What are Insolvent Transactions?

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.

In this article our insolvency lawyers explain 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

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FAQs: Understanding Insolvent Transactions

This FAQ section provides a concise and comprehensive set of frequently asked questions about insolvent transactions, designed to shed light on its definition, implications, and the legal frameworks surrounding it.

Whether you’re a business owner, an investor, or simply someone keen to enhance their knowledge, this FAQ will serve as a foundational guide. Let’s delve deeper into the intricacies of insolvent transactions.

What are insolvent transactions?

Insolvent transactions refer to transactions made by a company that either occur when the company is insolvent or cause the company to become insolvent. They involve unfair preferences or uncommercial transactions.

If a liquidator cannot prove a transaction is an insolvent transaction, what happens?

If a liquidator cannot establish that a transaction is an insolvent transaction, then their claim against it will fail.

What are voidable insolvent transactions?

A voidable transaction in company insolvency is one that a liquidator can avoid and recover. They can include unfair preferences, uncommercial transactions, insolvent transactions, unfair loans, and unreasonable director-related transactions.

What criteria does the Corporations Act set for a voidable transaction?

According to Section 588FE of the Corporations Act, a transaction must be an insolvent transaction, and it must have been made or acted upon for certain time frames depending on the type of transaction.

How does the Corporations Act define an “insolvent transaction”?

Section 588FC of the Corporations Act says a transaction is insolvent if it’s an unfair preference or uncommercial transaction, and it either happens when the company is insolvent or causes the company to become insolvent.

What is considered a “transaction” according to the Corporations Act?

A transaction includes conveyances, transfers, guarantees, loans, payments, releases, waivers, security interests, obligations, and more. Transactions can be completed, given effect to, or terminated.

How is the term “transaction of a company” distinguished from “transaction of the company”?

A transaction “of a company” involves the company’s involvement in the transaction, while a transaction “of the company” emphasizes the transaction being characteristic of that company’s dealings.

What is an “unfair preference” as per the Corporations Act?

An unfair preference involves a transaction between an insolvent company and an unsecured creditor, resulting in the creditor receiving more than they would have in a winding up of the company.

What constitutes an “uncommercial transaction”?

A transaction is considered uncommercial when a reasonable person wouldn’t have entered into the transaction, considering the benefits and detriments to the involved parties.

What does “giving effect to the transaction” mean?

This refers to actions or omissions made to realize or implement a transaction. It involves understanding if an act was done, or an omission made, for the purpose of executing a transaction.

Can you provide a simple example of an insolvent transaction?

A company, while solvent, gives a security interest. Later, the company becomes insolvent when the party holding the security interest acts to enforce or crystallize it.