In brief – Intention to defeat creditors pivotal to
The decision in March 2011 of the High Court in Marcolongo v Chen clarifies many issues regarding
transfers which parties seek to overturn under section 37A of the
Conveyancing Act as being a voluntary transfer with the
intention to defraud creditors.
Alienation of property can be voidable
The provisions of
section 37A of the
Conveyancing Act state that any alienation of property
with the intention to defraud creditors is voidable at the instance
of any person who is prejudiced. The section does not apply to any
interest of a purchaser in good faith not having, at the time of
alienation, notice of intention to defraud creditors.
The facts in this case were somewhat complicated. Effectively,
Mr Chen acted in a representative capacity for a company, Lym
International Pty Limited, which was undertaking two developments.
An adjoining owner, Mrs Marcolongo, had a claim against the
Transfer of property to avoid claim
At the insistence of Mr Chen, one of the properties owned by the
company was transferred by the company to him to avoid the claim of
Mrs Marcolongo, amongst other things.
The High Court held that the transfer to Mr Chen was caught by
section 37A and overturned the decision of the NSW Court of
Contrary to the view of the Court of Appeal, the High Court held
that all that was necessary was to show the existence of intention
of the transferor to hinder, delay or defeat creditors and
therefore that the transferor had acted dishonestly in this
The High Court also found that the provisions of section 37A,
when it referred to an intention to "defraud", included
hindering or delaying creditors.
Intention to defraud need not be sole or predominant
The High Court further found that there only had to be an
intention to defraud and that the section did not contemplate a
mixture of motives from which it must be extracted or distilled
that the predominant intention was to defraud.
In other words, the section does not require, for its operation
to come into effect, that the intention to defraud is the sole or
Good faith exemption not applicable
As the transfer of the property was at the initial behest of Mr
Chen, the Court found that the exemption for a party acting in good
faith in section 37A(3) did not apply, as he had acted totally in
bad faith, had full knowledge of the relevant intent and in fact
instigated this process.
This case clarifies the circumstances in which a party who has
been prejudiced by a voluntary transfer can challenge that transfer
if it has been made with the intention to defraud creditors.
Many retail leases include a covenant to trade, requiring the tenant to open the premises for trade during certain hours.
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