Clawback and bankruptcy do not draw a line under every transaction completed beforehand. A trustee can challenge particular payments and transfers under the Bankruptcy Act 1966 (Cth), chiefly as an undervalued transaction under s 120, a transfer intended to defeat creditors under s 121, or a preference under s 122. The result depends on the provision relied upon. Timing matters, but so do market value, insolvency, purpose, the recipient’s knowledge and the evidence preserved when the transaction occurred.
In this article, our insolvency lawyers deal with personal bankruptcy. Corporate unfair-preference claims arise under a different statutory regime.
What are clawback risks in bankruptcy?
“Clawback” is a convenient description, not a term used as a single cause of action in the Act. It covers several provisions under which a transaction is void against the bankruptcy trustee. The provisions serve different purposes. Section 120 restores value transferred for too little. Section 121 addresses property put beyond creditors for the proscribed purpose. Section 122 prevents an insolvent debtor from improving one creditor’s position at the expense of the general body of creditors.
A suspicious-looking transaction is not enough. The trustee must identify the statutory route and prove its elements, subject to any burden placed on the recipient for the clawback to be available. Conversely, an ordinary-looking transaction can be vulnerable if the documents and financial records establish the statutory test.
| Provision | Transaction targeted | Core question | Principal timing rule |
| Section 120 | Undervalued transfer | Did the recipient give no consideration, or consideration worth less than the property’s market value? | Transfer within the period beginning five years before commencement of bankruptcy and ending on the bankruptcy date, subject to the solvency qualifications in s 120(3) |
| Section 121 | Transfer to defeat creditors | Was the transferor’s main purpose to prevent property becoming divisible among creditors, or to hinder or delay that process? | No equivalent five-year look-back; an action concerning a s 121 transfer may be commenced at any time under s 127(4) |
| Section 122 | Preference | Did an insolvent debtor give a creditor a preference, priority or advantage over other creditors? | The period in the table in s 122(1), determined by the petition that led to bankruptcy |
The phrase “void against the trustee” is deliberate. It describes the transaction’s position against the trustee; it is not a general declaration that the transaction never existed for every purpose.
Which transactions attract a bankruptcy trustee’s attention?
A trustee ordinarily works from the bankrupt’s statement of affairs, bank statements, land-title searches, accounting records, tax material, loan documents and information obtained from the bankrupt and third parties. Transactions likely to receive attention include:
- gifts or transfers to a spouse, child or other relative;
- a sale at a price materially below an independent valuation;
- the discharge of one unsecured debt while comparable creditors remain unpaid;
- transfers into a trust or related company;
- a change in ownership after a demand, default, court proceeding or tax dispute;
- money paid to somebody other than the apparent seller; and
- an unusual superannuation contribution, which may engage the separate regime in ss 128B–128C.
Related-party status is a warning sign, not an element that automatically invalidates the dealing. A trustee still needs evidence about the asset, the transfer, the consideration and the transferor’s financial position. The practical difficulty for a recipient is often proof. Informal family arrangements may be genuine, yet poorly documented. Years later, reconstructed explanations carry less weight than contemporaneous bank records, valuations and written terms.
Substance matters more than the label
Calling a transfer a “sale” does not establish that you paid market value. Recording $500,000 as the price does not prove that $500,000 moved, nor that the property was worth that amount. Similarly, describing a payment as made in the ordinary course does not, by itself, satisfy a statutory protection.
Section 121A deals with consideration given to a third party. Where a person who later becomes bankrupt transfers property and the recipient gives some or all of the consideration to somebody else, ss 120 and 121 apply as though the transferor had transferred that consideration to the third party. Routing the sale proceeds elsewhere does not take the transaction outside the regime.
Undervalued transactions in bankruptcy under section 120
Under s 120(1), a transfer by a person who later becomes bankrupt is void against the trustee if it occurred within the statutory period and the recipient gave no consideration or consideration worth less than the property’s market value.
The relevant valuation date is the date of transfer: s 120(7)(c). Later growth or decline in value may affect the commercial stakes, but it does not rewrite the statutory comparison.
The five-year period is not a five-year automatic clawback
The outer period begins five years before the commencement of bankruptcy and ends on the date of bankruptcy. That is only the starting point. Section 120(3) provides that:
- for a transfer to a related entity more than four years before commencement, the transfer is not void if the recipient proves the transferor was solvent at the time; and
- for any other transfer more than two years before commencement, the same solvency qualification applies.
If the transferor failed to keep or preserve usual and proper business records that sufficiently disclosed the business transactions and financial position, s 120(3A) creates a rebuttable presumption of insolvency for the purpose of that qualification. Poor records can therefore become decisive, not merely inconvenient.
Section 120(2) excludes specified transactions, including payments of Commonwealth, State or Territory tax, transfers meeting liabilities under maintenance agreements or orders, transfers under debt agreements and any prescribed class.
What counts as consideration?
The court identifies what was actually given for the transfer and objectively assesses its value. Love and affection, family connection, a promise to marry and the other matters listed in s 120(5) have no value as consideration for this purpose.
If the transfer is void, s 120(4) requires the trustee to pay the recipient an amount equal to the value of consideration the recipient gave. The provision does not permit the estate to recover the transferred value while simply ignoring genuine consideration.
Case example 1: Anscor Pty Ltd v Clout (Trustee)
In Anscor Pty Ltd v Clout (Trustee) [2004] FCAFC 71; (2004) 135 FCR 469, Dexter, a company controlled by the bankrupt, paid Anscor more than $26 million for services connected with land transactions. The Full Court held that the s 120 enquiry concerned the consideration for the actual transfer and the objective value of what was given. It was not enough to point to broadly expressed promises in an earlier letter and assume that performance matched them.
The point extends beyond large commercial transactions. If a recipient says that services, debt forgiveness or work on a property formed the price, the real questions are what was agreed, what was performed and what that performance was worth when the property changed hands.
Real-world example: a discounted transfer to an adult child
A parent transfers an investment unit worth $720,000 to an adult child for $400,000, three years before the commencement of the parent’s bankruptcy. The transfer is to a related entity and falls within five years. Section 120 directs attention to the $320,000 shortfall and the statutory timing rules. Because the transfer occurred within four years, proving solvency under s 120(3) does not provide the child with the qualification available for an older related-entity transfer. Evidence that the child paid the $400,000 remains relevant because the trustee must account for the value of consideration under s 120(4).
Transfers to defeat creditors under section 121
Section 121 is not simply a longer version of s 120. Value is central to s 120; purpose is central to s 121.
Under s 121(1), the property must probably have become part of the transferor’s estate or probably have been available to creditors if it had not been transferred. The transferor’s main purpose must have been to prevent the property becoming divisible among creditors or to hinder or delay the process of making it available for division.
Direct admissions are rare. Purpose is usually proved by inference from the whole course of events: the transferor’s liabilities, pending claims, demands, tax exposure, the asset retained after the transfer, the relationship between the parties, the price, the timing and what each person said or did.
Section 121(2) deems the prescribed main purpose to exist if it can reasonably be inferred from all the circumstances that the transferor was, or was about to become, insolvent at the time. That is not the only route. Section 121(3) expressly leaves other methods of proof open.
The recipient’s protection under section 121(4)
A recipient must satisfy all three limbs of s 121(4):
- the consideration was at least as valuable as the property’s market value;
- the recipient did not know and could not reasonably have inferred the transferor’s prohibited main purpose; and
- the recipient could not reasonably have inferred that the transferor was, or was about to become, insolvent.
Paying market value is therefore necessary but not, by itself, sufficient for this protection. A purchaser who knows the sale is structured to obstruct creditors cannot rely on price alone.
Section 121 is also markedly different in time. Under s 127(4), an action concerning a s 121 transfer may be commenced at any time. By contrast, actions under ss 120 and 122 generally must be commenced within six years after the person became bankrupt: ss 127(3) and 127(5).
Case example 2: The Trustees of the Property of Cummins v Cummins
In The Trustees of the Property of John Daniel Cummins, a Bankrupt v Cummins [2006] HCA 6; (2006) 227 CLR 278, Mr Cummins, a barrister who had not lodged tax returns for many years, transferred his interest in the matrimonial home to his wife and transferred shares. The High Court upheld the conclusion that the transfers were made with the main purpose required by s 121.
The inference did not rest on one dramatic document. It arose from the circumstances, including that Mr Cummins voluntarily divested himself of virtually all substantial assets, retained insufficient assets to meet taxation liabilities if assessments issued, and regarded the transfers as improving the prospect that his property would be protected from ATO claims. The case is a strong reminder that a creditor-defeating purpose may be proved by the pattern left by the transaction.
Real-world example: market-value sale with proceeds diverted
A business owner receives repeated demands under a personal guarantee. He sells a boat to an associate for its independently assessed market value, but directs the associate to pay the price to a trust for his children. It would be unsafe to analyse only the boat’s sale price. Section 121A requires attention to the payment made to the third party, while s 121 directs attention to purpose, insolvency and what would otherwise have been available to creditors. A market-value valuation does not, on its own, make the arrangement safe.
Family-law orders require separate analysis
A consensual transfer between spouses is not insulated merely because it concerns matrimonial property. Nor should a transfer effected by a court order be treated as an ordinary voluntary conveyance without examining the source of the interests altered by the order and the remedies available in the family-law jurisdiction.
In Official Trustee in Bankruptcy v Mateo [2003] FCAFC 26; (2003) 127 FCR 217, the Full Court emphasised the legal effect of the Family Court order itself. Modern bankruptcy and family-law legislation expressly provides for the trustee’s participation and for the court to determine competing claims. A trustee, bankrupt or spouse should not assume that a consent order either defeats creditors automatically or can be attacked in precisely the same way as a private transfer.
Preferences in personal bankruptcy under section 122
Section 122(1) applies where an insolvent debtor transfers property in favour of a creditor, the transfer gives that creditor a preference, priority or advantage over other creditors, and it occurs within the statutory period.
The provision is concerned with effect. A debtor may prefer the supplier who is applying the most pressure, a family member who made an informal loan, or a creditor whose continued goodwill is commercially valuable. The trustee asks whether that creditor received an advantage over the others from a transfer made while the debtor was insolvent.
Why “six months” is an incomplete answer
The applicable period is fixed by the table in s 122(1):
| Bankruptcy route | Relevant period under s 122(1) |
| Creditor’s petition | Beginning six months before presentation of the petition and ending immediately before bankruptcy |
| Debtor’s petition presented while at least one relevant creditor’s petition is pending | Beginning on commencement of bankruptcy and ending immediately before bankruptcy |
| Debtor’s petition in any other circumstances | Beginning six months before presentation of the debtor’s petition and ending immediately before bankruptcy |
The second row can reach back to the commencement of bankruptcy under s 115, which may precede the bankruptcy date. That is why counting six months backwards from the day of bankruptcy can produce the wrong answer.
Protection for dealings in the ordinary course
Section 122(2) preserves specified rights. The principal commercial protection concerns a purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and gave consideration at least as valuable as the market value of the property. The person relying on s 122(2) bears the burden under s 122(3).
That wording should be applied as enacted. It is misleading to reduce it to a generic “lack of suspicion” defence borrowed from corporate insolvency. Personal bankruptcy and corporate unfair-preference claims are related in policy, but they are not interchangeable statutory tests.
Real-world example: paying the creditor who threatens proceedings
A sole trader cannot pay debts as they fall due. Four months before presenting a debtor’s petition, she pays an unsecured lender $60,000 in full. Three trade creditors receive nothing. The payment is in favour of a creditor and appears to improve that creditor’s position. The trustee would still need to establish insolvency, preferential effect and the applicable period. The lender’s position under s 122(2) would turn on the statutory evidence, not simply on the fact that the debt was genuinely due.
What happens when a transaction is clawed back?
The immediate consequence under ss 120–122 is that the transaction is void against the trustee. The practical remedy depends on what was transferred, what remains in the recipient’s hands and how the trustee proceeds.
A trustee may seek declaratory and recovery orders. Alternatively, s 139ZQ(1) permits the Official Receiver, either on its own initiative where the Official Trustee administers the estate or on a registered trustee’s application, to require a recipient to pay the trustee the money or value of property received. If the notice requires payment of a property’s value, transferring the property to the trustee satisfies that requirement: s 139ZQ(7).
A notice must state the facts and circumstances on which the Official Receiver considers the transaction void: s 139ZQ(2). Under s 139ZR, a notice concerning property creates a statutory charge securing the payment liability. The trustee has a statutory power of sale, subject to charges with priority.
Responding to a section 139ZQ notice
The deadline is unforgiving. A recipient applying under s 139ZS(1A)(a) must apply no later than 60 days after the notice was given. Another interested person has 60 days after becoming aware of the notice: s 139ZS(1A)(b). The court may set the notice aside if satisfied that the subdivision does not apply on the alleged facts and circumstances.
Refusal or failure to comply is an offence punishable by up to six months’ imprisonment under s 139ZT(1). The amount is also recoverable by the trustee as a debt under s 139ZQ(8). A recipient should preserve the notice envelope or service email, obtain the transaction documents and valuation material, and identify the final filing date immediately.
Evidence that usually decides a bankruptcy clawback dispute
These cases are fact-heavy. The most useful material tends to be contemporaneous:
- executed contracts, transfer forms and settlement statements;
- bank statements tracing both the price and its destination;
- independent valuations prepared close to the transfer date;
- loan agreements, ledgers and evidence of actual advances;
- aged payables, tax liabilities, cash-flow forecasts and demands relevant to insolvency;
- emails, messages and file notes recording the reason for the transaction; and
- complete accounting records capable of proving solvency where the recipient bears that burden.
An explanation assembled after a trustee’s demand will be tested against objective records. If the documents show that the stated price never arrived, that proceeds were redirected or that the transferor retained substantial undisclosed liabilities, polished witness evidence will not cure the underlying problem.
Read more about how we can help – Bankruptcy Lawyers 101 – Complete Guide
Common mistakes in bankruptcy clawback matters
Treating every look-back period as six months
Section 120 has a five-year outer period with important qualifications. Section 121 is not confined to that period, and s 127(4) permits an action concerning a s 121 transfer at any time. Section 122 uses the period attached to the petition route.
Assuming market value answers every question
Market value is central to s 120 and one limb of the s 121(4) protection. It does not decide purpose, knowledge, insolvency or the treatment of consideration diverted to a third party.
Treating a family transfer as automatically void—or automatically safe
Neither proposition is correct. Relationship explains why scrutiny is likely. Liability still turns on statutory elements and evidence. Family-law orders add another jurisdictional layer.
Waiting to reconstruct solvency records
Sections 120(3A) and 121(4A) attach evidentiary consequences to inadequate business records. A recipient who needs to prove solvency years later may find that the best evidence never existed or was not preserved.
Ignoring the recipient’s exposure
The bankrupt is not the only person at risk. The recipient may face a demand, a statutory charge, recovery proceedings, legal costs and a strict 60-day deadline if a s 139ZQ notice issues.
Frequently asked questions about clawback risks in bankruptcy
Can a trustee recover property transferred before bankruptcy?
Yes, if the transaction satisfies a provision such as s 120, s 121 or s 122. A pre-bankruptcy date does not itself protect the transfer. The relevant test depends on value, purpose or preferential effect, together with the applicable timing and protective provisions.
How far back can a bankruptcy trustee investigate?
Investigation and recovery periods are not the same thing. Section 120 reaches transfers within a five-year outer period, subject to its solvency qualifications. Section 122 applies its own petition-based periods. Section 121 has no equivalent five-year limit, and an action concerning a s 121 transfer may be commenced at any time under s 127(4).
Can I sell a house to a relative before bankruptcy?
A genuine sale to a relative is not automatically void. Expect scrutiny of the market value, the amount actually paid, where the money went, the transferor’s solvency and the transaction’s purpose. An independent valuation and fully traceable settlement funds are much stronger evidence than an informal family understanding.
Is a gift to a spouse vulnerable?
Potentially. A gift involves no consideration and may engage s 120 if it falls within the statutory period. Section 121 may also apply if the transferor had the prescribed main purpose. The spouse relationship neither proves nor defeats the claim.
Are all payments within six months of bankruptcy recoverable?
No. A payment must satisfy s 122, including insolvency, preferential effect and the correct statutory period. Section 122(2) also preserves specified rights. Six months is part of the timing analysis, not a conclusion.
Can a creditor be ordered to repay a genuine debt?
Yes. The debt may be genuine and the payment may still prefer that creditor over others within s 122. The question is not whether money was owed, but whether the statutory preference requirements and any protection are made out.
Does paying market value prevent a section 121 claim?
Not necessarily. Market-value consideration is only one of the three cumulative requirements in s 121(4). The recipient must also satisfy the provisions concerning knowledge of purpose and what could reasonably have been inferred about insolvency.
What if the buyer paid somebody else at my direction?
Section 121A may treat the consideration given to the third party as a transfer by the person who later became bankrupt. Directing payment away from the seller does not remove the arrangement from scrutiny.
Can the trustee challenge an old transaction after discharge?
Discharge does not necessarily end the trustee’s administration or recovery rights. The statutory cause of action and limitation provision must be checked. Section 127(4), for example, allows an action concerning a s 121 transfer to be commenced at any time.
What should a recipient do after receiving a section 139ZQ notice?
Record the date of receipt, preserve every service record, obtain the underlying transaction documents and seek advice promptly. An application to set the notice aside is generally due within 60 days. Non-compliance may expose the recipient to debt recovery and the offence in s 139ZT.
