Reviewable transactions in insolvency : the recognition of creditors’ interests in "subjective" and "objective" insolvency regimes

A person on the eve of bankruptcy may enter into transactions or arrangements that are intended to, or that have the effect of, preserving its property from being seized and distributed among creditors. Such transactions may provide a bankrupt with collateral benefits such as the continued use and enjoyment of property, or they may benefit third parties such as members of the bankrupt's family, or they may benefit selected creditors to the detriment of others. The effect of such transactions is to frustrate the legislative scheme which provides for the distribution of a bankrupt's residual property. This effect may be desired by a bankrupt or by a recipient of the bankrupt's property, or it may be unintended. Insolvency legislation confers wide powers upon a trustee in bankruptcy to "review" such transactions by bringing proceedings to reverse their effect and recover the value lost to the bankrupt's estate. Reviewable transactions comprise two main categories: dispositions or unequal transactions in which a debtor parts with property for no or insufficient consideration (such as a transfer of property to a spouse or a sale in which a bankrupt does not receive a fair price) and preferential repayments of debts owed to certain creditors to the detriment of others. Reviewable transaction laws in Canada and England have a subjective basis in that they focus upon the intent of a debtor to defeat creditors or prefer one creditor over others. In contrast, relevant Australian and New Zealand laws have an objective focus and provide remedies where the effect of a transaction, rather than the intent of a debtor, is to defeat the interests of creditors. This paper conducts a comparative critique of reviewable transaction regimes. It makes the argument that subjective regimes tend to reflect their historical origins in fraud law and a desire to punish and frustrate the fraudulent intent of a bankrupt; an inappropriate policy foundation that fails to address the competing interests and policy considerations which should form the basis of reviewable transaction law. Objective regimes, which focus upon the effect of impugned transactions, provide more appropriately for the balancing of creditors' and recipients' interests and the making of provision for policy considerations. This paper also considers collateral effects of reviewable transaction regimes upon creditors' interests (such as effects upon claims to property recovered by a trustee) in a variety of circumstances and concludes that the results are often inconsistent and undesirable. In this respect the relative positions of secured and unsecured creditors are described in detail and proposals for reform are ventured.Law, Peter A. Allard School ofGraduat