Deceitful Debtors - Acting in Bad Faith

Protecting Creditors - Voiding Transactions using section 37A of the Conveyancing Act 1919 (NSW)

Section 37A of the Conveyancing Act 1919 (NSW) (“the Act”’) affords creditors reassurance by providing statutory protection against debtors who attempt to defeat or otherwise impede creditors by alienating their property. A key example of circumstances where a creditor may utilise this provision is the common scenario where individuals, who have had default judgment entered against them, attempt to alienate their property or assets in an effort to conceal or “protect” their property from creditors.

The purpose of the section was stipulated as being to ensure “the estate of the alienor available to meet the claims of creditors generally is restored to the state in which it would have existed but for the alienation”.¹

Section 37A of the Act provides:

1           Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced.

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 property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.

“Alienation” in the context of this section is to be interpreted as “the transfer of value from one person to another” and “property” encapsulates both personal and real property.²

Establishing the requisite “intention” to defraud creditors is not an onerous threshold for creditors to meet and is to be read “liberally” in the creditor’s favour and includes intention to “hinder or delay” creditors from acquiring the property in dispute.³

Additionally, the word “creditors” has been interpreted broadly, with the section affording protection to not only persons and entities to which debts are presently owed, but also to “future creditors”. Therefore, this section is able to be used by creditors that have an “impending debt” owed, not necessarily a current outstanding debt.⁴

The only potential issue creditors may encounter is the exclusion provision contained in section 37A(3). If a purchaser can establish the relevant transaction (which resulted in the alienation of the property sought by the creditor) was made in good faith, any aggrieved creditors will not be able to utilise the voiding provision contained in section 37A(1). With respect to section 37A(3), the onus of proof rests with the purchaser alleging the transaction was made in good faith. This party must be able to prove they entered into the transaction with the debtor in good faith, without any notice of the debtor’s intention to defraud creditors.⁵

Therefore, raising Section 37A as a cause of action against “fraudulent” debtors is a particularly appealing legal avenue for creditors due to the relatively low onus of proof that must be met to have the disputed property transaction voided in favour of the prejudiced creditor.