Voidable Transactions Law

Unfair loans are only unfair if the interest on the loan, or charges in relation to the loan, were extortionate when the loan was made, or has since become extortionate.

This determination is made considering the following:

1. The risk to which the lender was exposed; and
2. The value of any security in respect of the loan; and
3. The term of the loan; and
4. The schedule for payments of interest and charges and for repayments of principal; and
5. The amount of the loan; and
6. Any other relevant matter.

Section 588FD of the Corporations Act 2001 (CTH) (“the Corporations Act”) outlines the requirements on the unfair loans provision.

Although not used by liquidators much, this article explains unfair loans and voidable transactions in more detail.

If you have been contacted by a liquidator in relation unfair loans, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

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What are Voidable Transactions?

A voidable transaction in company insolvency is a transaction entered into by the company and a third-party which can be avoided and recovered by the liquidator of the company in liquidation.

Voidable transactions can include:

1. 588FA – Unfair preferences;
2. 588FB – Uncommercial transactions;
3. 588FC – Insolvent transactions;
4. 588FD – Unfair loans to a company; and
5. 588FDA – Unreasonable director-related transactions.

If you fall into the category outlined above, then this transaction could be a voidable transaction.

Section 588FE(6) of the Corporations Act says:

The transaction is voidable if it is an unfair loan to the company made at any time on or before the day when the winding up began.

This means that there is no time limit as with other types of voidable transactions, simply at any time on or before the winding up began.

This article will focus on unfair loans.

What are unfair loans?

A loan is an unfair loan if the interest on the loan, or charges in relation to the loan, were extortionate when the loan was made, or has since become extortionate because of a variation to the loan.

In determining whether interest on a loan was or became extortionate or whether charges in relation to a loan were or became extortionate the liquidator must have regard to the following:

1. The risk to which the lender was exposed; and
2. The value of any security in respect of the loan; and
3. The term of the loan; and
4. The schedule for payments of interest and charges and for repayments of principal; and
5. The amount of the loan; and
6. Any other relevant matter.

588FD of the Corporations Act allows for two (2) parts – section 588FD(1) and section 588FD(2).

Section 588FD(1) of the Corporations Act says:

(1)  A loan to a company is unfair if, and only if:

(a)  the interest on the loan was extortionate when the loan was made, or has since become extortionate because of a variation; or

(b)  the charges in relation to the loan were extortionate when the loan was made, or have since become extortionate because of a variation;

even if the interest is, or the charges are, no longer extortionate.

The first part of the section says that loans are only unfair loans if the interest on the loan, or charges in relation to the loan, were extortionate when the loan was made, or has since become extortionate.

In calculating whether the interest on the loan, or charges in relation to the loan, were, or have become extortionate, consideration must be given to section 588FD(2) of the Corporations Act which says:

(2)  In determining:

(a)  whether interest on a loan was or became extortionate at a particular time as mentioned in paragraph (1)(a); or

(b)  whether charges in relation to a loan were or became extortionate at a particular time as mentioned in paragraph (1)(b);

regard is to be had to the following matters as at that time:

(c)  the risk to which the lender was exposed; and

(d)  the value of any security in respect of the loan; and

(e)  the term of the loan; and

(f)  the schedule for payments of interest and charges and for repayments of principal; and

(g)  the amount of the loan; and

(h)  any other relevant matter.

The explanatory memorandum contained in the Corporate Law Reform Bill 1992 (Cth) says:

373. ‘Unfair loan’ will be defined substantively in proposed section 588FD, to mean a loan in respect of which the interest rate or charges were extortionate at the time the loan was entered into. An unfair loan is liable to be set aside under proposed sections 588FE and 588FF.

The word extortionate sets a seemingly high bar, but what does extortionate mean?

What does Extortionate Mean?

The Oxford English Dictionary defines extortionate to mean:

(of a price) much too high; exorbitant.

The Oxford English Dictionary defines exorbitant to mean:

(of a price or amount charged) unreasonably high.

In John Irving as Liquidator of Mawson KLM Holdings P/L (In Liq) & Anor V Starmaker (NO 51) P/L [2005] SASC 309 a party referred to the word extortionate in pleadings as:

“grossly excessive”

Seemingly the bar is set very high for a loan to be unfair.  Use of the word extortionate and the definitions contained above, and the considerations contained in section 588FD(2) of the Corporations Act makes it a very onerous task to persuade a Court that a loan was unfair pursuant to the Act.

Arguably, the legislature actually intended this to operate this way.

The explanatory memorandum contained in the Corporate Law Reform Bill 1992 (Cth) says:

1048. This provision is quite different from anything contained in the present law and is directed to the situation where the rights of unsecured creditors as a class are prejudiced by the company’s having entered into a loan agreement for which the consideration is excessive. The section is not directed to loans which in hindsight may be judged as bad bargains but at transactions which are grossly unfair, so that in normal circumstances no reasonable company is likely to have entered into such a contract unless there were some further rationale such as where the agreement is a sham agreement intended to operate in circumstances of insolvency to confer an undue benefit on the lender.

What is a Loan?

Again, there is no definition of “loan” in the Corporations Act.

The Oxford English Dictionary defines loan as:

A thing that is borrowed, especially a sum of money that is expected to be paid back with interest.

Butterworths Concise Australian Legal Dictionary defines a loan as:

An advance of money … the payment of an amount on behalf or at the request of a person where there is an obligation to repay the amount.

In Federal Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753 Edmonds J said:

The essence of a loan of money from A to B is a corresponding contemporaneous obligation on the part of B to repay the money transferred from A to B … Absent that obligation, the transfer of the money from A to B is something else – a gift, a payment by direction, a payment or repayment of an anterior obligation – but it is not a loan.

In Commissioner of Taxation v Radilo Enterprises Pty Ltd [1997] FCA 22 the Court said:

In essence then a loan is a payment of money to or for someone on the condition that it will be repaid.

In Re Securitibank Ltd. (No. 2) [1978] 2 NZLR 136 Richardson J said:

The essence of a loan of money is the payment of a sum of money on condition that at some future time an equivalent amount will be repaid.

So, a loan is the advancement of money from one entity to another entity with the obligation that it be repaid at a later time.

This means that in a particular factual scenario it may be possible to argue that the liquidator’s claim for unfair loans might not actually be a loan.  This will depend on the facts of each particular case.

If it is determined to be an unfair loan, the Courts can make a number of orders.

What Orders can the Court Make?

The Court can make orders relating to unfair loans such as an order directing a person to indemnify the company in respect of some or all of its liability to the assignee.

Section 588FF of the Corporations Act says:

Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders … (f) if the transaction is an unfair loan and such a debt, security or guarantee has been assigned–an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;

There are also a number of other orders that the Court are able to make in relation to voidable transactions and unfair loans.

However, there are some defences to claims relating to unfair loans.

Defences to Unfair Loans Claims

Possible defences are outlined in the Corporations Act.

No Requirement for insolvency

There is no requirement for insolvency in unfair loans (just like unreasonable director-related transactions) for the insolvency defence or the defence of good faith are not available.

It was not a Loan

A person might be able to successfully argue that the alleged loan is not a loan in accordance with the definitions above.  There are a number of factual scenarios where the company might incur a loan which is not typical, business restructuring, debt restructuring, etc.  If the characteristic of the particular transaction is not a loan, then it may not be caught by this section.

It was not Extortionate

Probably the best defence to a liquidator claim for an unfair loan is that the interest and/or charges on the loan were not extortionate when the loan was made or have since become extortionate.  As discussed above, the bar is set very high in relation to whether interest and/or charges are extortionate, and even seemingly very high interest rates may not be extortionate.

In practice there has rarely (or never) been a reported case where the Court has found for a liquidator in a claim for an unfair loan.

How have the Courts Decided?

In Re Essendon Apartment Developments Pty Ltd (in liquidation) (No 2) [2013] VSC 210 a caveator was attempting to argue that a second mortgage was an unfair loan because it bore an interest rate of 60% per annum or 72% per annum if in default.  In determining this issue, Robson J said:

I am not satisfied that the loan was an unfair loan under s 588FD or that the liquidator was in error in deciding that it was not. On the evidence, the lender was exposed to relatively high risk. The mortgage was a second mortgage on an undeveloped development. There is no evidence of the value of the security. The loan was for three months. The loan was only for $120,000.

So, on balance, looking at all the circumstances, a loan which bore an interest rate of 60% to 72% per annum was not deemed “extortionate” or an unfair loan.

Non-588FD Unfair Loans Cases

As mentioned above, with a complete lack of and real judicial decisions in relation to 588FD Unfair Loans cases, other cases have decided whether interest rates and charges are reasonable.

In Takemura v National Australia Bank Ltd [2003] NSWSC 339 the Court considered whether 60% to 72% interest stopped the Mortgagee from obtaining an equitable remedy of specific performance.  Young CJ said:

What must be shown is that there is unconscionable pressure on the mortgagor to enter into the arrangement. A mortgage given by a businessperson at a very high rate of interest, if that mortgage was freely and voluntarily given, will not be able to be attacked … it seems to me that short of unconscionability including what is sometimes comprehended in the defence of lack of clean hands, the mere fact that there is a high interest rate charged in trade and commerce between people of business does not of itself mean that equity would decline specific performance.

So again, an interest rate of between 60% and 72% did not mean that the lender had acted unconscionably in this matter.

In Ozzy Loans Pty Ltd v New Concept Pty Ltd & Zhong [2012] NSWSC 814 the Court was asked to consider if an interest rate of 72% to 120% per annum was unreasonable in the circumstances.  In this case S G Campbell J said:

None of the four categories identified by his Honour [in Takemura] arises in this case on the findings I have made … It follows from what I have said that the plaintiff is entitled to judgment with interest at the mortgage interest rate …

So, even an interest rate of between 72% to 120% may not be excessive or extortionate.

In Re: Planet Securities Unit Trust v Dalrymple [1999] QSC 204 the Court was asked to consider if an interest rate of 180% (15% per month) was unreasonable.  Again, after considering the authorities Hon. Mr Justice Shepherdson said:

I order that the Mortgage made between the plaintiff and the defendants and dated 18 November 1997 (Exhibit 12) be read and construed as if clause “Thirdly” thereof were deleted and the following substituted: “The Mortgagor will pay interest in advance on the principal sum or so much thereof as shall from time to time be outstanding at the rate of fifteen percent (15%) per calendar month such interest to be calculated from 10 November 1997.” … I give judgment for the plaintiff against the defendants in the sum of $292,936 … The sum of $292,936 is calculated on principal of $70,588 unpaid plus 21 instalments each of $10,588 for interest due and payable on the 9th of each month

What is Unreasonable?

Notwithstanding the above, the Courts will make an order that interest and charges are uncommercial in some instances, for example in Solomon-Innes v Carter-Lannstrom [2017] QSC 49 the applicants were seeking an order for (1) an injunction; (2) the applicants pay a commercial rate of interest on the balance outstanding.  Ann Lyons J said:

The applicants allege they have been paying interest to the respondents at a rate which they say has, at times, been as high as “14,666% per annum” and that new loans were being taken out from the respondents for the purpose of repaying interest on existing loans, including penalties of $5,000 per day on the late payment of an interest instalment of $21,000.

Her Honour decided:

Having considered the material I am satisfied that the applicants have established that there is indeed a prima facie case and that the balance of convenience favours the grant of an injunction. I consider therefore that the injunction should be granted generally in the terms set out in paragraphs 1 and 2 of the Draft Order handed up by counsel at the hearing of this Application on 14 March 2017.

So, 14,666% interest on a loan may be too much. You think?

Section 588FD Unfair Loans

Hardly used by liquidators, the bar is seemingly set very high for a claim for unfair loans to be successful.  However, if you receive a letter from a liquidator then it is very important that you contact a solicitor immediately.

If you have been contacted by a liquidator in relation unfair loans, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

DEDICATED TEAM – FAST ACTING – PROVEN RESULTS

GET A FREE FEE ESTIMATE TODAY

OR CALL: 1300 545 133 FOR A FREE PHONE CONSULTATION

Wayne Davis

Wayne Davis, LLB, GDLP – Commercial litigation solicitor and legal practice director at Stonegate Legal Pty Ltd. Stonegate Legal focus on commercial litigation, debt disputes, the enforcement of money orders, and insolvency. Committee member of the Sunshine Coast Law Association. Committee member and volunteer lawyer with the Sunshine Coast Community Legal Service.

stonegatelegal.com.au/

Unreasonable director-related transactions occur when:

1. There is a transaction of a company; and
2. The transaction is a payment, conveyance, transfer, disposition of property, the issue of securities, and/or the incurring of an obligation; and
3. The transaction is, or is to be, made to a director of the company, a close associate of a director, or a person on behalf of, or for the benefit of, a director or close associate; and
4. It may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction.

Unreasonable director-related transactions claims are one of the types of voidable transactions in company insolvency outlined at section 588FDA of the Corporations Act 2001 (CTH) (“the Corporations Act”).

There are a number of defences and exceptions to the above which may mean that a director does not have to repay hard-earned monies to the liquidator.

However, there is no requirement that the unreasonable director-related transaction occurred when the company was insolvent.  Unlike other voidable transactions, unreasonable director-related transactions do not require the transaction to be an insolvent transaction, and so the possible insolvency defence is not available to these types of claims.

This article explains in detail unreasonable director-related transactions claims under the voidable transaction regime and details the possible defences and exceptions to unreasonable director-related transactions claims.

If you have been contacted by a liquidator in relation to unreasonable director-related transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

DEDICATED TEAM – FAST ACTING – PROVEN RESULTS

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What are Unreasonable Director-Related Transactions?

Unreasonable director-related transactions in company insolvency are transactions entered into by the company for the benefit of the director, or another person, which can be avoided and recovered by the liquidator of the company in liquidation.

Voidable transactions can include:

1. 588FA – Unfair preferences;
2. 588FB – Uncommercial transactions;
3. 588FC – Insolvent transactions;
4. 588FD – Unfair loans to a company; and
5. 588FDA – Unreasonable director-related transactions.

This article will focus on unreasonable director-related transactions.

Unreasonable Director-Related Transactions

Section 588FDA of the Corporations Act says:

(1)  A transaction of a company is an unreasonable director-related transaction of the company if, and only if:

(a)  the transaction is:

(i)  a payment made by the company; or

(ii)  a conveyance, transfer or other disposition by the company of property of the company; or

(iii)  the issue of securities by the company; or

(iv)  the incurring by the company of an obligation to make such a payment, disposition or issue; and

(b)  the payment, disposition or issue is, or is to be, made to:

(i)  a director of the company; or

(ii)  a close associate of a director of the company; or

(iii)  a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and

(c)  it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(i)  the benefits (if any) to the company of entering into the transaction; and

(ii)  the detriment to the company of entering into the transaction; and

(iii)  the respective benefits to other parties to the transaction of entering into it; and

(iv)  any other relevant matter.

This section asks a number of questions, namely:

1. What is a transaction by the company; and
2. What is a close associate of a director of the company; and
3. What does on behalf of, or for the benefit of mean; and
4. What have the Courts said about the objective test.

We will attempt to answer these questions below.

What is a Transaction by the Company?

Ordinarily, transactions are defined in section 9 of the Corporations Act.  However, section 588FDA seems to limit the scope for unreasonable director-related transactions and says that the transaction must be:

1. A payment made by the company; or
2. A conveyance, transfer or other disposition by the company of property of the company; or
3. The issue of securities by the company; or
4. The incurring by the company of an obligation to make such a payment, disposition or issue.

The Courts have decided that a transaction by the company can include (but in no way limited to):

1. A gift of money or property;
2. An assignment of debt;
3. Forgiving a debt or debts;
4. Granting a mortgage or charge;
5. Granting a security;
6. Issuing shares in the company;
7. Relinquishment of rights;
8. The granting of an encumbrance;
9. The payment of company money; and
10. The transfer of real or personal company property.

Because there is no definition of most of the transactions in the Corporations Act, the words can also be given their ordinary meaning in most cases.  Dictionary definitions are a good starting point.

The transaction (payment, disposition or issue) is, or is to be, made to a director of the company; or a close associate of a director of the company; or a person on behalf of, or for the benefit of, a director or a close associate of a director of the company.

What is a Director of a Company?

A director of the company can be found by obtaining a current or historical company extract from ASIC.

A director is also defined in section 9 of the Corporations Act to mean:

“director ” of a company or other body means:

(a)  a person who:

(i)  is appointed to the position of a director; or

(ii)  is appointed to the position of an alternate director and is acting in that capacity;

regardless of the name that is given to their position; and

(b)  unless the contrary intention appears, a person who is not validly appointed as a director if:

(i)  they act in the position of a director; or

(ii)  the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes

So, a director of a company can also be a shadow or defacto director, whether appointed or not.  But a liquidator would have to prove those things.

But what is a close associate of a director of the company?

What is a Close Associate of a Director of the Company?

Section 9 of the Corporations Act defines close associate of a director:

“close associate” of a director means:

(a)  a relative of the director; or

(b)  a relative of a spouse of the director.

Section 9 then goes on to define relative:

“relative” in relation to a person, means the spouse, parent or remoter lineal ancestor, child or remoter issue, or brother or sister of the person.

So, this could mean a husband, wife, defacto, mother, father, grandmother, grandfather, great grandmother, great grandfather, child, grandchild, great grandchild, stepchild, brother or sister – and possibly more.

What does on behalf of mean?

What Does “on-behalf-of” Mean?

Section 9 defines “on behalf of” to mean:

“on behalf of” includes on the instructions of

However, the cases seem to say that it was the intention of the section that the words “on behalf of” be broader than just on the instructions of.

The Explanatory Memorandum of the Corporations Amendment (Repayment of Directors’ Bonuses) Bill 2002 says:

3.8. The recipients covered are directors of the company and close associates of directors.  It also includes a person where the transaction is made on behalf of, or for the benefit of, a director or close associate.  In Commonwealth statues, references to “person” include bodies corporate.

In Vasudevan & Ors v Becon Const & Anor [2014] VSCA 14 Nettle JA (with Beach JA and McMillan AJA agreeing) said:

In the context of s 588FDA(1)(b)(iii), the requirement that a disposition be made ‘on behalf of’ a director requires something more than that it be effected on the instructions of the director. Arguably, the provenance of the section and the objectives which (according to the Explanatory Memorandum) it was designed to achieve, imply that a disposition to a person ‘on behalf of a director’ connotes a disposition which is of some benefit to the director. At the same time, however, I doubt that Parliament intended to confine the operation of s 588FDA to direct benefits or that the section should be so construed.

So seemingly, the case above says on behalf of must be of some benefit to a director, or close associate of a director.  But what does “for the benefit of” mean?

What does “for the benefit of” Mean?

Section 9 of the Corporations Act defines benefit as:

“benefit” means any benefit, whether by way of payment of cash or otherwise

So, benefit means any benefit, thanks Corporations Act!

The Oxford English Dictionary defines benefit to mean:

An advantage or profit gained from something or to receive an advantage; profit

In Vasudevan & Ors v Becon Const & Anor [2014] VSCA 14 Nettle JA (with Beach JA and McMillan AJA agreeing) said:

The natural and ordinary meaning of a requirement that something be for ‘for the benefit of’ a person is that it be ‘for the advantage, profit or good’ of the person … the natural and ordinary meaning of ‘for the benefit of’ accords to the objective of the section of preventing directors stripping benefits out of companies to their own advantage.

The Court also said:

‘benefit’ includes both direct and indirect benefits and, prima facie, that accords with the apparent objective of the section.

So, this means an advantage, profit, or good, whether by way of cash or otherwise, whether or not it is a direct benefit or an indirect benefit.

Lastly, the transaction is only an unreasonable director-related transaction if it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction.  This posits an objective test, but what have the Courts said about this objective test?

The Test for Unreasonable Director-Related Transactions

Section 588FDA(1)(c) of the Corporations Act says:

(1)  A transaction of a company is an unreasonable director-related transaction of the company if, and only if:

…

(c)  it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(i)  the benefits (if any) to the company of entering into the transaction; and

(ii)  the detriment to the company of entering into the transaction; and

(iii)  the respective benefits to other parties to the transaction of entering into it; and

(iv)  any other relevant matter.

The criteria above is calculated in the same as uncommercial transactions claims.

Read our article – Uncommercial Transactions Claims and how to Defeat Them

Section 588FDA(2) of the Corporations Act says:

(2)  To avoid doubt, if:

(a)  the transaction is a payment, disposition or issue; and

(b)  the transaction is entered into for the purpose of meeting an obligation the company has incurred;

the test in paragraph (1)(c) applies to the transaction taking into account the circumstances as they exist at the time when the transaction is entered into (rather than as they existed at the time when the obligation was incurred).

This means that the unreasonableness of a transaction must be assessed at the time when the transaction occurred, rather than the time the obligation which gave rise to the transfer occurred.

In the matter of Lawrence Waterhouse Pty Ltd (in liq) – Shaw v Minsden Pty Ltd [2011] NSWSC 964 Ward J said:

A transfer … might be voidable under s 588FDA if it is unreasonable at the time it takes place, even if it was not unreasonable when the contractual obligation to transfer the land was incurred.

If the liquidator can prove the above, then they may have a right to make an unreasonable director-related transaction claim.

However, the burden of proof is on the liquidator.  In Crowe-Maxwell v Frost [2016] NSWCA 46 Beazley P (Macfarlan and Gleeson JJA agreeing) said:

The onus of establishing that a transaction constitutes an unreasonable director-related transaction is on the party so alleging

Subject to some exceptions, if they can prove that there was a transaction, and that the transaction was an unreasonable director-related transaction, then the courts may make an order about the voidable transaction pursuant to section 588FF of the Corporations Act.

Defences to Unreasonable Director-Related Transaction Claims

More difficult to defend than the other voidable transactions, unreasonable director-related transactions claims can be beaten by stepping through the elements of the claim and ensuring the it applies.

Elements of an Unreasonable Director-Related Transactions Claim

As stated above, a transaction of a company is an unreasonable director-related transaction of the company if, and only if:

1. There is a transaction of a company; and
2. The transaction is a payment, conveyance, transfer, disposition of property, the issue of securities, and/or the incurring of an obligation; and
3. The transaction is, or is to be, made to a director of the company, a close associate of a director, or a person on behalf of, or for the benefit of, a director or close associate; and
4. It may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction.

So, if the transaction is:

1. Not a transaction of a company; and
2. Not a payment, disposition or issue; and
3. Not made by a director or a close associate; or
4. Not made on behalf of, or for the benefit of, a director or a close associate; and
5. Not expected that a reasonable person in the company’s circumstances would not have entered into the transaction;

Then it might be successfully defended because the elements are not made out.

Outside the Required Timeframe

A person may also defeat unreasonable director-related transactions claims if the transaction was entered into, or an act was done for the purposes of giving effect to the transaction during the 4 years ending on the relation-back day.

Section 588FE(6A) of the Corporations Act says:

(6A) The transaction is voidable if:

(a)  it is an unreasonable director-related transaction of the company; and

(b)  it was entered into, or an act was done for the purposes of giving effect to it:

(i)  during the 4 years ending on the relation-back day; or

(ii)  after that day but on or before the day when the winding up began.

So, if the transaction was entered into, or an act was done for the purposes of giving effect to the transaction after 4 years ending on the relation-back day, then might be successfully defended.

Insolvency is not Required

Unfortunately, the defences in relation to insolvency are not applicable to unreasonable director-related transactions claims because insolvency is not an element of the claim.

In the Matter of Lesvos Pty Ltd [2012] NSWSC 1288 Brereton J said:

As the plaintiff correctly submits, a liquidator claiming relief under s 588FDA is not required to establish insolvency, and defences such as good faith and reasonable grounds are not applicable.

The Transaction was Reasonable

Another way to defend or mitigate the liquidator’s claim is to make submissions that a reasonable person in the company’s circumstances would have entered into the transaction.

Similar to the test in uncommercial transactions claims, the Courts have determined that the reasonable assessment is based on:

1. The totality of the company’s circumstances at the time of the transaction; and
2. What knowledge the director or directors of the company ought to have known; and
3. The purpose of the transaction at the time of the transaction; and
4. The business relationship of the parties at the time of the transaction.

In Cussen & Ors v Sultan & Ors [2009] NSWSC 1114 Nicholas J said:

… the court will look at the totality of the business relationship between the parties, and to what the parties under their relationship intended to effect, and how their intention was effected, in part or in whole, by the impugned transaction.

So, with this objective approach, the section also requires consideration of the benefits and detriments to the parties to the transaction.

See our article on uncommercial transactions claims here for more.

Mitigating the Liquidator’s Claim

If there are problems with successfully defending the liquidator’s unreasonable director-related transactions claims, a party may still attempt to mitigate exposure.

Section 588FF(4) of the Corporations Act says:

(4)  If the transaction is a voidable transaction solely because it is an unreasonable director-related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between:

(a)  the total value of the benefits provided by the company under the transaction; and

(b)  the value (if any) that it may be expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c).

For example, if the company disposes of property worth $500,000.00 for $300,000.00, then the difference between what was paid, and what a reasonable company should have been paid, is the amount payable.

If you have been contacted by a liquidator in relation to unreasonable director-related transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

DEDICATED TEAM – FAST ACTING – PROVEN RESULTS

GET A FREE FEE ESTIMATE TODAY

OR CALL: 1300 545 133 FOR A FREE PHONE CONSULTATION

Wayne Davis

Wayne Davis, LLB, GDLP – Commercial litigation solicitor and legal practice director at Stonegate Legal Pty Ltd. Stonegate Legal focus on commercial litigation, debt disputes, the enforcement of money orders, and insolvency. Committee member of the Sunshine Coast Law Association. Committee member and volunteer lawyer with the Sunshine Coast Community Legal Service.

stonegatelegal.com.au/

Insolvent transactions are one of the elements the liquidator will need to prove if there is an unfair preference claim or an uncommercial transaction claim.

The elements of insolvent transactions are:

1. There must be a transaction of a company;
2. The transaction is an unfair preference or an uncommercial transaction;
3. The transaction is entered into; or an act has given effect to the transaction, when the company is insolvent; or
4. The company becomes insolvent because the transaction is entered into; or an act giving effect to the transaction has been made.

If a liquidator is unable to prove that the transactions which form an unfair preference or an uncommercial transaction claim are insolvent transactions, then its claim will fail.

This article explains insolvent voidable transactions in more detail.

If you have been contacted by a liquidator in relation insolvent transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

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What are Voidable Insolvent Transactions?

A voidable transaction in company insolvency is a transaction entered into by the company and a third-party which can be avoided and recovered by the liquidator of the company in liquidation.

Voidable transactions can include:

1. 588FA – Unfair preferences;
2. 588FB – Uncommercial transactions;
3. 588FC – Insolvent transactions;
4. 588FD – Unfair loans to a company; and
5. 588FDA – Unreasonable director-related transactions.

Section 588FE of the Corporations Act outlines the criteria for a transaction able to be avoided by the liquidator.

1. There must be an insolvent transaction; and
2. The transaction was made, or an act was done for the purpose of giving effect to it:
3. During the 6 months ending on the relation-back day; or
4. It is also an uncommercial transaction – 2 years ending on the relation-back day; or
5. It is also a related entity of the company – 4 years ending on the relation-back day; or
6. The company became a party to the transaction for the purpose of defeating, delaying, or interfering with, the rights of any or all of its creditors – 10 years ending on the relation-back day.

Then, each of the voidable transactions have their own specific requirements.

If you fall into the category outlined above, then this transaction could be a voidable transaction.  But what is an insolvent transaction?

Insolvent Transactions

Section 588FC of the Corporations Act says:

A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a)  any of the following happens at a time when the company is insolvent:

(i)  the transaction is entered into; or

(ii)  an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b)  the company becomes insolvent because of, or because of matters including:

(i)  entering into the transaction; or

(ii)  a person doing an act, or making an omission, for the purpose of giving effect to the transaction.

So, as outlined above, the elements of insolvent transactions are:

1. There must be a transaction of a company;
2. The transaction is an unfair preference or an uncommercial transaction;
3. The transaction is entered into; or an act has given effect to the transaction, when the company is insolvent; or
4. The company becomes insolvent because the transaction is entered into; or an act giving effect to the transaction has been made.

To assess if the transaction was an insolvent transaction, section 588FC of the Corporations Act asks a number of questions, namely:

1. What is a transaction?
2. What is a transaction of a company?
3. Is the transaction an unfair preference or an uncommercial transaction?
4. When does a person do an act, or an omission, for the purpose of giving effect to the transaction?
5. When is the company insolvent?

This article will explain these in more detail below.

What is a Transaction?

A transaction for this section of the Corporations Act includes:

1. A conveyance, transfer or other disposition of property;
2. A guarantee;
3. A loan;
4. A payment made;
5. A release or waiver;
6. A security interest granted in property; and
7. An obligation incurred;

A transaction can also include a transaction that has been completed or given effect to, or that has terminated.

Section 9 of the Corporations Act outlines these transactions, but also expressly states that they are by way of example (but without limitation).  So, it is therefore likely that a transaction not on this list may also be ruled to be a transaction.

Section 1371 of the Corporations Act defines the word “made” to mean:

“made” includes issued, given or published

So, what can be a transaction is very broad, and not limited to what is included in the Corporations Act.

But what is a transaction of a company?

What are Insolvent Transactions of a Company?

The Court has distinguished a transaction “of a company” from a transaction “of the company”.

In Kalls Enterprises Pty Ltd (In Liquidation) & Ors v Baloglow & Anor [2007] NSWCA 191 Giles JA said:

… the words “of the company” add something. As well as being a transaction to which the company is party … the transaction must warrant the description of a transaction of the company.

Ipp J agreeing with Giles JA said:

… the question whether a transaction is a transaction of a company depends on the nature and extent of involvement of the company in the transaction. A transaction may be “of” more than one company or party. The mere fact that a company is a party to a contract or contracts that form part of the transaction does not necessarily make the transaction “of” that company. Whether a company is so bound up in the transaction that it is a transaction “of” the company is a question of judgment dependent on fact and degree.

Then Basten JA agreeing with Giles JA went on to say:

A transaction “of” a particular company can be said to involve something more than the concept of a company being “party to” a transaction. It involves a different perspective. A sale may involve three companies, a vendor, a purchaser and a financier. Each is “party to” the transaction, but in order to characterise the transaction for the purposes of Pt 5.7B, one needs to identify “of” which company it is a transaction, so as to assess benefits for, detriments to, insolvency of and winding up of, that company.

Therefore, it may be possible that a transaction of the company may not be a transaction of a company.

This distinction may, if successfully argued, could enable a party to the transaction (or transactions) to defeat the liquidator’s claim.

A great discussion on these points can be found in McCann, in the matter of Walton Construction (Qld) Pty Ltd (In Liq) v QHT Investments Pty Ltd [2018] FCA 1986.

The transaction of a company must also be an unfair preference or an uncommercial transaction.

Are the Insolvent Transactions also Unfair Preferences?

Section 588FA of the Corporations Act gives the liquidator the power to avoid certain preference payments made by the company to an unsecured creditor of the company.

An unfair preference occurs when:

1. There is a transaction between the company and an unsecured creditor; and
2. The transaction occurred while the company was insolvent; and
3. The transaction results in the creditor receiving more than the creditor would receive from the company if the creditor were to prove for the debt in a winding up of the company.
4. If this happens, then a liquidator may be entitled to recover those funds from the creditor.

There are a number of defences and exceptions to the above.

Read our article – Unfair Preference Claims and how to Defeat Them

Are the Insolvent Transactions also Uncommercial Transactions?

Section 588FB of the Corporations Act gives the liquidator the power to avoid certain uncommercial transactions made by the company to another party.

A transaction of a company is an uncommercial transaction when:

1. There is a transaction of a company; and
2. There is a transaction with another party (or parties); and
3. A reasonable person in the company’s circumstances would not have entered into the transaction having regard to;
4. The benefits and detriments to the company and the other party (or parties).

There are a number of defences and exceptions to uncommercial transactions claims.

Read our article – Uncommercial Transactions Claims and how to Defeat Them

What is Giving Effect to the Transaction?

As well as entering into the transaction, an insolvent transaction also includes an act done, or an omission made, for the purpose of giving effect to the transaction.  But what does giving effect to the transaction mean?

In Re Legend International Holdings Inc (in liq) [2018] VSC 789 the Supreme Court of Victoria discussed the few authorities on this point.

In Demondrille Nominees Pty Ltd v Kevin R Shirlaw and Cornelis Holdings Pty Ltd (in liquidation); Kevin R Shirlaw v Cornelis Holdings Pty Ltd (in liquidation) and Demondrille Nominees Pty Ltd [1997] FCA 1220 (“Demondrille”) the relevant transaction was an agreement for sale of real property.

Cornelis Holdings Pty Ltd was a property development company and entered into a contract to sell a property to Demondrille.

The contract stated that a deposit of $120,000 had been paid.  This amount had not been paid but was accounting for a debt owing to Demondrille from a company related to Cornelis.

After Cornelis became insolvent, the parties entered into a deed of recession rescinding the sale contract upon repayment of $120,000 to Demondrille.

In their judgment Foster, Lindgren and Madgwick JJ said:

… the acts of Cornelis and Demondrille in entering into the deed in fact ‘gave effect’ … to the ‘transaction’ constituted by the agreement, because it gave effect to the ‘credit’ in favour of Demondrille which the agreement created.

In Lewis (as liquidator of Doran Constructions Pty Ltd (in liq) & v Doran & Ors [2005] NSWCA 243 the Court considered if a resolution of a board of directors and journal entries, relating to debt restructuring agreements between a number of related companies, gave effect to a transaction.

In the judgment of Giles JA, with Hodgson JA and McColl JA agreeing, he said:

I consider it sufficient that posting the journal entries was doing what had been agreed should be done, maybe sufficient even if the resolution(s) had not stipulated the method of payment. Attaching legal significance, in the present context, to an act done for the purpose of giving effect to a transaction seems to have been intended to catch an agreement entry into which was an uncommercial transaction if the company was insolvent when the agreement was performed.

In International Cat Manufacturing Pty Ltd (in liq) & Anor v Rodrick & Ors [2013] QSC 91 the Court considered whether payments made while the company was insolvent, gave effect to a charge created while the company was not insolvent.

In his judgment Philip McMurdo J said:

… the payment must have had a purpose of giving effect to the creation of the charge. None of these payments was made in order that the creation of the charge would have its legal effect. Rather each payment was made simply for the purpose of reducing the debt to Nu-Log. By contrast, the registration of a charge could be considered an act done for the purpose of making effective the creation of the charge.

In Cashflow Finance v WestpacCOD Factors v Cashflow FinanceStar v Kylon P/LCOD Factors v Walters [1999] NSWSC 671 the Court considered whether certain payments made by cheque were for the purpose of giving effect to previous transactions.

In the judgment, Einstein J said:

At the time that Mr Walters caused each of the cheques pursuant to which the WUPs were made to be drawn on Cashflow’s bank account, and paid to CODFA (or Burkett), and banked into the account of CODFA (or Burkett), an act was done (by Mr Walters) for the purpose of giving effect to the transactions. I accept that at each of those times, Cashflow was insolvent. I accept that this establishes each of them as an insolvent transaction within section 588FC(a)(ii) … Cashflow became insolvent because of (or because of matters including) a person (Mr Walters) doing an act for the purpose of giving effect to the transaction. I accept that at each time Walters did such an act, Cashflow was insolvent. I accept that this establishes each of the WUPs as an insolvent transaction within section 588FC(b)(ii).

In Diana Denise Newman as liquidator of Riverview Heights Pty Ltd (In Liq) v Coropean Pty Ltd [2002] WASC 79 the Court considered whether payments made by a related entity forming part of a continuing business relationship means that there was an act done for the purpose of giving effect to a transaction.

In the judgment Master Sanderson said:

I am satisfied that the payments made to the respondent by the Company were part of a continuing business relationship under s 588FA. That means there was only one transaction under s 588FA(1), but the fact that as part of this one transaction there were payments made during the four years ending on the relation-back day means that there was an act done for the purpose of giving effect to the transaction during that four-year period.

In looking at the above cases, they seem to have a similar theme – whether there is an act done, or an omission made (after the date of insolvency), for the purpose of giving effect to transaction (prior to the date of insolvency) is in-itself a transaction.

An easy to understand example might be when a solvent company gives a security interest, the company becomes insolvent when the secured party causes the security interest to crystallise.

But what are the time-frames for an insolvent transaction?

If you have been contacted by a liquidator in relation insolvent transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

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When is the Company Insolvent?

A transaction is voidable if the company is deemed to be insolvent.  There are different requirements for when a company is deemed to be insolvent depending on the circumstances of the transaction.

These time-frames are outlined at section 588FE of the Corporations Act.

Unfair Preference Claims

An unfair preference claim is normally voidable (if not a related entity) for six (6) months.

Section 588FE(2) says:

The transaction is voidable if:

(a)  it is an insolvent transaction of the company; and

(b)  it was entered into, or an act was done for the purpose of giving effect to it:

(i)  during the 6 months ending on the relation-back day; or

(ii)  after that day but on or before the day when the winding up began.

Uncommercial Transaction Claims

An uncommercial transaction is usually voidable (if not a related entity) for two (2) years.

Section 588FE(3) says:

The transaction is voidable if:

(a)  it is an insolvent transaction, and also an uncommercial transaction, of the company; and

(b)  it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day.

Related Entity of the Company

If a party to the transaction is a related entity, the transaction is voidable for four (4) years.

Section 588FE(4) says:

The transaction is voidable if:

(a)  it is an insolvent transaction of the company; and

(b)  a related entity of the company is a party to it; and

(c)  it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation-back day.

Attempting to Defeat Creditors

If the transaction was done for the purpose of defeating, delaying, or interfering with the rights of any or all of its creditors, then the transaction is voidable for ten (10) years.

Section 588FE(5) says:

The transaction is voidable if:

(a)  it is an insolvent transaction of the company; and

(b)  the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company; and

(c)  the transaction was entered into, or an act done was for the purpose of giving effect to the transaction, during the 10 years ending on the relation-back day.

Unfair Loans

An unfair loan is voidable at any time.  Section 588FE(6) says:

The transaction is voidable if it is an unfair loan to the company made at any time on or before the day when the winding up began.

Unreasonable Director-Related Transaction

An unreasonable director-related transaction, the transaction is voidable for four (4) years.

Section 588(6A) says:

The transaction is voidable if:

(a)  it is an unreasonable director-related transaction of the company; and

(b)  it was entered into, or an act was done for the purposes of giving effect to it:

(i)  during the 4 years ending on the relation-back day; or

(ii)  after that day but on or before the day when the winding up began.

Company Under Administration

If the company was under administration prior to the liquidation, then the relation back day commences:

1. When the company made the special resolution that it be wound up voluntarily; or
2. When the Court made the order that the company be wound up.

Deed of Company Arrangement

If the company was subject to a deed of company arrangement prior to the liquidation, then the relation back day commences:

1. When the company made the special resolution that it be wound up voluntarily; or
2. When the Court made the order that the company be wound up.

 This does not apply if the transaction, or the act done for the purpose of giving effect to it, was not entered into, or done, on behalf of the company by, or under the authority of:

1. The administrator of the deed; or
2. The administrator of the company.

Relation Back Day – Insolvent Transactions

The date for calculating the above relies on when the relation-back day is said to have been.

For example, for an order winding up the company in liquidation, the relation-back day is the date of filing the application in the Court.

There are a number of other possible scenarios at section 91 of the Corporations Act.

It is very important that this date is calculated correctly.

If you have been contacted by a liquidator in relation insolvent transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

DEDICATED TEAM – FAST ACTING – PROVEN RESULTS

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Wayne Davis

Wayne Davis, LLB, GDLP – Commercial litigation solicitor and legal practice director at Stonegate Legal Pty Ltd. Stonegate Legal focus on commercial litigation, debt disputes, the enforcement of money orders, and insolvency. Committee member of the Sunshine Coast Law Association. Committee member and volunteer lawyer with the Sunshine Coast Community Legal Service.

stonegatelegal.com.au/

Uncommercial transactions claims are one of the types of voidable transactions in company insolvency and are outlined at section 588FB of the Corporations Act 2001 (CTH) (“the Corporations Act”).

A transaction of a company is an uncommercial transaction when:

1. There is a transaction of a company; and
2. There is a transaction with another party (or parties); and
3. A reasonable person in the company’s circumstances would not have entered into the transaction having regard to;
4. The benefits and detriments to the company and the other party (or parties).

There are a number of defences and exceptions to uncommercial transactions claims which may mean that a third-party does not have to repay their hard-earned dollars to the liquidator.

This article explains in detail uncommercial transactions claims under the voidable transaction regime in the Corporations Act and details the possible defences and exceptions to uncommercial transactions claims.

If you have been contacted by a liquidator in relation to uncommercial transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

What are Voidable Transactions?

A voidable transaction in company insolvency is a transaction entered into by the company and a third-party which can be avoided and recovered by the liquidator of the company in liquidation.

Voidable transactions can include:

1. 588FA – Unfair preferences;
2. 588FB – Uncommercial transactions;
3. 588FC – Insolvent transactions;
4. 588FD – Unfair loans to a company; and
5. 588FDA – Unreasonable director-related transactions.

Section 588FE of the Corporations Act outlines the criteria for a transaction able to be avoided by the liquidator.

1. There must be an insolvent transaction; and
2. The transaction was made, or an act was done for the purpose of giving effect to it:
   1. During the 6 months ending on the relation-back day; or
   2. It is also an uncommercial transaction – 2 years ending on the relation-back day; or
   3. It is also a related entity of the company – 4 years ending on the relation-back day; or
   4. The company became a party to the transaction for the purpose of defeating, delaying, or interfering with, the rights of any or all of its creditors – 10 years ending on the relation-back day.

Then, each of the voidable transactions have their own specific requirements.

Section 9 of the Corporations Act defines a what transaction is.

Section 91 of the Corporations Act has a table which outlines the date of the relation-back day.

Section 95A of the of the Corporations Act defines what solvent and insolvent mean.

Section 588FC of the Corporations Act defines what an insolvent transaction means.

If you fall into the category outlined above, then this transaction could be a voidable transaction.

This article will focus on uncommercial transaction claims.

What is an Uncommercial Transaction?

Section 588FB of the Corporations Act says:

(1)  A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(a)  the benefits (if any) to the company of entering into the transaction; and

(b)  the detriment to the company of entering into the transaction; and

(c)  the respective benefits to other parties to the transaction of entering into it; and

(d)  any other relevant matter.

(2)  A transaction may be an uncommercial transaction of a company because of subsection (1):

(a)  whether or not a creditor of the company is a party to the transaction; and

(b)  even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

So, as outlined above, an uncommercial transaction is:

1. A transaction of a company; and
2. A transaction with another party (or parties); and
3. A reasonable person in the company’s circumstances would not have entered into the transaction; having regard to
4. The benefits and detriments to the company and the other party (or parties).

This raises some further interesting points, namely:

1. What is a transaction of a company; and
2. What does uncommercial mean; and
3. How have the Courts decided the objective test of whether a reasonable person in the company’s circumstances would not have entered into the transaction; and
4. What are the benefits and detriments to the parties to the transaction.

What is a Transaction of a Company?

The Court has distinguished a transaction “of a company” from a transaction “of the company”.

In Kalls Enterprises Pty Ltd (In Liquidation) & Ors v Baloglow & Anor [2007] NSWCA 191 Ipp J agreeing with Giles JA said:

… the question whether a transaction is a transaction of a company depends on the nature and extent of involvement of the company in the transaction. A transaction may be “of” more than one company or party. The mere fact that a company is a party to a contract or contracts that form part of the transaction does not necessarily make the transaction “of” that company. Whether a company is so bound up in the transaction that it is a transaction “of” the company is a question of judgment dependent on fact and degree.

Then Basten JA agreeing with Giles JA went on to say:

A transaction “of” a particular company can be said to involve something more than the concept of a company being “party to” a transaction. It involves a different perspective. A sale may involve three companies, a vendor, a purchaser and a financier. Each is “party to” the transaction, but in order to characterise the transaction for the purposes of Pt 5.7B, one needs to identify “of” which company it is a transaction, so as to assess benefits for, detriments to, insolvency of and winding up of, that company.

Therefore, it may be possible that a transaction of the company may not be a transaction of a company.

This determination will rely on the facts of each particular case.

This distinction may, if successfully argued, could enable a party to the transaction (or transactions) to defeat the liquidator’s claim.

A great discussion on these points can be found in McCann, in the matter of Walton Construction (Qld) Pty Ltd (In Liq) v QHT Investments Pty Ltd [2018] FCA 1986.

What does Uncommercial Mean?

A good starting-point, is that 588FB of the Corporations Act is used to recover undervalued transactions, or transactions where no consideration has been paid.

However, the Courts have found that both undervalued transactions have not been uncommercial, and that payment of full consideration have been uncommercial.

The Explanatory Memorandum for the Corporate Law Reform Bill 1992 (Cth) said that the uncommercial transactions provision was to prevent companies:

disposing of assets or other resources through transactions which resulted in the recipient receiving a gift or obtaining a bargain of such magnitude that it could not be explained by normal commercial practice.

In Liquidators’ Avoidance of Uncommercial Transactions (1996) 70 ALJ 390 Professor Keay said:

While not dealing exclusively with undervalue, undervalue is at the heart of the section, that is, if the company received less than what is reasonable from the transaction the liquidator may attack it.

The elements of an uncommercial transaction have been outlined in case law as essentially:

1. The wording of the legislation – the benefits to the company; and the detriment to the company; and the respective benefits to other parties; and any other relevant matter – are to be determined on an objective basis; and
2. The objective determination must include the actual knowledge of the controller of the debtor company; and
3. The recipient received a gift or obtained a bargain of such magnitude that it could not be explained by normal commercial practice; and/or
4. The consideration lacks commercial quality.

For more on this see Capital Finance Australia Limited v Tolcher [2007] FCAFC 185.

Whether a reasonable person would not have entered into the transaction?

Obviously, section 588FB of the Corporations Act posits an objective test.

A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction.

The Courts have determined that the reasonable assessment is based on:

1. The totality of the company’s circumstances at the time of the transaction; and
2. What knowledge the director or directors of the company ought to have known; and
3. The purpose of the transaction at the time of the transaction; and
4. The business relationship of the parties at the time of the transaction.

In Cussen & Ors v Sultan & Ors [2009] NSWSC 1114 Nicholas J said:

… the court will look at the totality of the business relationship between the parties, and to what the parties under their relationship intended to effect, and how their intention was effected, in part or in whole, by the impugned transaction.

So, with this objective approach, the section also requires consideration of the benefits and detriments to the parties to the transaction.

If you have been contacted by a liquidator in relation to uncommercial transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

What are the benefits and detriments to the parties to the transaction?

The main consideration in 588FB of the Corporations Act is the benefits and detriments of the company and the benefits for other parties to the uncommercial transaction.

What is a Benefit?

For an uncommercial transaction, section 9 of the Corporations Act says:

“benefit” means any benefit, whether by way of payment of cash or otherwise.

The dictionary defines benefit to mean:

an advantage or profit gained from something; or receive an advantage or profit; or bring advantage to.

So following the definitions above, a benefit pursuant to 588FB of the Corporations Act will be an advantage or profit whether by way of payment of cash or otherwise.

What is a Detriment?

Unlike benefit, detriment is not defined in the Corporations Act.

The dictionary defines detriment to mean:

the state of being harmed or damaged; or a cause of harm or damage.

So, a detriment pursuant to 588FB of the Corporations Act will be commercial harm or damage, or harm or damage that can be assessed on a commercial basis.

Does the Liquidator have an uncommercial transaction claim?

If the elements above are reasonably arguable by a liquidator, then the liquidator may have an uncommercial transaction claim against the other party or parties.

If so, then the transaction must have occurred within strict timeframes.

Timeframes for Uncommercial Transactions Claims

The timeframes for uncommercial transactions are:

1. Two (2) years – for an uncommercial transaction claim; or
2. Four (4) years – if the uncommercial transaction included a related party; or
3. Ten (10) years – if it was made defeat, delay, or interfere with, the rights of creditors.

The transaction is an uncommercial transaction of the company and it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day.

Alternatively, if the other party is also a related entity of the company, then the insolvent uncommercial transaction was entered into, or an act was done for the purpose of giving effect to it during the 4 years ending on the relation-back day.

Lastly, if the company became a party to the transaction for the purpose of defeating, delaying, or interfering with, the rights of any or all of its creditors then the insolvent transaction was entered into, or an act was done for the purpose of giving effect to it during the 10 years ending on the relation-back day.

These timeframes raise some interesting questions, namely:

1. What is the relation-back day?
2. What is a related entity?

What is the Relation Back Day?

Section 91 of the Corporations Act includes a table which says the relation-back day is either:

1. The date of the filing of the winding up application; or
2. The date the company resolves that it be wound up voluntarily; or
3. The date that the deed of company arrangement was executed.

Most commonly, the date of the winding up application.

What is a Related Entity in uncommercial Transactions Claims?

A related entity is defined at section 9 of the Corporations Act and includes (but not limited to):

1. A body corporate that is related to the first-mentioned body; and/or
2. A director or member of the body or of a related body corporate; and/or
3. A relative of a spouse of such a director or member; and/or
4. A relative of such a director or member.

Examples of an Uncommercial Transactions Claim in Liquidation

Some examples of uncommercial transaction claims in liquidation include claims for:

1. The transfer of property of an insolvent company, for undervalued consideration or no consideration, to a related party of the insolvent company; and/or
2. Payments made by a company to a related entity satisfying the related entities liabilities;
3. The forgiveness of debts by a company for no commercial reason; and/or
4. Extravagant upfront payments for services provided by another party being of such a magnitude rendering payments inexplicable in normal commercial practice; and/or
5. The granting of security thereby turning an unsecured loan into a secured loan with no further consideration or commercial advantage; and/or
6. The undervalue transfer of shares of a corporate trustee limiting the trustees right of indemnity against trust assets.

The liquidator’s job is to realise as many assets, and recover as much money, as it can to pay company creditors.

This is understandable from an unpaid creditor’s perspective.

However, if you are the party (or the director of the party) to which the uncommercial transaction claim is directed then it may not seem very fair at all.

However, there are a number of defences and exceptions to uncommercial transaction claims.

Defences to Uncommercial Transactions Claims

There are defences to uncommercial transaction claims.  They include:

1. The person received no benefit because of the transaction; or
2. The party entered into the transaction in good faith; and
3. At the time of entering into the transaction a reasonable creditor did not know, or ought not to suspect that the company was insolvent.

Section 588FG of the Corporations Act prescribes transaction which are not voidable as against certain persons.

If the claim is made against a person other than a party to the transaction, then it is a defence under 588FG(1) if:

1. The person received no benefit because of the transaction; or
2. If there was a benefit the person received the benefit in good faith; and
3. At the time when the person received the benefit the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent; and
4. A reasonable person in the person’s circumstances would have had no such grounds for so suspecting.

If the claim is made against a creditor if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, then it is a defence under 588FG(2) if:

1. The person became a party to the transaction in good faith; and
2. At the time when the person became such a party the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent; and
3. A reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
4. The person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

Probably the most important of the above is proving that a creditor did not know, or ought to have known, that the company in liquidation was insolvent at the time of the transaction.

However, as well as the defences 588FG of the Corporations Act, the liquidator must ensure that the elements of the uncommercial transaction are made out.

Elements of an Uncommercial Transactions

As outlined above, for a claim to be an uncommercial transaction claim, the liquidator must prove the elements of the uncommercial transaction.  These include:

1. There is a transaction of a company; and
2. There is a transaction with another party (or parties); and
3. A reasonable person in the company’s circumstances would not have entered into the transaction having regard to;
4. The benefits and detriments to the company and the other party (or parties).

If we can sufficiently argue that one or more of these elements cannot be made out, then the liquidator’s claim should fail.

For example, we can attempt to argue that:

1. There was no transaction as defined by the act; and/or
2. The transaction was not a transaction of a company; and/or
3. You were not a party to the transaction; and/or
4. It is reasonable that the company would have entered into the transaction; and/or
5. The balance of benefits and detriments to the company and the other party (or parties) swings in favour of the person whom the claim is made.

If you have been contacted by a liquidator in relation to uncommercial transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

Wayne Davis

Wayne Davis, LLB, GDLP – Commercial litigation solicitor and legal practice director at Stonegate Legal Pty Ltd. Stonegate Legal focus on commercial litigation, debt disputes, the enforcement of money orders, and insolvency. Committee member of the Sunshine Coast Law Association. Committee member and volunteer lawyer with the Sunshine Coast Community Legal Service.

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