Voidable Transactions in Australia: What You Need to Know

If you’ve ever heard about a liquidator “clawing back” payments from suppliers or undoing a deal after a company collapses, you’re already in the world of voidable transactions.

For small businesses in Australia, understanding voidable transactions isn’t just an academic exercise - it’s about protecting your cash flow and avoiding nasty surprises if a customer, supplier, or even your own company runs into insolvency.

In this guide, we’ll explain what voidable transactions are under the Corporations Act 2001 (Cth), when liquidators can unwind them, and the practical steps you can take to reduce risk and respond with confidence.

What Is A Voidable Transaction?

A “voidable transaction” is a transaction a court can unwind (or a liquidator can recover) if it unfairly reduced the pool of assets available to a company’s creditors before the company went into liquidation.

In simple terms, if a company was insolvent (or became insolvent because of a transaction) and certain kinds of payments or transfers were made shortly before it went under, the liquidator may ask for those funds or assets back.

The rules are designed to treat creditors fairly. They stop one creditor from being “preferred” over others and discourage “asset stripping” as a business fails.

Why Do Voidable Transactions Matter For Small Businesses?

Voidable transaction laws affect you in two common ways:

• You received payments from a customer that later went into liquidation - the liquidator may demand that you repay those amounts to the company.
• Your own company made payments or transfers before liquidation - the liquidator may challenge them and seek recovery for the benefit of creditors.

Either way, you need to know the red flags, your potential defences, and how to structure deals so you’re not left out of pocket.

The Main Types Of Voidable Transactions

The Corporations Act sets out several categories a liquidator can challenge. The most common for small business are below.

Unfair Preference (s 588FA)

An unfair preference occurs when a company pays a creditor more than that creditor would receive in a liquidation - and the company was insolvent at the time (or became insolvent because of the payment).

Classic example: a struggling company pays one supplier in full to keep stock coming, while other suppliers go unpaid. If liquidation follows soon after, the liquidator may claw back those payments.

Key points:

• Preference period: generally within the 6 months before the “relation-back day” (usually the date the winding up process effectively began).
• Running account: if payments form part of a continuing supplier relationship (deliveries and payments on rolling terms), a “running account” analysis may reduce or eliminate the preference amount.

Uncommercial Transaction (s 588FB)

An uncommercial transaction is one a reasonable person in the company’s circumstances wouldn’t have entered into - because the terms were not commercially sensible for the company.

Think of transactions at significant undervalue, or deals where the company shoulders disproportionate risk or cost without a solid business reason.

Key points:

• Longer reach: the liquidator can look back up to 2 years (or 4 years if with a related party).
• Focus: the court considers benefits and detriments to the company, and whether an arm’s length party would agree to similar terms.

Unreasonable Director-Related Transaction (s 588FDA)

This covers transactions that benefit a director (or their close associates) that are unreasonable in the company’s circumstances - for example, paying personal expenses or transferring company assets to a director cheaply when the company is struggling.

Creditor-Defeating Disposition (s 588FDB)

Introduced to combat illegal phoenixing, this targets transfers of company property for less than market value (or for no value) that prevent, hinder, or significantly delay creditors from accessing assets.

These can be unwound even outside typical preference timeframes and come with serious consequences for those involved.

Unfair Loans (s 588FD)

Loans with extortionate interest or charges (considering risk and market rates) can be declared “unfair” and set aside or adjusted by the court.

When Can A Liquidator Unwind A Transaction?

To recover a payment or set aside a transaction, a liquidator typically needs to show:

• The company was insolvent at the time of the transaction (or became insolvent because of it).
• The transaction falls within a specific category (e.g. unfair preference or uncommercial transaction).
• It occurred within the relevant “look-back” period counted from the relation-back day.

There are also key defences and practical considerations.

The “Good Faith” Defence (s 588FG)

If you’re a creditor who received a payment, you may defend a claim by showing that you:

• Acted in good faith.
• Provided valuable consideration (e.g. supplied goods or services).
• Had no reasonable grounds to suspect the company was insolvent (and a reasonable person in your position would not have suspected it).

Evidence matters: consistent trading terms, normal collection activity, and credible explanations for delays can all help.

The Running Account Defence

Where there’s a continuing business relationship (rolling supply and payment), the court may view the entire sequence as one transaction. The “net” improvement to your position over the period (rather than each individual payment) is what counts. This can significantly reduce exposure.

How Liquidators Recover

Liquidators can ask the court for orders under s 588FF to recover money or property, or to otherwise unwind the effect of a transaction. Often, matters resolve commercially through negotiation - but you should respond promptly and strategically if you receive a demand.

Red Flags And Practical Steps To Reduce Risk

There’s no way to eliminate risk entirely, but you can stack the odds in your favour with clear trading terms and good credit practices.

1) Use Security To Protect Payment

Taking security turns you from an unsecured creditor into a secured creditor, which can improve recoveries and reduce voidable preference risk because you’re not being “preferred” - you’re being paid from your security.

• Consider a General Security Agreement to take security over a customer’s assets.
• Register your security interest on the PPSR (Personal Property Securities Register) and ensure it’s perfected within the relevant timeframes.
• If you supply goods, make sure your terms include retention of title and actually register a security interest to protect those rights.

Well-structured security arrangements, correctly registered on time, are one of the most effective protections you can put in place.

2) Trade On Clear, Consistent Terms

Keep your credit policy consistent. Sudden changes to terms, aggressive collection tactics out of the blue, or one-off deals on the eve of insolvency can trigger scrutiny.

Make sure pricing and discounts are commercially justifiable and documented. If you negotiate payment plans, record the reasons and ensure they reflect a genuine effort to keep a customer trading, not to “prefer” you over others.

3) Document Market Value

If you’re buying assets or taking security from a distressed business, document how you assessed market value (quotes, valuations, comparable sales). Uncommercial or undervalue deals can be unwound.

4) Consider Alternatives To Cash

Tools like bank guarantees can reduce exposure if a customer fails. They’re not a fit for every transaction, but they can be powerful in higher-value projects and longer engagements.

5) Be Careful With Related Parties

Payments or transfers to directors, shareholders, or related entities attract extra attention. Record the commercial purpose, ensure terms are fair, and avoid “last-minute” changes that can look like asset shifting.

6) Watch For Early Warning Signs

Common indicators include repeated dishonours, requests for unusual terms (like paying one small invoice to release large shipments), or sudden silence from finance teams. If you have reasonable grounds to suspect insolvency, step up protections or pause supply until risk is addressed.

7) Keep Your Own House In Order

For company directors, board oversight of cash flow is critical. Regularly considering a solvency resolution, escalating issues early, and seeking advice quickly if trouble arises can limit exposure and preserve options such as safe harbour.

How To Respond If You Receive A Demand From A Liquidator

If a liquidator alleges a voidable transaction, don’t panic - and don’t ignore it. Timeframes matter.

• Gather the paper trail: contracts, invoices, delivery records, emails, payment histories, any security registrations, and notes of collection calls.
• Map the “running account”: show supply and payment flows over time, not just the specific payment they’re targeting.
• Assess the defences: good faith, valuable consideration, no reasonable grounds to suspect insolvency, and the continuing business relationship defence.
• Quantify exposure: sometimes a portion of payments may be vulnerable while others are defensible.
• Engage constructively: many claims settle commercially with evidence-based negotiation.

If you do settle, consider documenting outcomes with a tailored Deed of Release and Settlement to finalise the matter cleanly.

Key Legal Documents And Tools That Help Manage Risk

Strong contracts and security arrangements won’t make voidable transaction law disappear - but they can significantly reduce how exposed your business is if a trading partner fails.

• General Security Agreement: lets you take security over a customer’s assets, improving recovery prospects and reducing preference risk.
• Register a security interest: ensures your security is enforceable and “perfected”, including retention of title for goods suppliers.
• Personal guarantees: additional comfort from directors or owners - useful, but understand the risks and enforceability issues on both sides.
• Bank guarantees: third-party instruments that can secure performance or payment in larger projects.
• Deed of Release and Settlement: records settlement of disputed debts or liquidator claims to provide certainty going forward.
• Robust trading terms: align pricing, credit periods, default interest, and retention of title with your commercial risk profile and ensure the terms are clearly accepted.

If you also lend money or move funds between your company and directors, be mindful of how director loans are documented and repaid, particularly during periods of financial stress.

Frequently Asked Questions

How Far Back Can A Liquidator Look?

It depends on the type of transaction. Unfair preferences typically have a 6‑month look-back (longer for related parties). Uncommercial transactions can reach back 2 years (4 for related parties). Creditor-defeating dispositions have their own regime focused on undervalue transfers designed to defeat creditors.

Are All Payments In The Months Before Liquidation At Risk?

No. Liquidators assess each case. Normal, arm’s length trading on consistent terms with no reasonable grounds to suspect insolvency is much safer, especially where you have security in place and a clean running account history.

Can I Protect Myself If I Suspect A Customer Is In Trouble?

Yes. Tighten terms, consider COD or milestone payments, seek additional security, or pause supply until concerns are addressed. If you take security, make sure it’s properly documented and registered on the PPSR.

What If I Already Received A Demand?

Act quickly, compile your records, and get advice. Many claims are defensible in whole or in part, or can be resolved commercially with the right evidence and strategy.

Key Takeaways

• Voidable transactions let liquidators unwind certain pre‑insolvency payments or transfers to ensure creditors are treated fairly.
• The main risks for small businesses are unfair preferences, uncommercial transactions, director‑related benefits, and undervalue asset transfers.
• Defences exist, including good faith, valuable consideration, no reasonable grounds to suspect insolvency, and the running account analysis.
• Reduce exposure by using security (e.g. a General Security Agreement) and registering it on the PPSR, trading on consistent terms, and documenting market value.
• If you receive a liquidator’s demand, respond promptly with evidence - many claims can be defended or settled on commercial terms.

If you’d like a consultation on managing voidable transaction risk for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.