Undervalued transactions (in the context of bankruptcy)

Undervalued transactions occur where a bankrupt gives away their assets or sells them at a favorably low price prior to being declared bankrupt. Section 120 of the Bankruptcy Act 1966 (Cth) focuses on the effect of the transaction on the creditors rather than the type of transaction, and as such, it is unnecessary to show that the bankrupt had any intent to avoid creditors.

Section 120 states that undervalued transactions are void (voidable on the court’s order) if it took place in the period of the five years before the bankruptcy commenced, and the transferee gave no or sub market value consideration for the property. There are certain further qualifications on time and nature as to the transferee.

(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and
(b) the transferee gave no consideration for the transfer or gave consideration of less than the market value of the property.

There are also several exceptions under s 120(2):

(a) a payment of tax payable under a law of the Commonwealth or of a State or Territory; or
(b) a transfer to meet all or part of a liability under a maintenance agreement or a maintenance order; or
(c) a transfer of property under a debt agreement; or
(d) a transfer of property if the transfer is of a kind described in the regulations.