Uncommercial Transactions

Uncommercial transactionsWhat are ‘uncommercial transactions’?  Uncommercial transactions take place where a company is insolvent and a transaction is entered which is either disadvantageous or detrimental to the company. Such transactions are investigated by liquidators and can be voided which results in the return of the asset or the provision of a payment to the liquidator. These transactions are regulated by the Corporations Act 2001.

How can uncommercial transactions be voided?

Uncommercial transactions can only be voided by liquidators, but not provisional liquidators, voluntary administrators or deed administrators.

Elements of a voidable uncommercial transaction

There are three elements which uncommercial transactions must possess to be voidable:

  1. The transaction must have either had no financial benefit or been detrimental to the company
  2. The transaction must have occurred while the company was insolvent
  3. The transaction must have involved a party who should have expected that the company was insolvent.

Why are uncommercial transactions voided?

As the role of a liquidator is to distribute the company’s assets to its creditors all assets need to be accounted for. As an uncommercial transaction reduces the asset pool of a company a liquidator will recover these assets or their monetary equivalent so that they can make an equitable distribution amongst creditors.

What constitutes a transaction?

The term transaction can be applied broadly as long as there is an identifiable event between identifiable parties. Uncommercial transactions usually come in the form of a sale, transfer or purchase of assets or services.

What makes a transaction uncommercial?

Where a transaction had little or no financial benefit, or was detrimental to the financial position of the company then it is of uncommercial transactions nature. Where the transaction resulted in a reduction of the company’s net assets then it is also uncommercial. To make this determination the ‘reasonable person test’ can be implemented.

There are two main circumstances in which uncommercial transactions present themselves, generally involving related entities of the company.

  1. Property is disposed of for less than its true value
  2. Property is purchased at a price higher than its true value

The ‘reasonable person’ Uncommercial Transactions Test

When assessing the circumstances of the uncommercial transactions the court will adopt the view of a ‘reasonable person’ in the company’s position. This involves knowledge of the company’s financial position. A reasonable person is deemed to be someone who is not seeking to gain personal benefit, to benefit another, or to cause a loss to the company. The assumption is that a reasonable person would not enter a transaction that would cause detriment or financial loss to the company.

Does the company have to be insolvent?

It is essential that the company was either insolvent when the uncommercial transactions occurred or that the company became insolvent as a result of the transaction. For these purposes insolvency is defined by s 95A of the Corporations Act as the inability to pay debts as and when they fall due. Insolvency is a necessary element of an uncommercial transaction as solvent companies can meet their debts and therefore a transaction cannot be considered detrimental to creditors.

Time limitations

There are three dates to which a uncommercial transactions must have occurred:

  1. Six months where the parties are not related
  2. Four years if the recipient is a related party
  3. Ten years where there is any ‘attempt to defeat, delay or interfere’ with the rights of creditors.

The ‘relation-back day’

The ‘relation-back day’ is the commencement date of the liquidation. Where a liquidation occurs following voluntary administration this will be the day the administrators where first appointed. For other voluntary liquidations the day will be that of the members meeting to commence winding up the company. Where the liquidation is court appointed it will be the date that the application was filed in court.

How long does a liquidator have to make a claim?

A claim application, and not just a demand, must be made within three years of the relation-back day. If an application is made to the court for an extension it must be made within three years of the relation-back day, and the liquidator must prove that there was a reasonable reason for the delay.

Defences available to the other parties to the transaction

The defences available to the parties to a uncommercial transactions are found in s 588FG of the Corporations Act. The onus is on the other party to the transaction to prove:

  1. Valuable consideration was given
  2. The party acted in good faith
  3. There was no reason to suspect insolvency.

All three elements must be proven by the other party. There is no requirement that the liquidator disprove the defence.

What is valuable consideration?

This is usually the easiest of the three elements to prove uncommercial transactions. A creditor need only show that they gave something of value in consideration for receiving payment from the company. Trade creditors can rely on the supply of goods or services and a loan creditor can rely on the initial loan to amount to valuable consideration.

What is good faith?

A creditor must show that they did not act in a manner contrary to normal trading conditions or to that of a person acting in good faith. Acting contrary to good faith can occur where proceedings are commenced or statutory notices are issued, supply is stopped, or changing to a cash on delivery basis.

When should insolvency be suspected?

Where a creditor knows or has received information which would lead them or a reasonable person in their position, to suspect the insolvency of the company then the third element of the statutory defence will be disproven. The mere suspicion of a reasonable person, even without the knowledge or expectation, will render the defence unavailable.

This suspicion can reasonably arise where a repayment agreement has been entered, cheques have been dishonoured or post-dated, or there is knowledge that other creditors remain unpaid. As the courts recognise the difference between insolvency and a short term cash problem it can be difficult to make a determination on this element.

Contact us today to talk about insolvency and uncommercial transactions