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Insolvency Law News, March 2011

Beware of trying to be too smart in trying to offload assets to defeat creditors where there is a risk of bankruptcy

In Leonilda Marcolongo v Yu Po Chen & Anor [2011] HCA 3 the High Court allowed an appeal to set aside a registered transfer of land by applying s.37A of the Conveyancing Act (NSW). This section provides that where a property is “alienated” or transferred with the intent to defraud creditors then [in most circumstances] that transfer can set aside in favour of the person who has been disadvantaged by the transfer having occurred.

In this case Mrs Marcolongo sued Mr. Lym for damaging her property during Lym's construction works on a neighbouring property. The litigation continued for some time and Mrs. Marcolongo tried to obtain an order over another property of Lym's to secure payment of the claim, in the event that she was successful. Lym decided to reduce his exposure to a loss in the litigation, by selling the second property to his friend Mr Chen.

A couple of years later Mrs Marcologo succeeded in her claim against Lym. She then made a claim against Lym and Chen that the transfer of the second property was “voidable” based on s.37A . The Supreme Court, the Court of Appeal and the High Court examined Lym's motives in transferring the property. The High Court held that to “defraud” includes the hindering or delaying of creditors in exercising their rights to a remedy, the majority of judges held that to defraud does not necessarily require an element of dishonesty or the sole intent to defraud, and in this case the level of Lym's intent to defraud Mrs Marcolongo was enough to satisfy the requirements of s.37A and Mr. Chen was not a purchaser of the second property in good faith who at the time of the transfer did not have the notice of any intent by Lym to defraud Mrs Marcolongo.

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