Voidable transactions and the determination of insolvency

Another key judgement has been made in relation to insolvent and undervalue transactions, otherwise known as voidable transactions, providing clarification as to when it can be stated that a company has become unable to pay its due debts. A transaction is not voidable unless the company in liquidation is unable to pay its due debts at the time of the transaction.

The common rule of thumb is to state that a company is unable to pay its due debts when a company breaches its credit terms and when a creditor commences recovery action against it. Williams J in Rowmata Holdings Limited (In Liquidation) & Ors v Hildred & Ors [2013] NSHC 2435 contradicts this common view. He notes that all parties need to look at the situation in its entirety, which includes contingent liabilities.

The judgement dealt with a company entering into a sale and purchase agreement for the purchase of land that it did not have the financial ability to settle. Prior to settlement date for the purchase, it claimed a GST refund from the purchase, which it then paid out to other associated parties in settlement of debts. When the company subsequently defaulted at settlement date, the GST initially received then became repayable to the Inland Revenue Department, but there were no funds held by the company to meet this liability. The company went into liquidation, and the liquidators from Deloitte sought repayment of the GST receipts from the associated parties who had received them, claiming that they were both insolvent and undervalue transactions.

Williams J agreed with the liquidators that they were entitled to recover the entire amounts claimed. In his judgement Williams J noted that the company had no reasonable prospect of settling the sale and purchase agreement, and accepted that GST was a contingent liability that should be considered in this case when looking at when the company became unable to pay its due debts. He noted that,"To ignore such an obligation would defy commercial reality as well as commonsense even if it was technically contingent only".

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This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.

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