Uncommercial Transactions: Balancing Benefit and Detriment
Parties to a transaction with a company which was not undertaken on commercial grounds need to be aware of the provisions of the Corporations Act that allow a Liquidator of a company to deem these transactions voidable and to recover funds from the other party in the winding up.
There are provisions in the Corporations Act that allow an insolvent company’s Liquidator to recover property or compensation for the benefit of creditors. Certain transactions entered into by the company may be deemed to be ‘voidable’. Uncommercial transactions are a type of voidable transaction.
What is an uncommercial transaction?
Section 588FB of the Corporations Act deals with uncommercial transactions and provides that a transaction 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.
Further, Section 588FB provides that a transaction may be an uncommercial transaction of a company because of the above:
(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.
Essential to determining if a transaction is uncommercial and therefore voidable is identifying whether the transaction provided any benefit to the company.
A common example of an uncommercial transaction is the situation where a company releases a debt for no consideration, or a sale of a business or assets at undervalue. In Lewis v Doran (2005) it was noted that the section involves “balancing of benefit and detriment” so that “a transaction detrimental to the company but beneficial to other parties to the transaction might not unreasonably be entered into”.
An uncommercial transaction causes detriment to the company which may affect the return available to creditors of the company in the winding up.
Timeframe for recovery of an uncommercial transaction
To determine if any uncommercial transactions are voidable, a Liquidator will calculate what is known as the Relation-Back Period for the company. Any payments or transactions made during this period that are uncommercial transactions will be voidable and may be recoverable by a Liquidator.
The Relation-Back Day is determined as, if the company was previously in voluntary administration, the date of administration. If there was a winding up order against the company prior to the date of voluntary administration, in this instance the relation back day will be the date the earlier winding up application was filed. Otherwise the earlier of the date of the filing of a winding up application and the date the members resolve to wind up the company.
Section 588FE(3) of the Corporations Act specifies that an uncommercial transaction is a voidable transaction if:
- It is an insolvent transaction, and also an uncommercial transaction, of the company; and
- it was entered into, or an act was done for the purposes of giving effect to it, during the 2 years ending on the relation-back day.
In summary, any uncommercial transactions that the company was a party to during the 2 year period prior to the relation-back day, will be a voidable transaction and may be recoverable by the Liquidator.
How will a Liquidator recover an uncommercial transaction?
Once a Liquidator has identified an uncommercial transaction that is a voidable, he/she will request the other party to the transaction to repay to the company the amount determined to make the transaction commercial i.e. the difference between what the transaction should have been on commercial grounds versus the actual amount of the transaction.
A Liquidator may apply to the Court for an Order. If the court is satisfied that a transaction of the company is voidable because of Section 588FE, the Court may make an order under Section 588FF of the Corporations Act.
The funds recovered by the Liquidator will be added to the pool of company assets and used to make a cents-in-the dollar distribution to all creditors of the company, so each creditor will receive a return proportional to the amount of their debt.
If you are a party to a transaction with a company that is uncommercial and allows a greater benefit to you and causes detriment or provides less benefit to the other party, you need to be aware that transactions between you and the company may come under scrutiny if a Liquidator is appointed to the company. A Liquidator has the right to recover any voidable uncommercial transactions from you that occurred in the 2 years prior to the winding up of the company.
If you have any queries in relation to what constitutes an uncommercial transaction, or if you would like advice in relation to your specific business circumstances, contact Rodgers Reidy now for a confidential discussion. Obtaining the right advice at the right time can help protect your business and personal financial position.