Recovering Unfair Transactions in Company Liquidation

At a Glance

Liquidators can recover certain transactions entered into before a company goes into liquidation
Transactions involving directors, shareholders and related parties attract increased scrutiny
Insolvency at the time of the transaction is a central consideration
Recovery actions can extend several years into the past
Directors may face personal exposure alongside the company

What Are “Unfair” or Voidable Transactions?

Under Part 5.7B of the Corporations Act 2001 (Cth), a liquidator has the power to apply to the court to set aside certain pre-liquidation transactions, commonly referred to as voidable transactions.

Broadly speaking, a transaction may be voidable if:

the company was insolvent at the time, or became insolvent as a result of the transaction;
the transaction falls within a recognised statutory category; and
the transaction occurred within the applicable relation-back period.

If the court is satisfied that a transaction is voidable, it may order the recipient to repay money or return property to the company so it can be distributed fairly among creditors.

Common Types of Transactions Recovered in Liquidation

Unfair Preference Transactions

An unfair preference occurs where an insolvent company makes a payment to a creditor that results in that creditor receiving more than they would have received in a liquidation.

This commonly arises where:

directors repay loans owed to themselves or family members;
companies clear tax liabilities or unsecured debts while leaving trade creditors unpaid; or
pressure from a particular creditor leads to selective repayments.

The High Court in Airservices Australia v Ferrier confirmed that the focus is not on intention, but on the net effect of the transaction (including any running account). Even well-meaning repayments can be clawed back if they disrupt creditor equality.

Uncommercial Transactions

A transaction may be uncommercial if a reasonable person in the company’s position would not have entered into it, having regard to the matters in s 588FB(1), including the benefits and detriments to the company.

Examples include:

transferring assets for less than market value;
forgiving debts owed to the company;
granting guarantees or security without commercial benefit.

Unlike unfair preferences, uncommercial transactions do not require one creditor to be preferred over others. The key issue is whether the company received reasonable value.

Insolvent Transactions and Director Risk

Transactions entered into while a company is insolvent may sit alongside insolvent trading claims against directors. While the recovery action focuses on restoring value to the company, directors may simultaneously face allegations that they breached their duties by allowing the company to continue trading.

In ASIC v Plymin, the court identified practical indicators of insolvency, including ongoing cash flow shortages, inability to meet debts as they fall due, and reliance on extended creditor terms. These indicators frequently underpin recovery proceedings.

How Far Back Can a Liquidator Go?

The period a liquidator can investigate depends on the type of transaction and the parties involved.

In general:

unfair preferences involving unrelated creditors can be pursued up to six months before the relation-back day;
transactions involving related parties may be reviewed up to four years prior;
transactions entered into with the intention of defeating creditors (s 588FE(5)) can be challenged up to ten years later.

This extended reach often surprises directors, particularly where family trusts, related companies or informal arrangements are involved.

Practical Case Example

Consider a scenario where a family-owned company begins experiencing cash flow stress. The director repays a personal loan to stabilise their own finances and transfers a vehicle to a related entity for “safekeeping”. Twelve months later, the company enters liquidation.

From a commercial perspective, these decisions may have seemed reasonable. Legally, however, both transactions are likely to attract scrutiny. The repayment may constitute an unfair preference, while the asset transfer may be characterised as an uncommercial transaction. In practice, these fact patterns are common in recovery proceedings.

What Often Goes Wrong

In our experience, recovery actions rarely arise from deliberate misconduct. They usually stem from directors attempting to manage competing pressures with limited information and declining cash reserves.

The law applies an objective test. Once insolvency is established, the fairness of outcomes outweighs personal relationships, historical arrangements and subjective intentions. Directors who continue operating as if the company were solvent often expose themselves and related parties to significant legal risk.

The most important warning sign is sustained cash flow pressure. At that point, every transaction should be assessed through an insolvency lens.

Are There Defences to Recovery Actions?

Yes, but they are narrowly applied and highly fact-specific. Common defences include:

the creditor acted in good faith;
the transaction occurred in the ordinary course of business as part of a continuing business relationship;
the creditor had no reasonable grounds to suspect insolvency.

Successfully relying on these defences requires careful evidence and early legal strategy.

Key Takeaways

Liquidation allows historical transactions to be revisited
Related-party dealings are high risk
Intent is less important than effect and timing
Early legal advice materially reduces exposure

Frequently Asked Questions

Can a liquidator recover payments made years before liquidation?

Yes. Transactions involving related parties or creditor-defeating intent may be challenged years after they occur.

Can directors be personally liable?

Yes. Directors may face personal exposure through insolvent trading claims or compensation orders alongside recovery actions.

What types of transactions are most at risk?

Commonly challenged transactions include unfair preferences, uncommercial transactions, related-party dealings, loans to directors, asset transfers for undervalue, and transactions designed to defeat creditors.

Can a transaction be challenged even if it was legal at the time?

Yes. A transaction may still be set aside if it meets the statutory tests for a voidable transaction, even if it appeared lawful when it was entered into.