Transfers made to defraud creditors can be successfully challenged

In brief – Intention to defeat creditors pivotal to challenge

The decision in March 2011 of the High Court in Marcolongo v Chen clarifies many issues regarding transfers which parties seek to overturn under section 37A of the Conveyancing Act as being a voluntary transfer with the intention to defraud creditors.

Alienation of property can be voidable

The provisions of section 37A of the Conveyancing Act state that any alienation of property with the intention to defraud creditors is voidable at the instance of any person who is prejudiced. The section does not apply to any interest of a purchaser in good faith not having, at the time of alienation, notice of intention to defraud creditors.

The facts in this case were somewhat complicated. Effectively, Mr Chen acted in a representative capacity for a company, Lym International Pty Limited, which was undertaking two developments. An adjoining owner, Mrs Marcolongo, had a claim against the company.

Transfer of property to avoid claim

At the insistence of Mr Chen, one of the properties owned by the company was transferred by the company to him to avoid the claim of Mrs Marcolongo, amongst other things.

The High Court held that the transfer to Mr Chen was caught by section 37A and overturned the decision of the NSW Court of Appeal.

Contrary to the view of the Court of Appeal, the High Court held that all that was necessary was to show the existence of intention of the transferor to hinder, delay or defeat creditors and therefore that the transferor had acted dishonestly in this matter.

The High Court also found that the provisions of section 37A, when it referred to an intention to "defraud", included hindering or delaying creditors.

Intention to defraud need not be sole or predominant intention

The High Court further found that there only had to be an intention to defraud and that the section did not contemplate a mixture of motives from which it must be extracted or distilled that the predominant intention was to defraud.

In other words, the section does not require, for its operation to come into effect, that the intention to defraud is the sole or predominant intent.

Good faith exemption not applicable

As the transfer of the property was at the initial behest of Mr Chen, the Court found that the exemption for a party acting in good faith in section 37A(3) did not apply, as he had acted totally in bad faith, had full knowledge of the relevant intent and in fact instigated this process.

This case clarifies the circumstances in which a party who has been prejudiced by a voluntary transfer can challenge that transfer if it has been made with the intention to defraud creditors.