Part One – The basics
One of my clients was placed into liquidation a few months ago and the liquidator has written to me demanding payment of voidable transactions.
What is a voidable transaction? Do I have to pay the money back? How could I have avoided being in this position?
These are the three questions we will answer in this series.
What is a voidable transaction?
If you have been paid for goods or services provided, common sense dictates that the payment received is your money. Unfortunately, in the legal profession, common sense doesn’t always apply. Many people haven’t heard of the term ‘voidable transaction’ and by the time they do, it’s too late as the liquidator is trying to claw back money the company has paid you.
A company is insolvent when it is unable to pay its debts as and when they fall due. As a result, the company may be placed into liquidation, either voluntarily or by court order. The liquidator then has the task of investigating the finances of the company in the months (and sometimes years) leading up to the liquidation, to identify voidable transactions.
Voidable transactions generally fall within the 6 months prior to the liquidation of the company. However, in circumstances where a related party to the company (such as a director, a relative of a director or a related company) is involved in the transaction, the applicable period is extended.
Transactions which a liquidator may consider to be voidable transactions include:
- Unfair preferences, such as a trade creditor paid for goods purchased or services provided;
- Uncommercial transactions, such as a contract entered into just prior to liquidation with unreasonable terms;
- Unfair loans, where the interest or charges imposed are substantial;
- Unreasonable director-related transactions, such as a loan to a director or related party.
If the liquidator identifies voidable transactions, the liquidator will seek to recover from the parties or creditors who benefited from the transactions. This will usually begin with a letter of demand and can result in court proceedings, with significant costs to all parties.
Part two of this series will identify what options you have if the liquidator identifies that you may have benefited from a voidable transaction.
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