+ Enhancing Recovery Options by Examining the Latest Developments in Voidable Transactions

 

1.       Introduction

It is now over 13 years since Part 5.7B was introduced into the Corporations Act.  As it only applies to companies wound up after 23 June 1993, we have now seen many cases under Part 5.7B being decided by the Courts.

 2.       Transaction

Definition

The Liquidator must prove a relevant "transaction" before a Court can set aside a “voidable transaction”.

 "Transaction" is defined in Section 9 very broadly.  It means "a transaction to which the company is a party, for example (but without limitation):

(a)       a conveyance, transfer or other disposition by the company of property of the             company; and

(b)       a charge created by the company on property of the company; and

(c)       a guarantee given by the company; and

(d)       a payment made by the company; and

(e)       an obligation incurred by the company; and

(f)        a release or waiver by the company; and

(g)       a loan to the company;

and includes such a transaction that has been completed or given effect to, or that has terminated".

3.       Insolvent Transactions 

Section 588FC tells us that unfair preferences and uncommercial transactions have to be "insolvent transactions" before the liquidator can claw back the money. 

That is, the liquidator has to prove that the company was insolvent when the transaction was entered into, or that the company became insolvent as a result of the transaction.  If either of these two (2) elements can be proved, then the transaction is voidable.

 Mandie J in ASIC -v- Plymin (2003) 46 ACSR 126 referred to a checklist of indicators of insolvency as follows.

1. Continuing losses. 

2. Liquidity ratios below 

3. Overdue Commonwealth and State taxes.       

4. Poor relationship with present Bank, including inability to borrow further funds. 

5. No access to alternative finance. 

6. Inability to raise further equity capital. 

7. Suppliers placing the company on COD, or otherwise demanding special payments before resuming supply. 

8. Creditors unpaid and outside trading terms. 

9. Issuing of post-dated cheques. 

10. Dishonoured cheques. 

11. Special arrangements with selected creditors. 

12. Solicitors' letters, summons[es], judgments or warrants issued against the company. 

13. Payments to creditors of rounded sums which are not reconcilable to specific invoices. 

14. Inability to produce timely and accurate financial information to display the company's trading performance and financial position, and make reliable forecasts.

  4.       Statutory Presumptions 

Part 5.7B provides two new presumptions which may be relied upon to establish insolvency. The new presumptions of insolvency were designed to enhance the likelihood of recovery actions succeeding.

Under Sub-section 588E(3), a company is presumed to be insolvent during any period where accounting records are inadequate. 

 In addition, Sub-section 588E(3) also provides that where a company is shown to be insolvent at any time within 12 months prior to its liquidation, then the company is presumed to continue to be insolvent at all times thereafter.

5.       Deferral of Trading Debts

Recently the Courts have adopted the view that the rationale for companies entering into deferral payment arrangements with creditors is because they are not able to pay their debts as and when they fall due. That is, that they are insolvent -   section 95A of the Corporations Act defines insolvency in these terms.

6.       Voidable Transactions

For a transaction to be voidable, it must also fall within the time frames specified in Section 588FE.  Unfair preferences occurring in the six (6) months prior to the date of filing of the winding up petition may be recovered, but a transaction preferring a related entity (for example, a company one of whose directors is also a director of the insolvent company) is now recoverable if it took place within four (4) years before that date.

7.       Unfair Preferences

Part 5.7B characterises an unfair preference as a transaction between a company and a creditor which results in the creditor receiving a greater return than if it were to prove for its unsecured debt in the winding up of the company (Section 588FA(1)).

8.       Running Accounts

Section 588FA(2) enacts the "running account principle", which provides that where a transaction is integrally connected with a series of transactions between the company and a creditor, for example, its bank, then the ultimate effect of all dealings between the parties during the relation back period should be considered to determine the amount of the preference.

9.       Debt

The unfair preference provisions only relate to unsecured “debts”.  A debt does not include a claim in damages (see Jelin Pty Ltd v Johnson (1987) 5 ACLC 483).

Monies payable to revenue authorities are debts (see Sutherland v Liquor Administration Board (1997) 24 ACSR 176 where it was found that debt included poker machine taxes).

10.     Directors indemnification Obligations to the Commissioner

If payment to the Commissioner of Taxation by the company is recovered by the liquidator because it is a preference, then each person who was a director of the company when the payment was made to the Commissioner of Taxation is liable to indemnify the Commissioner of Taxation in relation to that refund the Commissioner has to make to the liquidator -   Section 588FGA

11.     Uncommercial Transactions

Opportunities for recovery are broadened considerably by the provisions relating to uncommercial transactions. Part 5.7B enables transactions at over or under value with unrelated third parties to be challenged providing it can be established that a "reasonable person" in the company's position would not have entered into the transaction, after considering the benefits flowing to both parties. 

12.     Defences

There are two (2) possible defences that apply to unfair preference claims and to uncommercial transaction claims.

The first applies where relief is sought against a person, who is not a party to the transaction.  For them, there is a defence if they can prove they received no benefit because of the transaction, or that, in relation to each benefit they received, it was received in good faith, at a time when they had no reasonable grounds for suspecting that the company was insolvent  and a reasonable person in their circumstances would have had no such grounds for suspecting insolvency (Section 588FG(1)).

The second applies where the person became a party to the transaction in good faith, at a time when they had no reasonable grounds for suspecting that the company was insolvent, and a reasonable person in their circumstances would have had no such grounds for suspecting insolvency and they provided valuable consideration under the transaction, or changed their position in reliance on the transaction (Section 588FG(2).

13.    The Corporations Amendment (Repayment of Directors’ Bonuses) Act     2002

The object of the Act is to assist in the recovery of funds, assets and other property for companies in liquidation where prior payments or transfers of property to directors are unreasonable.

The Act seeks to achieve this object by allowing liquidators to recover “unreasonable” payments, dispositions of property or issues of securities to directors or their “close associates” in the four years prior to the commencement of winding up.

Where the transaction (i.e. the payment) is entered into for the purpose of meeting an obligation the company has incurred (i.e. pursuant to the company’s obligations under the director’s employment agreement), the test of what is reasonable is applied taking into account the circumstances that exist at the time when the payment is made rather than when the employment agreement was entered into.

As such, even if a proposed payment is perfectly reasonable at the time the company agrees to pay it (i.e. at the time the director enters a service agreement providing for future bonuses), it may still be voidable if circumstances have changed before the payment (i.e. the bonuses) are actually made.