Voidable transaction

What it means

A voidable transaction is an act by a debtor that disadvantaged its creditors. A creditor or, in bankruptcy, the trustee can ask the court to declare it ineffective against them, bringing the assets that left the debtor back within creditors’ reach.

Typical cases are selling assets below value, gifts, transfers for nothing, granting a lien to secure an old debt or preferring one creditor over the others shortly before insolvency. Transactions with related parties are judged especially strictly.

The right to challenge is time-limited: only acts made within a certain period before bankruptcy starts or the claim is raised can be challenged, with longer periods for related parties and deliberate disadvantage. Ineffectiveness is not invalidity: the transaction stands between the parties, but the creditor can be satisfied from the transferred assets.

How it works in practice

We advise companies in difficulty to consider, before any significant transfer of assets, sale to a shareholder or loan repayment, how it would be viewed if bankruptcy followed. Transactions at market price and properly documented are much less vulnerable.

When acting for creditor clients who suspect a debtor is “emptying” its company, we check the commercial register, the land register and the collection of deeds. A timely action to set the transaction aside or a tip to the trustee can bring back assets from which the claim can be paid.

In the debtor’s books, a successful challenge changes the relationship between the parties and creates a claim to return what was received. When selling assets in a crisis, we therefore recommend having evidence of the market price ready, such as an expert valuation.

What to watch out for

The most common mistake by directors is “rescuing” assets by transferring them to a relative or a new company just before bankruptcy. Such transactions are almost always challenged, and the director may face personal liability and even prosecution.

The second risk is preferring certain creditors, for instance repaying a shareholder loan when the company can no longer pay the others. The trustee claws such payments back, and special restrictions apply to repaying shareholder loans while a company is in crisis.