Recovering assets from a debtor is usually done via the recovery provisions in the Corporations Act 2001 (Cth) or the Bankruptcy Act 1966 (Cth), but there is another option, at least in New South Wales, which offers creditors, insolvency practitioners and any prejudiced parties a useful alternative. A recent case demonstrates its advantages (Lardis v Lakis  NSWCA 113; Clayton Utz acted for the successful creditor).
How does section 37A work?
The effect of section 37A of the Conveyancing Act 1919 (NSW) is to make voidable any transactions where the debtor has "alienated" (disposed of) assets with the intent to defraud creditors. It applies to both individual and company debtors.
Some benefits of commencing recovery proceedings under section 37A include:
- the debtor does not need to be insolvent or in liquidation either at the time of the transfer of the assets or at the time proceedings are commenced;
- the "property" in section 37A covers all forms of property and is not limited to real property; and
- any persons (usually creditors and insolvency practitioners) can rely on section 37A, provided that they are prejudiced by the disposal of assets by the debtor.
The focus of section 37A is on the debtor's "intent to defraud" which is a question of fact. This means that proceedings under section 37A require demonstration of the transferor's intent and also the transferee's knowledge of that intent, which are based primarily on evidence.
Case study on section 37A: Lakis v Lardis
Mr Lakis and Mr Lardis were business partners and the directors of a pest control business, Amazon Pest Control Pty Ltd. Disputes arose between the business partners which led to the following events:
- Mr Lakis commenced proceedings in the NSW Supreme Court in August 2012 for Amazon to be wound up. Justice Black made that order in December 2012, while also finding that Mr Lardis had paid his own personal expenses out of Amazon's funds.
- Separate NSW Supreme Court proceedings were brought by both Mr Lakis and Mr Lardis against each other for breach of directors' duties. Acting Justice Young made adverse findings against both parties, including an order on 1 September 2013 that Mr Lardis account to Amazon for the sum of $1,090,076.24, plus interest.
Meanwhile, NAB had approved a loan to Mr and Mrs Lardis which was secured by a mortgage over their matrimonial home at Dolls Point. In September 2012, Mr and Mrs Lardis' solicitor wrote to NAB advising that Mr Lardis wished to transfer a majority of his interest in the Dolls Point Property (49% of his half share) to his wife, so he would hold 1% and his wife 99%. In November 2012, the transfer was signed by Mr and Mrs Lardis with the consideration stated on the transfer as being $1.00. The transfer was registered in January 2013, on the same date as Amazon was wound up.
In August 2016, Mr Lakis and Amazon commenced proceedings in the NSW Supreme Court against Mr and Mrs Lardis under section 37A, seeking a declaration that the 49% transfer of Mr Lardis' interests in the Dolls Point Property was void. The timing of the agreement was a key fact on which the outcome of the section 37A proceedings was based.
Mrs Lardis alleged in her defence that the consideration she provided in return for the 49% interest was the loan money secured by the property which she advanced to Mr Lardis to pay his business and legal expenses.
On 8 September 2013, a trustee in bankruptcy was appointed over Mr Lardis' estate.
At first instance, Justice Sackar was satisfied that Mr Lardis, together with Mrs Lardis, first applied their minds to the question of the transfer of Mr Lardis' interest in the Dolls Point property to Mrs Lardis, in or about early September 2012 (around the time of the email to NAB being the earliest documentary reference to a transfer of Mr Lardis' interest in the Dolls Point Property to Mrs Lardis), galvanised "by the progress and imminence of the litigation and the fear of the real possibility of adverse consequences".
The Court held that no equitable interest in the property was conveyed prior to registration date and that:
- Mr Lardis transferred to Mrs Lardis his 49% in the matrimonial home with an intent to defraud, hinder or delay prospective creditors including, Amazon and Mr Lakis; and
- Mrs Lardis had notice of the intent and shared this intent with Mr Lardis.
On appeal, the Court of Appeal held that both Mr and Mrs Lardis understood that there was a likelihood of future indebtedness arising out of the litigation which followed the winding up proceedings. A letter from Mr Lakis' solicitors dated 9 December 2011 made plain at the outset that there was a real possibility of claims against Mr Lardis personally, for damages arising out of his withdrawal or use of company funds.
In addition, the evidence of their solicitor was not supported by, and was inconsistent with, contemporaneous documents and was inconsistent with the evidence of Mr and Mrs Lardis. It therefore followed that there was no binding agreement between Mr and Mrs Lardis when the relevant alienation of property occurred and that Mrs Lardis failed to establish a defence under section 37A(3) of the Conveyancing Act.
The Court dismissed Mrs Lardis' appeal with costs.
Key considerations when running proceedings to recover property under section 37A
Section 37A offers an alternative to, and supplements, the other provisions available to a creditor or insolvency practitioner under the Corporations Act and Bankruptcy Act, and may be used in a non-insolvency scenario.
The creditors intended to be defrauded include future, contingent and prospective creditors. This means that the transferor need not be indebted at the time of the transfer.
It is not necessary to prove that the debtor actually intended to defraud creditors. The Court may draw this inference upon considering the circumstances and evidence.