Directors and creditors take note: Changes to the claw-back rules

In a liquidation, a liquidator has the right to take back property or money that the debtor improperly gave away before the liquidator was appointed.

"Claw-back" is the term used to describe this power, which allows the liquidator to regain any assets that should have been part of the debtor's insolvent estate, but were removed or hidden by means of preferential or fraudulent transfers.

Such transactions are referred to as ‘voidable transactions’, and are capable of being set aside by a Liquidator. The period during which such transactions can be set aside, is referred to as the relation back period.

Claw-back changes

From 1 March 2017, the starting date which is used to determine the period during which a transaction may be a voidable transaction — the relation-back day — has changed as a result of amendments in the Insolvency Law Reform Act 2016 (Cth).

Prior to these changes, the relation-back date could be changed as a result of the appointment of a voluntary administrator, despite a winding up application already being filed against the company. If the company was subsequently placed into liquidation at the second meeting of creditors, the relation-back period would be the date the company entered voluntary administration, and the period during which payments made to a creditor could be voidable transactions was the six-month period ending on the relation-back date.

Where a creditor makes an application to court to have a company wound up in insolvency before the company enters voluntary administration, the relation-back day will be the date the application was filed. This may result in an extension in the claw-back period.

For directors, this is particularly relevant as should a liquidator obtain an order of the court to set aside a payment the Australian Taxation Office received as a voidable transaction, each person who was a director of the company at the time the company made the payment will be liable to indemnify the ATO in respect of any loss or damage resulting from the order.[1]

Creditors and directors should be alert to the fact that the change in legislation will, in certain circumstances mean that there are more payments that will potentially be exposed to claw-back than was previously the case.

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