When a company collapses, the liquidator's job is to gather up whatever assets are left and distribute them fairly among creditors. That job often means looking backwards. Under Part 5.7B of the Corporations Act 2001 (Cth), a liquidator can ask a court to unwind payments and transfers the company made in the period before it went under, so the money can be brought back into the pool and shared around. Those transactions are called voidable transactions.
The rules matter to small businesses in two opposite situations. If a customer of yours goes into liquidation, the liquidator may demand that you repay money the customer paid you in the months beforehand. If your own company is heading towards liquidation, a liquidator may challenge payments and transfers it made, including to directors, shareholders and suppliers. Either way, the stakes are real, and knowing how the machinery works is the first step to protecting your position.
This guide explains how the voidable transaction regime operates: who is involved, what triggers it, the different categories and their time limits, how liquidators recover money, and the defences that can keep a payment safe.
Who is involved and what each party wants
Four groups interact in a voidable transaction dispute:
- The liquidator: appointed to wind the company up, realise its assets and distribute them to creditors. The liquidator investigates pre-liquidation dealings and decides whether to pursue recovery, usually after reviewing the company's bank statements, ledgers and director reports.
- The company in liquidation: the entity that made the payments or transfers being challenged.
- The recipient: usually a creditor who was paid, or a director, related entity or third party who received property or a benefit. The recipient's interest is to keep what they got.
- The court: only a court can make orders unwinding a transaction, on application by the liquidator. The relevant powers sit in s 588FF of the Corporations Act.
The underlying policy is fairness between creditors. If one supplier extracts payment in full while everyone else is left with a dividend of cents in the dollar, the law says that payment may have to come back so it can be redistributed. The regime also targets asset-stripping, where a failing company shifts assets out of the reach of creditors before the collapse.
What makes a transaction "voidable"
A transaction is not voidable merely because it happened before liquidation. It must fall within one of the categories in s 588FE, and each category has its own conditions and look-back period measured from the relation-back day (defined in s 91).
The relation-back day is the day the winding up is treated as having begun. For a creditors' voluntary winding up, it is usually the day of the resolution to wind up. For a court-ordered winding up, it can be earlier, for example the day the winding up application was filed, or in some cases the day administration began. The practical point is that the look-back period can start before the company formally went into liquidation.
Most categories also require that the company was insolvent at the time of the transaction, or became insolvent because of it. Section 588FC describes an insolvent transaction as an unfair preference or uncommercial transaction entered into, or given effect to, while the company was insolvent, or that caused the company to become insolvent. The meaning of insolvency itself comes from s 95A: a company is insolvent when it is unable to pay its debts as and when they fall due.
The categories and their time limits
The Act creates several distinct categories of voidable transaction, each with its own test and look-back period.
Unfair preferences
An unfair preference, under s 588FA, exists when a company pays an unsecured creditor more than that creditor would have received if the payment had not been made and the creditor had instead proved for the debt in the winding up. A classic example is a struggling company paying one supplier in full to keep deliveries flowing while other suppliers go unpaid.
To be voidable, the preference must be an insolvent transaction entered into during the 6 months ending on the relation-back day. A separate rule in s 588FA(3) deals with continuing business relationships, discussed below, which can fundamentally change how much is at risk.
Uncommercial transactions
Under s 588FB, a transaction is uncommercial if a reasonable person in the company's circumstances would not have entered into it, having regard to the benefits and detriments to the company, the benefits to the other parties, and any other relevant matter. Sales at a significant undervalue, or deals where the company shoulders disproportionate risk or cost without commercial justification, fit this description.
An uncommercial transaction is voidable if it is also an insolvent transaction and was entered into within the 2 years ending on the relation-back day. The longer window reflects that these transactions are often hidden for longer than an ordinary payment.
Related party transactions
Where a related entity of the company is a party to an insolvent transaction, the look-back period extends to 4 years under s 588FE(4). Related entities include directors and their relatives, and other companies in the same group. Payments to a director's spouse, or asset transfers to a family trust, fall into this category.
Unreasonable director-related transactions
s 588FDA targets payments, property dispositions, securities issues and obligations to make them, where the recipient is a director, a relative of a director or of a director's spouse, or someone acting for them, and where a reasonable person in the company's circumstances would not have entered into the transaction. The look-back period is 4 years. Recovery is limited to the difference between the value actually provided and the value a reasonable person would have provided.
Unfair loans
A loan to a company is unfair under s 588FD if the interest or charges were extortionate when the loan was made, or became extortionate through a variation. The assessment considers the risk to the lender, the value of any security, the term of the loan, and the repayment schedule, among other matters. Unfair loans are voidable no matter when they were made, because the category has no look-back limit. A court can set the loan aside, vary it, or order repayment of amounts paid under it.
Creditor-defeating dispositions
s 588FDB catches dispositions of company property for less than market value (or less than the best price reasonably obtainable) that prevent, hinder or significantly delay the property becoming available to creditors in the winding up. This category was introduced as part of the Commonwealth's anti-phoenixing reforms, and it operates differently from the older categories.
A creditor-defeating disposition is voidable if the company was insolvent when it was made, became insolvent because of it, or an external administration began within 12 months of it. It does not need to be an unfair preference or uncommercial transaction. It applies to transfers for undervalue, including transfers where the consideration is routed to a third party, and people involved in such dispositions can face orders to compensate the company, civil penalties and criminal liability.
How the liquidator recovers
Recovery happens through the court. Under s 588FF, on application by the liquidator the court can order a person to pay back money the company paid, transfer back property it transferred, or pay an amount fairly representing the benefit received. It can also declare agreements void or vary them, release or discharge debts and securities, and make related orders.
The liquidator has a limited window to apply. Section 588FF(3) fixes it at the later of 3 years after the relation-back day and 12 months after the first appointment of a liquidator, unless the court extends the period on application during that time.
Many claims never reach a hearing. Liquidators commonly send a demand letter, and recipients respond with evidence and negotiate a settlement. Responding promptly matters: a liquidator who gets no meaningful response may simply issue proceedings, and defence costs can quickly outweigh the amount in dispute.
The defences that can keep a payment safe
The most important provision for a business that received a payment is s 588FG. The court must not make an order materially prejudicing a person's rights if the person proves they received the benefit in good faith, had no reasonable grounds for suspecting the company was insolvent at the time, and a reasonable person in their circumstances would not have suspected it either. Where the transaction is not an unfair loan or an unreasonable director-related transaction, the person can also rely on having given valuable consideration or changed their position in reliance on it.
In practical terms, a supplier who was paid in the ordinary course, on consistent trading terms, with no reason to think the customer was in trouble, has a credible defence. A supplier who extracted payment after repeated dishonours, or who demanded payment of a single invoice as a condition of releasing a large shipment, is in a much weaker position, because the circumstances gave grounds for suspicion.
The running account analysis
Where payments and supplies form part of a continuing business relationship, s 588FA(3) treats the whole series of transactions as a single transaction. The question is whether the creditor's net position improved over the course of the relationship, not whether any individual payment was a preference.
The High Court considered this provision in Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2. The liquidators of Gunns Limited sought to recover payments made to a logging contractor within the six-month period, and argued that the "peak indebtedness rule" let them choose a starting point for the running account that would manufacture a preference. The Court rejected that argument. The running account starts from the first transaction after the beginning of the prescribed period or after the date of insolvency, whichever is later, and the inquiry into whether transactions form part of a continuing business relationship is an objective one based on the actual business dealings between the parties. On the facts, because the contractor kept supplying and the company kept paying, the net position did not improve, and no preference arose.
For a supplier, the lesson is to keep records of the full course of dealing. If deliveries continued and payments ebbed and flowed, the running account analysis can reduce what the liquidator can claim to the net improvement in your position, which can be much smaller than the sum of individual payments, or nothing at all.
Where the rules commonly catch people out
A few situations generate most of the disputes involving small businesses:
- Sudden changes in trading terms: Tightening credit terms or demanding cash on delivery from a customer you previously supplied on 30-day terms, shortly before it collapses, looks like preference-seeking. If the customer is insolvent at the time, the payment may be recoverable.
- Payments extracted under pressure: Chasing a large overdue invoice hard, while knowing the customer is struggling, can create exactly the "reasonable grounds for suspicion" that defeats the good faith defence.
- Director dealings in the shadow of insolvency: Repaying a director loan, transferring a company vehicle to a director cheaply, or moving assets to a related entity in the period before liquidation attracts scrutiny under both the related party and director-related transaction provisions.
- Security taken late: A creditor who extracts a security interest from a struggling company shortly before liquidation can face challenges under s 588FJ, which voids circulating security interests created within 6 months of the relation-back day except to the extent of new value provided.
None of this means every payment in the months before liquidation is at risk. Ordinary trading on consistent terms, with no reasonable grounds to suspect insolvency, is generally safe. The risk concentrates in payments and deals that look different from the normal course of business.
Where a lawyer makes a difference
Voidable transaction law is technical, and the time limits are unforgiving. A lawyer is most useful at three points:
- When you receive a demand letter from a liquidator: advice on whether the claim has legal foundation can save you from paying money you are not obliged to repay. A lawyer can assemble the paper trail, map the running account, assess whether the good faith and valuable consideration elements of s 588FG are available, and quantify your actual exposure, which is often a fraction of the amount demanded.
- If your own company is in financial difficulty: early advice on how to manage payments, director loans and asset dealings can stop ordinary attempts to keep trading from becoming recoverable transactions later.
- When structuring credit arrangements: a lawyer can help you take and register security properly, including retention of title arrangements under the Personal Property Securities Act 2009 (Cth), so you are not relying on the preference rules at all.
What to do if a liquidator demands repayment
Do not ignore the demand, and do not pay it without thinking. Compile the contracts, invoices, delivery records, payment histories, emails and notes of collection calls, and check whether the payments formed part of a continuing supply relationship. Consider whether you had reasonable grounds to suspect insolvency at the time, because that is the question a court will ask. Then respond within the liquidator's timeframe with the evidence, and negotiate if there is a genuine dispute about the amount. If a settlement is reached, recording it in a deed of release gives both sides certainty that the matter is closed.
The single point that most often decides these disputes is whether your position genuinely improved relative to the other creditors. A payment that merely kept a continuing trading relationship level is hard to recover; a payment that lifted you above everyone else, taken when you knew the company was sinking, is exactly what the regime exists to unwind. Understanding which side of that line your dealings sit on, and documenting the dealings from the start, is the best protection a small business can have. If you are facing a demand from a liquidator, or you are worried about how your own company's recent dealings would look to one, an early conversation with a lawyer is worth having before time runs out.