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High Court confirms that transfers that delay creditors can be voidable even if the transferee is not insolvent

03 May 2011

In a recent decision by the High Court - Marcolongo v Chen [2011] HCA 3, the High Court has determined that a creditor was entitled to have a transaction declared voidable on the basis the transaction was made with the intention to defraud creditors.

The decision was made in relation to s37A of the Conveyancing Act 1919 (NSW) (’Conveyancing Act’), which is the equivalent of section 228 of the Property Law Act 1974 (Qld) (’PLA’). This recent decision has widened the operation of s37A of the Conveyancing Act, and as such has also extended the operation of s228 of the PLA.

The law

Section 228 of the PLA provides:

  1. Subject to this section, every alienation of property, made whether before or  after the commencement of this Act, with intent to defraud creditors, shall be voidable, at the instance of any person prejudiced by the alienation of property.
  2. This section does not affect the law of bankruptcy for the time being in force.
  3. This section does not extend to any estate or interest in the property conveyanced for valuable consideration and in good faith to any person not having, at the time of the conveyance, notice of the intent to defraud creditors.

Facts

Marcolongo was a creditor of Lym International Pty Ltd ('Lym') and had commenced proceedings in the New South Wales District Court in August 2004.

Lym’s only substantive assets in Australia were two development projects - Project 1 and Project 2. By October 2004, Project 1 had been sold, leaving Project 2 as Lym’s only Australian asset. Lym's debts exceeded the value of the Project 2.

On 15 August 2006 Lym transferred Project 2 to Chen to satisfy loans made by Chen to Lym. At the time of the transfer Lym, Chen and Yang (the sole director and 50% shareholder of Lym) were aware of the proceedings on foot between Lym and Marcolongo.

Marcolongo brought proceedings in the Supreme Court seeking to have the transfer declared voidable pursuant to section 37A. In cross examination, Yang as director of Lym, admitted that they had transferred the property to avoid Lym suffering a loss.

Findings by Supreme Court of New South Wales

The Supreme Court found that although one of the purposes for Chen purchasing the project was to satisfy debts owed to him and his companies by Lym, the alienation/transfer of the property (that the transfer of Project 2) was made with an intent to hinder enforcement of claims against Lym.

The court found that this constituted an intent to defraud creditors and the transaction should be declared voidable due to the fact that Chen and Yang were both aware of the creditor and the transaction occurred with extreme urgency.

"I find that the alienation of property was made 'with intent to defraud creditors'. Mrs Marcolongo is a person prejudiced by the transaction and therefore entitled to bring proceedings. She had at the time and has a claim for some $600,000 against Lym. Although she was not within the terms of the category of creditors as expressed in the admissions it was indeed her potential debt of $600,000 intended to be referred to. Mr Chen cannot characterise himself as a purchaser in good faith not having notice of the intent to defraud. This equally flows from the fact that I have found...above that he pressed upon Ms Yang the existence of the claim and urged her to carry out the transaction expeditiously in order to avoid its effect. Mrs Marcolongo is therefore entitled to have the transaction declared voidable."

High Court of Australia

The High Court found that intent of the transaction was to delay or hinder a creditor, Marcolongo, by forestalling any attempt by her to obtain an injunction ensuring that assets in the hands of Lym would remain available to satisfy any judgment which she obtained in the District Court proceedings.

The High Court held that it was an intention that was primary and not ’merely incidental’ to other intentions, such that the intent was not merely a minor element amidst a range of mental states. That meant that the court could set aside the transfer as void.

What this decision means

The High Court in their unanimous decision confirmed:

  • The operation of section 37A (and for Queensland, 228 PLA) is not confined to actual fraudulent conduct by a debtor of its property with an intent to defraud creditors - constructive or equitable fraud may be sufficient.
  • The operation of the section does not require an element of dishonesty and does not require a predominant or sole intent to defraud.
  • Despite the express wording of the section, the operation of the section includes the hindering or delaying of creditors in the exercise of their legal remedies, not just ’defrauding creditors’.

This decision means that if:

  • someone has knowledge of a creditor, and they transfer property to another person who has knowledge of the existence of creditor; and
  • it can be established that the transaction was done in any way to defraud, hinder or delay a creditor; then
  • the court can declare the transaction voidable and the property returned to the original owner for the purpose of satisfying the debt owed to the creditor.

While this gives section 37A of the Conveyancing Act (and by analogy, section 228 PLA) a very similar operation as section 121 of the Bankruptcy Act, these provisions have a much broader operation, extending to all transactions, not just those which involve someone who is insolvent.