Lenders beware: are loans unfair?

29 June 2017

Lenders need to be aware of the provisions of the Corporations Act that allow a Liquidator of a company to deem an unfair loan voidable and to recover funds from the lender 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’.  Unfair loans are a type of voidable transaction.

What is an unfair loan?

Section 588FD of the Corporations Act deals with unfair loans and provides that 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 violation;  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.

In determining whether the interest or charges were extortionate at a particular time, the following matters are considered:

·         The risk to which the lender was exposed;  and

·         The value of any security in respect of the loan;  and

·         The term of the loan;  and

·         The schedule for payments of interest and charges and for repayments of principal;  and

·         The amounts of the loan;  and

·         Any other relevant matter.

Any creditor that has provided an unfair loan to a company is at risk of being required to repay amounts to the company if it is wound up.

An unfair loan 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 unfair loan

An unfair loan to a company is voidable if the loan was made at any time on or before the day when the winding up began (Section 588FE(6) of the Corporations Act).

Any loan made to a company at any time prior to the winding up of the company which is deemed to be unfair will be a voidable transaction.  A Liquidator may recover amounts from the party that provided an unfair loan to the company.
 

How will a Liquidator recover an unfair loan?

Once a Liquidator has identified an unfair loan that is voidable, he/she will request the other party to the transaction to repay a determined amount to the company.  In determining the amount, the Liquidator will consider what the market value of the interest and charges would have been at the relevant times and will also take into consideration the following:

·         The risk to the lender;

·         The value of any security;

·         The term of the loan;

·         The schedule of payments of principal, interest and charges;

·         The amount of the loan;  and

·         Any other relevant matter.

One the detriment of the unfair loan to the company has been quantified, the Liquidator will seek retribution from the lender.

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.

Action

If you have provided an unfair loan to a company that has charged extortionate interest or charges to a company, you need to be aware that this arrangement may come under scrutiny if a Liquidator is appointed to the company and the loan may be deemed voidable.  A Liquidator has the right to recover amounts from you for any voidable unfair loans that occurred at any time prior to the winding up of the company. 

If you have any queries in relation to what constitutes an unfair loan, 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.

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