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Uncommercial Transactions

What are Uncommercial Transactions?

Liquidators investigate transactions when they believe it was either not beneficial to, or was detrimental to, the company. These transactions are called uncommercial transactions. The Corporations Act sometimes will void these transactions and require the other party to the transaction to return an asset or make a payment to the liquidator.

Who may void uncommercial transactions?

Only liquidators may seek to void uncommercial transactions. These provisions are not available to provisional liquidators, voluntary administrators, deed administrators or controllers.

What makes a transaction voidable?

To void a transaction, the liquidator must show that:

1. a transaction was entered into;
2. there was no benefit to or there was a detriment to the company;
3. it occurred at a time when the company was insolvent; and
4. the other party to the transaction suspected or should have suspected that the company was insolvent.

Why void uncommercial transactions?

One of a liquidator's functions is to discover whether the company entered into any transaction that reduced the amount of assets available for distribution to creditors. The liquidator will want to recover these assets or their monetary equivalent to increase the distribution.

The elements of uncommercial transactions

1. Uncommercial transaction Defined

An transaction is uncommercial if it had no or limited benefit, or was detrimental to financial position of the company, and where a reasonable person in the company's position would not have entered into the transaction for those reasons. The heart of the section is commerciality. Although not limited to these circumstances, two major times that this provision will be used is when:

(a) the company disposes of an asset for less than its true value; or
(b) the company purchases something at a price that is more than its true value.

2. The company must be insolvent

The company must have either been insolvent at the time of the transaction, or became insolvent because of the transaction. Section 95A defines insolvency as not being able to pay ones debts as and when they fall due. The reasoning that the company must be solvent is that a solvent company has the capability of paying all of its debts and the transaction could not have caused a detriment to creditors.

3. There must be a transaction

Uncommercial transactions are generally sales, transfers or purchases of assets or services, though any type of transaction can be caught under these provisions. What may be considered a transaction is very wide, but there must be an identifiable transaction.

4. The transaction must be uncommercial

The liquidator must show a reduction in the net asset position of the company. Any benefits of the transaction must be outweighed by the cost or detriment to the company. In cases where assets are sold, unless they are sold for their true value and the price is recoverable, there will be no benefit to the company. If they are sold for less than their true value, there will be a detriment.

Where money is being dissipated from the company, assets or services may have been purchased for inflated prices, i.e. excessive to the asset or service provided, and the transaction will be detrimental overall. This type of transaction is usually done with parties related to the company.

5. The "reasonable person" test

The Court will look at the transaction from the eyes of a reasonable person in the company's circumstances, who has knowledge of the financial position of the company, and who is not trying to gain a personal benefit, or give a benefit to anyone else, or cause a loss to the company. The Court assumes that a reasonable person would not enter into a transaction that causes a detriment or reduction of assets to the company.

6. The time period

There are various time periods before the 'relation back day' during which the transaction must occur. These are:

• 6 months - for non-related parties;
• 4 years - if the recipient is related to the company; and
• 10 years - if there is any "attempt to defeat, delay or interfere" with the rights of creditors.

The relation back day is the day on which the liquidation is deemed to have commenced. For a liquidation which follows a voluntary administration, it is the day that the administrators were first appointed, even if a Deed of Company Arrangement intervenes. For other voluntary liquidations, it is the date of the members meeting. For an official liquidation (a court appointment) it is the day that the application was filed in the court.

What defenses are available to the other parties to transactions?

The Corporations Act sets out a set of statutory defenses that are available to parties to a transaction. The other party must prove all three arms for the defense to be available. If they cannot prove even one of the arms, the entire defense will fail. The onus of proving these defences lies with the other party, as they have knowledge of these matters, it is not the liquidator's role to disprove it.

The three arms of the defense are:

1. valuable consideration was given
2. the creditor acted in good faith
3. there was no reason to suspect insolvency

What is Valuable Consideration?

Generally it is the level of consideration in the transaction that comes under investigation. The consideration given by the company must be commercial when compared to the value of the benefit received by the company.

What is Good faith?

The other party must not have acted in any manner that would indicate that they were not acting in good faith or under normal business conditions. Actions that may repute good faith are the issuing of proceedings or statutory notices to the company, ceasing supply to the company, changing to a COD basis etc. They must not have forced the payment to be made by threat or action.

What is needed to suspect insolvency?

The other party must not have received or have known of any information or circumstance that would lead them (or a reasonable person in their position) to suspect that the company was insolvent. It is not necessary that the other party knew, or believed, or even expected that the company was insolvent to loose the benefit of this defense. The mere suspicion of a reasonable man is sufficient.

How long does the liquidator have to make the claim?

Claims have to be commenced within 3 years after the relation back day. It is insufficient for the liquidator to only have made a formal demand within that period, they must issue proceedings within that time period. An extension to this limit may be granted by the Court, but the application has to be made within the three year period after the relation back day and the liquidator will need a reasonable reason for the delay.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

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Last Updated: 6.3.2008