Voidable & Uncommercial Transactions

When a company becomes insolvent, the liquidator is entitled to all the assets that belonged to the company at the commencement of the winding up. The liquidator then manages and distributes this property equally amongst the company’s creditors.

It isn’t uncommon for a company to make certain transactions or otherwise attempt to dispose of property in the wake of impending insolvency proceedings, which leaves little for the liquidator to distribute.

To combat this happening, the liquidator has wide ranging powers that allow them to regain sold/disgorged property for the benefit of the company’s creditors.

Transactions can be voided if they are considered:

  • An unfair loan
  • An unfair preference
  • An uncommercial transaction
  • An unreasonable director-related transaction
  • A transfer to defeat creditors

What is an uncommercial transaction?

Uncommercial transactions are the most common forms of voidable transactions.

According to Subsection 588FB(1) of the Corporations Act 2001, a transaction can be regarded as uncommercial if it is deemed that a reasonable person in the company’s circumstances (insolvency) would not have entered into the transaction, with regards to:

a. The benefits (if any) to the company of entering into the transaction

b. The detriment to the company of entering into the transaction

c. The respective benefits to other parties to the transaction of entering into it

d. Any other relevant matter

Examples of uncommercial transactions

A transaction is considered uncommercial if it has no financial benefit or is detrimental to a company’s financial standing. The two most common uncommercial transactions made by companies include:

  • Selling property at an amount below market value
  • Agreeing to pay significantly more for property or services than market value

To be deemed ‘uncommercial’, the transaction must have resulted in a bargain of such magnitude that is cannot be explained by normal commercial practice.

If you have been party to an uncommercial transaction, we can help. Contact us to find out more.