Liquidators investigate transactions they believe were not beneficial, or were in fact detrimental, to the company. These types of transactions are called uncommercial transactions.
Who may void uncommercial transactions?
Only liquidators may seek to void uncommercial transactions. This recovery is not available to provisional liquidators, voluntary administrators, deed administrators or controllers.
What makes an uncommercial transaction voidable?
The transaction must have:
- no financial benefit to the company, or was detrimental to the company
- occurred when the company was insolvent
- involved another party who should have suspected the company was insolvent.
Why void uncommercial transactions?
A liquidator must make an equitable distribution of the company’s assets to its creditors. If
the company entered into a transaction that reduced the assets available for distribution to creditors, a liquidator will recover these assets, or its monetary equivalent.
What is the transaction?
Generally, uncommercial transactions are sales, transfers, or purchases of assets or services. What can be a transaction is broad, but there must
be an identifiable event between the parties.
What makes a transaction uncommercial?
A transaction is uncommercial if it had no or limited financial benefit or was detrimental to the company’s financial position. If the transaction reduced the company’s net asset position, the transaction is uncommercial. The ‘reasonable person test’ can assist to test the situation.
Two main circumstances that make an uncommercial transaction are when:
- The company disposes of property for less than its true value.
- The company purchases property at a price for more than its true value.
Usually, these types of transactions are made with related entities to the company.
Must the company be insolvent at the time?
The company must have either been insolvent at the time of the transaction or became insolvent because of the transaction. Section 95A of
the Corporations Act defines insolvency as not being able to pay debts as and when they fall due. The reasoning is the company must be insolvent, as a solvent company can pay all of its debts and therefore the transaction cannot cause detriment to creditors.
What is a ‘reasonable person’ test?
The court will look at the transaction from the view of a ‘reasonable person’ in the company’s circumstances. This is someone
that has knowledge of the company’s financial position, who is not trying to gain a personal benefit, or give a benefit to anyone else, or cause a loss to the company. It is assumed that a reasonable person would not enter
into a company transaction that would cause detriment to the company or reduce its assets.
What periods are applicable?
Three periods apply to when the transaction happened, and before the ‘relation-back day’ during which the transaction must occur. These are:
- six months—for non-related parties
- four years—if the recipient is related to the company
- ten years—if there is any ‘attempt to defeat, delay or interfere’ with creditors’ rights.
What is valuable consideration?
Usually, the easiest condition to prove is the creditor gave valuable consideration. For trade creditors, the initial supply of goods or services provides the valuable consideration. A loan creditor can rely on the initial loan to the company. The creditor will only have to show that they have given something of value in consideration for receiving the payment.
What is good faith?
The creditor must not have acted in any manner that would indicate they were not acting in good faith or under normal trading conditions. Actions that may repute good faith are commencing proceedings or issuing statutory
notices; ceasing supply; or changing to a cash on delivery (COD) basis. They must not have forced the payment by any form of threat or action.
What is needed to suspect insolvency?
The creditor must not have received or have known of any information or circumstance
Who may void uncommercial transactions?
Only liquidators may seek to void uncommercial transactions. This recovery is not available to provisional liquidators, voluntary administrators, deed administrators or controllers.
What makes an uncommercial transaction voidable?
The transaction must have:
- no financial benefit to the company, or was detrimental to the company
- occurred when the company was insolvent
- involved another party who should have suspected the company was insolvent.
Why void uncommercial transactions?
A liquidator must make an equitable distribution of the company’s assets to its creditors. If the company entered into a transaction that reduced the assets available for distribution to creditors, a liquidator will recover these assets, or its monetary equivalent.
What is the transaction?
Generally, uncommercial transactions are sales, transfers, or purchases of assets or services. What can be a transaction is broad, but there must
be an identifiable event between the parties.
What makes a transaction uncommercial?
A transaction is uncommercial if it had no or limited financial benefit or was detrimental to the company’s financial position. If the transaction reduced the company’s net asset position, the transaction is uncommercial. The ‘reasonable person test’ can assist to test the situation.
Two main circumstances that make an uncommercial transaction are when:
- The company disposes of property for less than its true value.
- The company purchases property at a price for more than its true value.
Usually, these types of transactions are made with related entities to the company.
Must the company be insolvent at the time?
The company must have either been insolvent at the time of the transaction or became insolvent because of the transaction. Section 95A of
the Corporations Act defines insolvency as not being able to pay debts as and when they fall due. The reasoning is the company must be insolvent, as a solvent company can pay all of its debts and therefore the transaction cannot cause detriment to creditors.
The relation-back day is the day that the
liquidation commenced. For the various types of liquidations, the relevant days are:
- For a liquidation that follows a voluntary administration, it is the day the administrators were first appointed.
- For other voluntary liquidations, it is the meeting date that the members held to wind up the company.
- For an official liquidation (a court appointment) it is the day that the application was filed in the court.
What defences are available to the other parties to transactions?
Statutory defences are available to the parties to the transaction under section 588FF of the Corporations Act. The other party to the transaction must prove all three parts of the defence, which are:
- valuable consideration was given
- the party acted in good faith
- there was no reason to suspect insolvency.
The other party must be able to prove all three parts of the statutory defence. The onus is on that party to prove their defence, the liquidator does not have to disprove the defence.
that would lead them (or a reasonable person in their position) to suspect that the company was insolvent. It is not necessary that the creditor knew, or believed, or even expected that the company was insolvent to lose the benefit of this defence. The mere suspicion of a reasonable person is enough.
Actions such as receiving post-dated cheques, dishonouring cheques, entering into repayment agreements, knowing of other creditors that are unpaid and pressing for payment can reasonably lead to this suspicion. Whether or not a person should have suspected insolvency is often difficult to determine particularly as the courts recognise a distinction between a short-term cash-flow problem and insolvency.
How long does the liquidator have to make a claim?
A claim application for an uncommercial transaction must be made within three years after the relation-back day. It is insufficient for the liquidator to only issue a demand within that period. The court can grant an extension, but the court application must be made within the three-year period after the relation-back day, and the liquidator must show the court a reasonable reason, for the delay in initiating the claim.
Last updated date: 01. 11. 2021