Statutory Defences To A Liquidator’s Clawback Claims
When a company enters liquidation, liquidators are tasked with recovering funds to pay back creditors. One necessary part of this process involves clawback claims, which are legal actions brought by liquidators to retrieve payments or transfers made by the company before its insolvency. Clawback claims aim to recover assets that were improperly transferred or paid to certain creditors in the lead-up to insolvency, restoring them to creditors.
For directors, businesses and individuals facing clawback litigation, there are statutory defences that can be vital to help avoid financial repercussions. This blog post will outline the key statutory defences to a liquidator’s clawback claims and what they can demonstrate to the court.
The purpose of clawback claims — common scenarios and reasoning
When liquidators initiate a clawback claim, the goal is typically to increase the pool of assets for creditors by recovering funds incorrectly transferred to creditors prior to the business’s insolvency. Some of the most common clawback actions are based on:
- Unfair preference claims— Where a creditor was paid in preference over others during the insolvency period.
- Uncommercial transactions— Where the company entered into a transaction that had no commercial benefit.
- Unfair loans— Where the terms of a loan were not commercially reasonable.
Statutory defences to clawback claims under the Corporations Act 2001 (Cth)
The Corporations Act 2001 (Cth) outlines several defences that individuals or businesses may rely on to counter clawback claims. Below are the most common statutory defences in commercial litigation in Queensland.
- Good Faith Defence (Section 588FG(2))
To successfully use this defence, creditors must show that they were unaware of the company’s financial difficulties and acted in good faith during their dealings. Section 588FG(2) provides a defence where the recipient of the payment or benefit can demonstrate that:- They became a party to the transaction in good faith.
- At the time of the transaction, they had no reasonable grounds for suspecting the company was or would become insolvent due to the transaction and a reasonable person in the person’s circumstances would have had no such grounds for so suspecting.
- They provided valuable consideration or they have changed their position in reliance on the transaction.
- Running Account Defence (Section 588FA(3))
The running account defence applies to unfair preference claims, where a creditor is paid in preference to others. In cases where the creditor had an ongoing business relationship with the insolvent company, the payments made within the preference period may be protected if they were part of a broader “running account”.
Under this defence, if payments were made as part of a continuous trade or credit relationship between the company and the creditor, the court may only look at the net effect of all transactions within that period. The running account defence allows a creditor to argue that the payments were part of ordinary business dealings rather than an unfair preference. - No reasonable grounds for suspecting insolvency
One major consideration for clawback claims is the fact or presumption that the company was insolvent during the transaction. However, demonstrating that the transaction recipient had no reasonable grounds for suspecting the company was insolvent or likely to become insolvent can be a strong indication of the existence of a potential good faith defence.
To prove this element of the defence, the recipient must prove they did not have access to information or facts that would reasonably suggest the company’s insolvency. This defence is particularly effective in cases where the company’s financial distress was not publicly known, or the recipient was not closely involved in the company’s affairs.
Navigating clawback claims through commercial litigation
As you can imagine, defending against a clawback claim can be incredibly complex and detail-focused. When it comes to protecting your financial interests, seeking legal counsel is highly recommended. Experienced commercial litigation lawyers in Queensland can assist you in building a strong defence and reducing your exposure to financial loss.
At ADVIILAW, our experienced team of QLD commercial litigation lawyers specialises in assisting clients with navigating the complexities of liquidation and insolvency matters. Whether you are a creditor defending against clawback claims or a business grappling with the effects of insolvency, our firm is well-equipped to provide tailored legal solutions that protect your finances.
For risk-conscious and cost-effective commercial solutions, turn to the experienced team at ADVIILAW
While clawback claims are a critical part of the liquidation process, businesses and individuals have access to statutory defences that can mitigate or eliminate liability. If you or your organisation are facing a clawback claim, ADVIILAW can help protect your business against financial losses.
We are a boutique law firm in Queensland, specialising in commercial dispute resolution law. Our team of qualified commercial litigation lawyers has extensive experience in managing clawback claims and focuses on delivering powerful solutions that uphold your business’s best interests.
If you are facing a clawback claim or require assistance with other areas of insolvency litigation, please contact us at ADVIILAW today.
Disclaimer
This commentary is of a general nature only, containing some general information for the reader.
It is not intended to be legal advice, nor can it be relied upon as legal advice, as each case will depend upon its own specific facts, matters and circumstances.
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