The Corporations Act 2011 (Cth) was enacted by the Commonwealth of Australia to regulate transactions at the federal and interstate level of companies in Australia. Regulation of partnerships and managed investment schemes are also covered by the law. The "Corps' Law" may be the largest statute governing business entities in the world. Reforms were instituted in to simplify statute through passage of the Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Act 2004 (CLERP 9). This article provides a brief discussion of several components of the corporate insolvency legislations: Uncommercial transactions, voidable transactions, and unfair preference.
Under Section 588FB (1) of the Corporations Act 2001, an uncommercial transaction is said to have occurred if "…it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction…" (Warde, 2009). A Court may determine a transaction that confers no benefit or causes some detriment to a company -- which cannot be explained by what would be considered normal commercial practice -- is an uncommercial transaction (Warde, 2003).
The Court makes a decision about "whether a reasonable person would not have entered into the transaction" in question from an objective position, but the decision must be informed by a "state of knowledge of the company when it entered into the transaction" (Warde, 2003). In Capital Finance Australia Limited v. Tolcher  FCAFC 185, the Full Federal Court considered if a composite set of circumstances constituted an uncommercial transaction of the debtor company, "LSE," an agent of financial companies "Capital companies") ("Addison papers," 2007). A separate financier's application disclosed fraud by the director of LSE, which resulted in mareva (asset preservation) orders against LSE ("Addison papers," 2007). In order to receive payment of several million dollars over several months, including the payout of all equipment agreements, Capital companies insisted that LSE execute a deed to that effect ("Addison papers," 2007). LSE entered liquidation several months later ("Addison papers," 2007) . The Court found that the constellation of steps, including the deed and payments transactions, were uncommercial and therefore voidable on the liquidator's application ("Addison papers," 2007). The grounds for the decision -- and the dismissal of the appeal by the Capital companies -- were that the Capital companies substantially benefitted from the transaction, that LSE executed the deed under pressure from the Capital companies, and that the deed resulted in no real benefits to LSE, and did cause significant detriment to LSE ("Addison papers," 2007).
Transactions that are considered to be uncommercial transactions and insolvent transactions fall into a separate category defined as a voidable transaction (§588FE (3), §588FC). An insolvent transaction must have given unfair preference by the company or it must be an uncommercial transaction of the company. Voidable transactions are said to have occurred if one of four conditions are in place: (1) A company is insolvent when the transaction takes place; (2) The transaction is considered to be the cause of the company's insolvency (§588FC); (3) A winding-up application was filed and the transaction occurred during the 2-year stipulated period; and (4) A voluntary administrator was appointed. Under these circumstances the Court may declare on the liquidator's application that the transaction is a voidable transaction (§588FC, §588FE) (Warde, 2003). In Rivarolo Holdings Pty Ltd. & Anor v Casa Tua (Sales) Pty Ltd. & Ors (1997) 15 ACLC 821, the Court had to consider if an uncommercial transaction was also an insolvent transaction. A transaction in which Casa Tua received assets of $550,000 as compensation for assuming Rivarolo's alleged liabilities. The liabilities were not listed in any previous financial statements, and the source of the debts could not be ascertained. Should the alleged debts be paid, it would mean that the interests of those creditors would be preferred over others. Rivarolo was found to be insolvent as a result of the transaction -- which passed the reasonable person test, as there was "no sensible explanation for the transaction -- if not before the transaction. The Court found the transaction to be uncommercial.
Defenses Applicable to Uncommercial Transactions
The provisions of §588FG include defenses in favor of individuals separate from the relevant company. The Court is bound not to make an order that would materially prejudice an interest or a right of individual who is party to the transaction, under the following conditions: (1) The individual entered the transaction in good faith;…