When a company becomes insolvent, the liquidator is entitled to all of the assets that belonged to the company at the commencement of the winding up, so they can manage and distribute that property equally amongst the company’s creditors.
It can be difficult to determine when a winding up commences and the way in which this date is calculated is beyond the scope of this article.
It is not uncommon for a company to make certain transactions or otherwise attempt to dispose of property in light of impending insolvency proceedings, leaving little for the liquidator to distribute. To combat this, the liquidator is given wide ranging powers to ‘claw back’ disgorged property for the benefit of all the company’s creditors.
Transactions can be avoided on the basis they are an:
- Unfair loan
- Unfair preference
- Uncommercial transaction
- Unreasonable director related transaction
- Transfer to defeat creditors
This article addresses what constitutes an uncommercial transaction. Other articles on this website will address other avoidance provisions.
What is an uncommercial transaction?
A transaction will be regarded as uncommercial if a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
- the benefits (if any) to the company of entering into the transaction;
- the detriment to the company of entering into the transaction;
- the respective benefits to other parties to the transaction of entering into the transaction and
- any other relevant matter.
The company must also have been insolvent at the time or become insolvent as a result of the transaction.
Examples of an uncommercial transaction could include property given as a gift for no value, undertaking burdens for no value, selling property at an amount below market value or agreeing to pay significantly more for property or services than market value.
To be ‘uncommercial’ the transaction must have resulted in a bargain of such magnitude that it cannot be explained by normal commercial practice or the consideration lacks commercial quality.
The uncommercial transaction must have occurred within a certain time period – 2 years ending on the ‘relation-back’ date. If the uncommercial transaction occurred with a ‘related entity,’ the time period extends to 4 years. A related entity refers to parties such as relatives or spouse and body corporates such as subsidiary companies and companies with the same directors.
The time period can be tricky to work out as the relation-back day varies depending on whether different types of corporate insolvency proceedings (eg. Administration, provisional liquidation) were already underway before winding up commenced. It is generally either the day the company was placed into administration or the date on which an application wind up the company was lodged - but not always.
Due to this difficulty we would highly recommend seeking legal advice when attempting to determine the time period within which an unfair preference could have occurred.
What if I am party to an uncommercial transaction?
If you are found to be a party to an uncommercial transaction and a demand has been served on you to repay what you received there are potentially two defences.
First, you could argue that you were not a party to the transaction because you received no benefit from the transaction, or if you did receive a benefit you did so in good faith and there were no reasonable grounds to suspect insolvency.
Alternatively, if you were a party to the uncommercial transaction, you can argue you did so in good faith and there were no reasonable grounds to suspect insolvency. However, you must also show you provided valuable consideration or changed your position in reliance on the transaction (eg. By releasing security) which may be difficult to establish if the transaction was indeed uncommercial.
Often it can be difficult to decide from the facts whether or not a defence is likely to succeed.
If you require assistance regarding uncommercial transactions please do not hesitate to contact us.