insolvency. The creditor must provide valuable consideration or change position in reliance on the transaction.

Repeated dishonoured payments, overdue accounts, statutory demands and disclosed cash flow problems provide evidence of whether those grounds existed. Account holds, changed credit terms, and payment plans provide evidence about what the creditor knew when accepting payment.

Other Voidable Transaction Categories: Uncommercial Transactions and Unfair Loans

Uncommercial transactions and unfair loans address different forms of financial harm from an unfair preference. The first examines whether a reasonable company would have entered the transaction, while the second focuses on extortionate loan interest or charges.

Uncommercial transactions

The uncommercial transaction statutory test considers company benefits and detriments, benefits to other parties, and other relevant matters. A transaction may qualify even when no creditor participated, which distinguishes the category from an unfair preference.

Examples include transferring property substantially below value or accepting obligations with no proportionate commercial benefit.

The two-year uncommercial transaction period applies when the dealing was also an insolvent transaction. A four-year period applies when a related entity participated.

Unfair loans

The unfair loan statutory definition covers extortionate interest or charges imposed when made or following a variation. The assessment considers matters including risk, security value, the loan term, repayment arrangements, and the amount advanced.

Unlike an uncommercial transaction, an unfair loan does not require proof that the company was insolvent when it entered the arrangement. Section 588FE makes an unfair loan voidable if it was made at any time on or before the winding up began.

The Relation-Back Period

The relation-back day calculation rules provide the reference point for several section 588FE look-back periods. Section 91 determines the applicable day according to the events that placed the company into liquidation.

Different periods apply according to the transaction and parties involved:

• Ordinary insolvent transactions: An unfair preference or another insolvent transaction has a six-month period ending on the relation-back day.
• Uncommercial transactions: An insolvent transaction that is also uncommercial has a two-year period ending on the relation-back day.
• Related-entity transactions: An insolvent transaction involving a related entity has a four-year period ending on the relation-back day.
• Transactions intended to defeat creditors: Section 588FE(5) applies a 10-year period when the company intended to defeat, delay or interfere with creditors’ rights.
• Creditor-defeating dispositions: Section 588FE(6B) covers the 12 months ending on the relation-back day and the period until winding up begins. The company must have been insolvent or become insolvent because of the disposition. Alternatively, it must have entered external administration within 12 months as a direct or indirect result of the disposition.
• Unreasonable director-related transactions: Dealings satisfying section 588FDA have a four-year period when they involve a director or the director’s close associate.
• Unfair loans: A loan satisfying section 588FD is voidable if made at any time on or before the winding up began.

The look-back period differs from the deadline for commencing court proceedings. The voidable transaction application deadline is the later of three years after the relation-back day or 12 months after the liquidator’s first appointment.

A court may extend the application period when the liquidator applies before the ordinary deadline expires. 

What to do if a Liquidator Raises a Claim

A recipient should examine the demand and supporting material before deciding whether to repay, dispute, or negotiate the claimed amount. ASIC advises creditors to request the liquidator’s supporting claim evidence before repaying the disputed money.

The response should follow a documented sequence that preserves evidence and addresses the liquidator’s allegations directly:

1. Record the response deadline: The recipient should identify the stated deadline and arrange legal review before correspondence or inaction affects the available options.
2. Preserve transaction records: Contracts, invoices, bank statements, delivery records, ledger entries, and correspondence should remain available for examining the complete course of dealing.
3. Request the liquidator’s evidence: The recipient should obtain the identified payments, insolvency basis, preference calculation, and reasons the liquidator considers section 588FG unavailable.
4. Test each statutory element: Legal review should consider the parties, unsecured debt, preferential effect, insolvency, relation-back day, and applicable look-back period separately.
5. Review the commercial relationship: Continued supply, account movements, payment demands, and changed trading terms may affect both the running-account analysis and suspected-insolvency assessment.
6. Provide a supported response: The reply should address disputed elements with records rather than relying on a general denial or an unsupported assertion of good faith.

Directors face a different inquiry because the challenged transaction may involve company assets, director loans, related entities, or duties arising during financial distress.

Speak to a Brisbane Insolvency Lawyer

Responding to a liquidator’s demand often requires prompt attention, particularly when records must establish the transaction’s timing, purpose, and commercial context. Acting early before a response deadline passes gives directors, creditors, and transaction counterparties the best opportunity to protect their position with diligence and discretion.

Macmillan Lawyers and Advisors provides Brisbane insolvency legal advice to directors, creditors, and transaction counterparties facing voidable transaction claims. The firm specialises in insolvency law and corporate litigation, including matters involving payments or transfers challenged during liquidation.

Parties seeking advice can contact the firm for a free 30-minute consultation to discuss their situation.

Voidable Transactions and Unfair Preference Claims in Liquidation FAQs

Does a liquidator’s demand require immediate repayment?

A demand letter does not, by itself, require the recipient to accept liability or make immediate repayment. The recipient can request the transaction details, insolvency evidence, and calculation supporting the claim before deciding how to respond.

Who must prove an unfair preference claim?

The liquidator must prove the statutory elements of the claim, including the transaction, insolvency, timing, and preferential effect. A creditor relying on section 588FG must establish the facts supporting the applicable protection.

Do simplified liquidations use different unfair preference limits?

Simplified liquidations restrict recovery from unrelated creditors to payments made within three months before liquidation when the total received exceeds $30,000. The simplified liquidation recovery limits do not apply automatically to every creditor’s voluntary liquidation.

Can a creditor claim the debt after returning an unfair preference?

A creditor that relinquishes an unfair preference may prove for the original debt in the winding up under section 588FI. The creditor then participates according to the ordinary distribution rules rather than retaining the preferential benefit.

Do bankruptcy voidable transactions follow the same legislation?

Bankruptcy voidable transactions involving an individual ‌arise under the Bankruptcy Act transaction provisions. Company liquidation claims arise under the Corporations Act 2001 (Cth), so each process requires separate statutory analysis.

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