While the objective avoidance rules in the Satisfaction of Claims Act §§ 5-2 to 5-8 give the bankruptcy estate the opportunity to avoid specific dispositions made within relatively short deadlines, the subjective avoidance rule in § 5-9 provides a much broader access to avoidance. This provision functions as a general clause and has been called "the long arm" in bankruptcy law.
Conditions for Subjective Avoidance
For a disposition to be avoided under the Satisfaction of Claims Act § 5-9, the following conditions must be met:
There must be a "disposition" that in an "improper manner" either:
Favors one creditor at the expense of others
Removes the debtor's assets from serving as coverage for the creditors
Increases the debtor's debt to the detriment of the creditors
The debtor's financial position was weak or was seriously weakened by the disposition
The other party knew or should have known about:
The debtor's difficult financial situation and
The circumstances that made the disposition improper
The disposition must have been made at the latest ten years before the cut-off date
Differences from the Objective Avoidance Rules
The subjective avoidance rule differs from the objective rules in several important ways:
Longer deadline: While the objective rules have deadlines of three months to two years, subjective avoidance can occur for dispositions made up to ten years before the cut-off date.
Broader scope of application: The subjective rule is not limited to specific types of dispositions, but can affect all dispositions that, after a concrete assessment, are considered improper.
Stricter effect: With objective avoidance, the estate can only demand the return of the other party's enrichment (cf. § 5-11), while with subjective avoidance, the estate can claim compensation for its full loss (cf. § 5-12).
The Assessment of Impropriety
Central to the subjective avoidance rule is the assessment of whether the disposition has in an improper manner favored a creditor or removed assets from the estate. This assessment is objective, but subjective factors may still be relevant.
In practice, dispositions that by their nature are covered by the objective rules will normally also be considered improper under § 5-9. This is evident from both the preparatory works and case law. The Supreme Court has, for example, in Rt. 2001 p. 1136 (Kjells Markiser) established that repayment of loans that would have been affected by § 5-5 was also improper under § 5-9.
Other factors that may be relevant for the assessment of impropriety include:
Whether the disposition benefits related parties
Whether one of the parties can be punished for making the disposition
The timing of the disposition and the debtor's financial position when it was made
Whether the creditor has had special insight into the debtor's finances or the ability to influence payments
Practical Significance
In practice, the subjective avoidance rule has particular significance in two types of cases:
Where the disposition was made outside the deadlines for objective avoidance
Where the estate's loss exceeds the other party's enrichment
However, due to the stricter evidence requirements and more extensive processes, the estate will often prefer to invoke the objective rules when possible. The subjective rule thus functions as an important supplement ensuring that particularly reprehensible dispositions can be avoided even when the objective rules are insufficient.
Are you facing a bankruptcy situation or do you have questions about avoidance? Don't hesitate to contact us. We offer practical guidance and strategic advice for both creditors who want to protect their interests, and bankruptcy administrators who are considering avoidance claims.
