Explained Simply: How the Law Tries to Undo Unfair Deals Before Insolvency

When a business or individual goes insolvent, one of the first questions creditors ask is: “Where did all the money and assets go?”

In many cases, the financial collapse did not happen overnight. Often, assets were sold, transferred, or paid out shortly before insolvency - sometimes innocently, sometimes not.

South African insolvency law recognises this reality and provides a way to look back at what happened before insolvency. This is where insolvency avoidance actions come in. These legal actions allow certain transactions to be undone (reversed) so that assets can be brought back into the insolvent estate and shared fairly among creditors owed.

This article explains, in simple terms:

1. What avoidance actions are?
2. Why they exist?
3. How recoveries work in practice?

What Are Insolvency Avoidance Actions?

Insolvency avoidance actions are legal steps taken by a liquidator (for a company) or a trustee (for an individual) to reverse certain transactions made before insolvency.

In plain language, they allow the law to say: “That deal should not have happened, and the asset or money must come back.”

These actions exist to prevent situations where one person (or creditor) benefits unfairly while everyone else (other creditors) is left unpaid.

Why Does the Law Allow These Actions?

The basic principle behind insolvency law is fairness. When someone becomes insolvent, all creditors should be treated equally, according to legal ranking.

Avoidance actions exist to stop:

• last-minute payments to favoured creditors,
• assets being given away or sold cheaply, and
• insiders protecting themselves while others suffer losses.

Without avoidance actions, insolvency would reward those who acted fastest or had inside knowledge.

Which Law Applies in South Africa?

Avoidance actions are mainly regulated by the Insolvency Act 24 of 1936, which applies to individuals and companies in liquidation. The Companies Act 71 of 2008 also plays a role in corporate insolvency matters.

These laws define:

• which transactions can be challenged,
• how far back they can be challenged, and
• who may bring the legal action.

The Most Common Types of Avoidance Actions (Explained Simply)

South African law recognises several categories of transactions that may be undone. While the legal terms sound technical, the ideas behind them are straightforward.

1. Paying One Creditor Before Everyone Else

This is often called a preference.

If a business knows it is in trouble and pays one creditor shortly before collapsing, leaving others unpaid, the law may step in and undo that payment.

The reasoning is simple: All creditors should share the loss, not just the unlucky ones who were paid last.

2. Paying a Creditor Who Knew the Business Was Insolvent

If a creditor accepted payment knowing that the business could not pay its other debts, that payment may be challenged.

In these cases, the focus is often on what the creditor knew at the time and whether they acted unfairly.

3. Giving Assets Away or Selling Them Too Cheaply

This is known as a disposition without value.

Common examples include:

• donating property to family members,
• selling assets far below market value, or
• transferring assets to related businesses.

If the insolvent person or company did not receive fair value in return, the transaction may be undone.

4. Collusive or Dishonest Deals

Some transactions are designed deliberately to keep assets away from creditors. These are known as collusive dealings.

These cases often involve:

• insiders,
• related parties, or
• complicated structures meant to hide assets.

Courts look closely at the surrounding facts to determine whether a deal was genuinely commercial or intentionally unfair.

How Far Back Can Transactions Be Challenged?

Avoidance actions are subject to look-back periods, which limit how far back a transaction can be challenged.

Examples of look-back periods include:

• Dispositions without value – up to 2 years
• Voidable preferences – up to 6 months
• Undue preferences – up to 2 years
• Collusive dealings – no fixed time limit

Once these time periods expire, recovery may no longer be possible, even if the transaction was unfair. This is why early investigation is critical.

Who Brings These Legal Actions?

Avoidance actions are brought by:

• a liquidator, or
• a trustee.

Creditors do not usually bring the case themselves. Instead, the liquidator or trustee acts on behalf of the insolvent estate for the benefit of all creditors.

What Happens If an Avoidance Action Succeeds?

If the court sets a transaction aside:

• the money or asset is returned to the insolvent estate, and
• it becomes available for distribution to creditors.

While this does not usually result in full repayment, it often significantly improves creditor recoveries.

Are These Cases Easy to Win?

No. Avoidance actions are often complex and evidence-driven.

Defendants frequently argue that:

• the business was not insolvent at the time,
• fair value was paid,
• they had no knowledge of insolvency, or
• the claim has prescribed (too much time has passed for the legal claim to be brought).

Success depends on financial records, timing, and careful legal analysis.

Why Legal Advice Matters Early

The longer an insolvency goes unexamined, the harder it becomes to recover assets. Evidence disappears, assets move again, and legal time limits expire.

Early legal investigation allows:

• identification of recoverable transactions,
• preservation of evidence, and
• informed decisions about whether litigation is worthwhile.

How EW Serfontein & Associates Inc. Can Help

EW Serfontein & Associates Inc. assists liquidators, trustees, creditors, and affected parties with insolvency-related litigation, including:

• reviewing transactions before insolvency,
• advising on recovery prospects,
• bringing or defending avoidance actions, and
• pursuing recoveries through the courts.

Our role is to ensure that unfair transactions are properly challenged and that recoveries are pursued lawfully and efficiently. Our team is well-versed in assisting clients in all aspects of insolvency avoidance actions.

Conclusion

Insolvency avoidance actions exist to stop unfair last-minute deals and ensure that creditors are treated equitably. While the legal rules are technical, the principle is simple: no one should benefit unfairly when a business or person collapses financially.

With early legal advice and careful strategy, these actions can make a meaningful difference to insolvency outcomes. EW Serfontein & Associates Inc. provides experienced guidance to help navigate this process with clarity and confidence.

Contact Us today for any enquiries surrounding insolvency. We look forward to assisting you!

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This article is not intended to constitute any form of financial or legal advice.

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You might also be interested in reading one of our recent articles, Understanding Debt Collection In South Africa.