Creditors - don't forget section 37A!

Introduction

A recent High Court decision highlights the breadth of the scope of section 37A of the Conveyancing Act 1919 (NSW), a long standing provision having its roots in an Elizabethan era statute which essentially prohibits dispositions of property by a debtor with the intent to defraud creditors. In doing so, this section (which has also been substantially incorporated into the laws of other Australian states) complements other similar statutory remedies available to creditors seeking redress from recalcitrant debtors. These include section 121 of the Bankruptcy Act 1966 (Cth), in the case of individual debtors and section 588FE of the Corporations Act 2001 (Cth), in the case of corporate debtors. However, section 37A a significant advantages over these provisions. The debtor need not necessarily be insolvent at or shortly after the time of this section's application.

In Marcolongo v Chen [2011] HCA 3 the High Court unanimously allowed an appeal from the New South Wales Court of Appeal in deciding that section 37A applied to the facts, thereby rendering the relevant transfer of property void. This was despite the fact that the transfer was effected under the Real Property Act 1900 (NSW) with the indefeasibility of title notion being a bulwark of the Torrens title system implemented by this Act.

Factual context

Mrs Marcolongo (M) owned a property adjoining a development site (Site 1) being developed by Lym International Pty Ltd (LIPL). During the course of the development, excavation works on Site 1 caused damage to M's property amounting to some $400,000 in respect of which she successfully sued LIPL. LIPL failed to pay M from the sale proceeds of the Site 1 development, despite certain steps taken by M to attempt to ensure this would be done. LIPL then proceeded to develop another site (Site 2). M's lawyers then ramped up their debt recovery efforts and threatened to obtain a freezing order to preserve the Site 2 property as an asset...