Creditors have a powerful weapon against fraudulent debtors

Debtors often dispose of property to avoid paying creditors. Section 172 of the Property Law Act 1958 (Vic) provides creditors with a powerful weapon to defeat them. In Grapple Pay Pty Ltd v Conroy [2025] NSWCA 171 the New South Wales Court of Appeal added a gloss to the principles governing the New South Wales equivalent of s.172.

Section 172 relevantly provides:

(1) Save as provided in this section, every alienation of property made, whether before or after the commencement of this Act, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced. 

….

(3) This section shall not extend to any estate or interest in property alienated for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the alienation, notice of the intent to defraud creditors.

Thus, to attract the operation of s.172(1) there must be:

(a) an alienation of property;

(b) with:

• an intent (which must be actual, rather than constructive (Cannane v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557; [1998] HCA 26 at [12]) and which need not be the transferor’s sole intent (Marcolongo v Chen (2011) 242 CLR 546; [2011] HCA 3 at [57]);
• to defraud (which has been construed to include to hinder or delay: Marcolongo at [12], [19], [22]-[23], [28] and [56]);
• creditors (including present and future creditors, whether individually or collectively rather than any particular creditor: Cannane at [12]); and

(c) the applicant for an order declaring the transfer to be void must be prejudiced by the transfer.

While the intention to defraud must be an actual intention, ordinarily the existence of that fact will be inferred: Marcolongo, [34]. The section does not require that a debtor wants creditors to suffer a loss or has a purpose of causing loss: Marcolongo, [32].  But it does require the claimant to “show the existence of an intention to hinder, delay or defeat creditors and in that sense to show that accordingly the debtor had acted dishonestly”: Marcolongo, [32]. 

A person may have acted dishonestly, "judged by the standards of ordinary, reasonable people", without appreciating that the act in question was dishonest by those standards”: Marcolongo, [33].

The intention to defraud need not be the sole purpose of the debtor; it may exist concurrently with a genuine and good faith intention to dispose of property: Jewell v Holloway [2013] VSCA 260 at [11].

The relevant intent can be proved where:

(1)       the ‘natural and probable consequences’ of the disposition is the defeat or delay of creditors;…

(2)       the alienation is made voluntarily;

(3)       the alienation is made, relevantly, for no consideration by a person in financial difficulties;

(4)       the alienation is made in favour of a family member; and

(5)       the alienation is made in haste or proximately to one or more events indicating financial stress on the part of the disponor.

See: Commissioner v Taxation v Oswal (No. 6) [2016] FCA 762; (2016) 339 ALR 560 at [66]

In Grapple, the Court of Appeal held that an intent to defraud cannot be inferred merely because one creditor is preferred over another creditor. Grapple contains a summary of the principles governing s.172.

Where a transfer is prima facie voidable under s.172(1)), s.172(3)) operates as a proviso with the burden of proof on the purchaser to show good faith and that the purchaser did not, at the time of alienation have notice of the intent to defraud: Grapple, [95].

Section 18 of the Property Law Act defines a “purchaser” as meaning “a purchaser in good faith for valuable consideration”.

In Barton v Official Receiver (1986) 161 CLR 75 at 86, the High Court held that, for the purposes of s 121 of the Bankruptcy Act 1966 “a purchaser … for valuable consideration … is one who has given consideration for his purchase ‘which has a real and substantial value, and not one which is merely nominal or trivial or colourable’.” This dictum was applied by the Queensland Court of Appeal in Wise Investments Pty Ltd v Ruddy Tomlines & Baxter, Solicitors (A Firm) [2019] QCA 271 [57]-[61] in the context of an application to avoid a transfer under the equivalent provision to s.172.