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defending voidable transactions

The main defences to a voidable transaction claim are:

  • Good faith defence;
  • Running account balance defence;
  • The defendant creditor is a secured creditor; and
  • The ultimate effect doctrine or “the landlord defence”.

Other arguments that we have faced against claims we have run are:

  • Capacity to pay;
  • Equitable liens;
  • Set-off, following the recent case law commentary;
  • Charging clauses; and
  • Factoring agreements.

If you have any questions regarding these possible defences, please give our experts at SV Voidables a call on 1800 246 801.

Good faith defence

The main defence to a voidable transaction claim is for the defendant creditor to prove that they did not know (objective test) or they ought not reasonably have known (subjective test) that the company was insolvent at the time they received the alleged unfair preferences. Common characteristics that Liquidators look for when deciding whether to pursue creditors, are:

  • Excessive pressure by debtor collection teams within companies;
  • Statutory demands and other informal demands;
  • Long outstanding debts;
  • Round payments; or
  • Dishonoured payments or post-dated cheques.

There are many different ways a creditor can utilise the good faith defence, however it is important that before you go down the path of trying to defend an unfair preference, you spend the time and resources to correctly assess HOW to PROPERLY utilise this defence.

Remember it is not just what you thought or knew in terms of the company’s purported insolvency, but rather what a reasonable person would have thought or known.

We have developed a number of techniques that can help you properly utilise this defence. Therefore, we encourage you to give us a call to see how we can help.

Running Account balance defence

By way of example:

Say we present the following fictitious supplier ledger showing the dealings during the relation-back period for a creditor that is owed $100,000 by a company that went into liquidation on 31 December 2014:

Date Transaction type Amount ($) Running balance
1 July 2014 Balance carried from prior period   $500,000
15 July 2014 Supply of goods $20,000 $520,000
31 July 2014 Payment ($100,000) $420,000
1 August 2014 Payment ($100,000) $320,000
15 August 2014 Supply of goods $20,000 $340,000
31 August 2014 Payment ($240,000) $100,000
31 December 2014 Company in Liquidation   $100,000







As you can see from the above table:

  • On 1 July 2014, the company owed the creditor $500,000
  • During the relation-back period (being 1 July 2014 to 31 December 2014), the creditor supplied further goods worth $40,000, but received payments totalling $440,000

Although payments totalled $440,000, the liquidator could only pursue the creditor as an unfair preference (if all other elements are met) for the difference between:

  • the peak debt owed by the company during the relation-back period and the debt owing on the relation-back day = $520,000 less $100,000 = $420,000.

This is because, arguably, some of the payments were made to induce further supply of goods by the creditor to the company (which totalled $40,000).

The defendant creditor is a secured creditor

A Liquidator cannot pursue a creditor for unfair preferences if they are a secured creditor, but only in proportion to the value of that security. This means that if a creditor validly registers on the Personal Property Securities Register (PPSR) and holds security over the company that is greater than the sum of the purported preference payment, then the creditor would likely be safe from a liquidators claim. 

Personal Property Securities Act 2011 (Cth) (“the PPSA”) – the PPSA came into effect on 30 January 2012 and comprehensively changed the landscape in respect of a creditor’s ability to take security over the company’s property. One of the biggest changes was the creation of a central register of all security interests held by creditors over the company, known as the PPSR. The purpose of this register was to create transparency for creditors as to where they may stand in respect of competing interests over the company’s assets, should the company go into Liquidation or other type of external administration or receivership.

Secured creditor – is a creditor of the company that has validly perfected its security in the company and thereby, grants priority in the company’s assets, should it go into external administration (subject to other competing secured creditors).

Perfection – perfection is a key concept under the PPSA. It is a means by which the holder of a security interest (the secured party) can protect its security interest. There are three methods of Perfection:

  • Possession of the secured property.
  • Control of the secured property.
  • Registration of a financing statement (ie PMSI – Personal Money Security Interest) on the PPSR.

Retention of title (“ROT”) – an ROT clause is a provision in a contract for the sale of goods, which means that the seller retains legal ownership of the goods until certain obligations are fulfilled by the buyer – usually payment of the purchase price.

Under the new PPSA regime, a perfected ROT clause is known as a Personal Money Security Interest (PMSI).

A supplier’s interest is referred to as a ‘security interest’, which is defined to include an agreement to sell subject to retention of title if the transaction, in substance, secures payment or performance of an obligation. If an external administrator is appointed to a purchaser company and the security interest has not been perfected, then the supplier cannot reclaim the goods and the security interest vests in the purchaser company.

Under the PPSA, ROT suppliers enjoy the benefit of a PMSI super priority. Super priority is only available in respect to PMSI’s, which include a security interest taken in collateral, to the extent that it secures all, or part of its purchase price. However, registration is the key, so suppliers must take care to ensure that they comply with all of the relevant time frames.

There are two types of ROT’s:

Specific goods clause – this states that legal ownership, or title, to the goods will not pass to the buyer until the buyer has paid for the goods. This does not cover the situation where the buyer on-sells the goods, before the buyer pays the seller.

All monies clause – this type of ROT clause reserves title in all goods supplied to the buyer, until the buyer has settled all outstanding invoices to the seller and even covers the situation where the buyer on-sells the goods, before the buyer pays the seller.

Incorporation – regardless of the type of ROT clause used, unless it is incorporated into the contract between the buyer and seller it will be unenforceable. This means that the seller’s trading terms must have been communicated to the buyer before the contract is made. If the first time the buyer sees the Terms of Business is on the back of an invoice, it may be too late.

The ultimate effect doctrine or “the landlords defence”

The theory goes that if a creditor provides a service to the company that is so beneficial to the creditors and the company as a whole, then they can’t possibly receive a preference.

The common example is that of a landlord. The landlord allows the company to trade from its premises in consideration for rent payments. The company is able to then purchase goods from creditors and on-sell those goods (hopefully at an increased price) to customers.

The ultimate effect of the payment of rent is so beneficial to the company and its creditors that the non-payment of rent would cease (in this example) all of the company’s operations.

However, this does not mean that landlords can never be pursued for unfair preferences. It depends on the circumstances, especially if the landlord has not acted in good faith, has issued expired statutory demands or is a related entity.

The leading cases are McKern & Ors v The Minister Administering the Mining Act 1978 (WA) [2010] VSCA 140 and VR Dye & Co v Peninsula Hotels Pty Ltd (In Liq) [1993] 3 VR 201.

Potential users may include: landlords, accommodation providers to mining service companies, fuel providers to trucking companies, and in specific circumstances: accountants, lawyers and advisers.


Contact our Voidables team

If you have any questions relating to our Voidables services, please contact one of our expert advisors.


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