Understanding creditor-defeating dispositions

And how to steer clear of violating the provisions.

One critical concept in the realm of insolvency law in Australia that garners significant attention is "creditor-defeating dispositions." These dispositions (transactions) are a subject of concern for both creditors and regulators due to its potential to prejudice the rights of creditors.

A creditor-defeating disposition is a transaction or arrangement a debtor makes with the primary intention of preventing, hindering, or significantly delaying creditors recovering their debt. These dispositions come in various forms, such as transferring assets at undervalue, granting security interests, or altering the debtor's financial position to creditors’ detriment. 

The implications of creditor-defeating dispositions are: 

1. Prejudice to creditors: The primary concern surrounding creditor-defeating dispositions is that they can have detrimental effects on creditors. By stripping the debtor of assets or reducing their value, legitimate creditors may find themselves unable to recover the debts owed to them.

2. Increased risk for unsecured creditors: Creditor-defeating dispositions can be particularly harmful to unsecured creditors. When assets are disposed of or encumbered in favour of secured creditors or related parties, unsecured creditors are left with fewer assets from which to recover their debts.

3. Erosion of trust in the insolvency system: The prevalence of creditor-defeating dispositions can erode trust in the insolvency system. If creditors perceive that debtors can easily shield their assets from being used to pay off debts, it may discourage lending and investment, negatively impacting the economy.

Recent legislative amendments introduced new provisions with fresh offences and powers in dealing with and setting aside creditor-defeating dispositions.

Our legal framework

Our robust legal framework addresses creditor-defeating dispositions through these key pieces of legislation and regulations: 

1. Corporations Act 2001: Under section 588FE of the Corporations Act, a transaction may be considered voidable if it qualifies as a creditor-defeating disposition. Liquidators can set aside such transactions by applying to court, ensuring that assets are available for distribution to creditors. This provision plays a vital role in preventing debtors from disposing their assets to the detriment of creditors.

2. Personal Property Securities Act 2009 (PPSA): This legislation regulates security interests in personal property. The Personal Property Securities Register (PPSR) is the national system for the registration and enforcement of security interests, helping to prevent creditor-defeating dispositions that involve granting security interests without proper disclosure and registration.

3. Phoenix activity laws: In an effort to combat illegal phoenix activity, where companies are liquidated to avoid paying debts and then re-emerge under a new identity, the Australian government has introduced stronger laws and penalties.

Creditor-defeating dispositions are a critical issue in corporate insolvency appointments. These transactions, intended to shield assets from creditors, have serious implications for the integrity of the financial system and the rights of creditors. Australia's legal framework, particularly the provisions in the Corporations Act and the PPSA, are designed to counteract such dispositions, ensuring creditors have a fair chance to recover their debts. Understanding these laws and its implications is essential for both creditors and debtors navigating the complex landscape of insolvency.

To steer clear of violating the provisions related to creditor-defeating dispositions, consider the following actions:

1. Confirm that any assets are sold at a fair market value and secure a valuation to support the sale price.

2. Execute a well-structured sales campaign (if applicable) to maximise the selling price.

3. Keep comprehensive company financial records, including documentation of the steps taken throughout the sales process.

As always, the sooner you seek options, the more you’ll have. The Teams at Worrells are ready to help. Our people know how to turn a business around, understand insolvency at the deepest level, and are always keen to find the right answers.