What Are Voidable Transactions?

19 December, 2019 | Nathan Tetzlaff

This article considers voidable transactions, sometimes referred to as clawbacks.  Voidable transactions can be an especially nasty surprise for businesses and can seemingly come out of nowhere.  So, what are they?

Consider this scenario:

You are a small business owner producing widgets.

You sell about $30,000 of widgets on credit monthly to your local widget buyer, “Widget Retail Limited”, who pays on the 20th of the following month.

Widget Retail gets into a bit of financial strife and misses a monthly payment.  They make it up the next month, but late payments continue and build up.  Eventually Widget Retail owes you $50,000 and you stop supplying.

A few months later Widget Retail pays the full $50,000 and from that point you only do cash sales to them.

A few months after that Widget Retail goes into liquidation and stops trading.

A year later, the liquidator of Widget Retail sends you a letter saying that you received the $50,000 payment unlawfully and demanding that this amount be paid back to Widget Retail/ the liquidator.

What should you do?  How can this happen?  Are you required to repay the $50,000?

What should you do?
The first step is to come talk to us.  These sorts of problems don’t just go away, and if you leave them too long a time limit could expire.

In most cases you’ll receive a letter of demand from the liquidator.  However, if you ignore this letter (and occasionally right from the start) you may be served with a formal notice.  If that happens you have 20 working days to ensure that the liquidator receives a written notice of objection and copies of all the documents you are relying on to support your objection.

Twenty working days might seem like quite a while, but an objection can be a complicated and time consuming for us to produce so don’t delay contacting us!

How can this happen?  What is a voidable transaction?

A voidable transaction arises when:

• You provide credit to a company (even just to the 20th of the next month);
• You receive payment;
• That company goes into liquidation within 2 years, owing money to creditors; and
• The liquidator of the company thinks that you got paid when other creditors didn’t (or got paid proportionately more than others).

The idea behind the law is to try to ensure fairness between creditors.  If one creditor gets paid while another misses out entirely, the law allows the money to be recovered and distributed more evenly.

In theory this is a great way to prevent a company in trouble from making payments to the shareholders, their associates, or other companies with good leverage, before everyone else.

In practice this may mean that your business could get hit with a big bill out of nowhere, without (as far as you know) having done anything wrong.  Even worse, the demand might arrive months or years after the payment was made.

Are you required to repay the money claimed by the liquidator?

That’s a complicated question and is why taking legal advice asap is essential.

The law describes when you are liable and provides a defence that you may be able to use.

Defending Against a Voidable Transaction Claim

The defence is in three parts.  To avoid having to repay the money you need to be able to show that:

• You acted “in good faith”;
• You didn’t suspect, and shouldn’t reasonably have suspected, that the company was in trouble; and
• You gave up something of value in exchange for the payment or changed your position in reliance on the payment.

The meaning and application of these three things is often debated by lawyers; exactly what they mean and what situations they apply to has changed over time.  We will be able to consider your specific situation and figure out whether you can use the defence.

If the defence does apply to you, we can write to the liquidator and explain why you aren’t required to repay the money.

Even if your situation does not give you especially good grounds to use the defence, we can still enter into negotiations with the liquidator.  Having a weak case is still useful; liquidators don’t like getting into unnecessary legal battles, especially if there is a chance (however small) that they might lose.  We may be able to negotiate on your behalf so that you pay only apart of what is due or make the payment over time (or both).

If you receive a letter or a notice from a liquidator demanding money, come see us as soon as possible so we can consider your options and help you keep the money paid to you.

Have you received a voidable transaction notice from a liquidator demanding money? Set up an appointment today with our experienced liquidation specialists by phone 09 837 6844 or email partners@smithpartners.co.nz.