Proving uncommercial and insolvent transactions – a recent commentary

Introduction

On 8 October 2014, her Honour Gordon J of the Federal Court of Australia handed down his decision in Rathner in his capacity as official liquidator of Kalimand Pty Ltd (in liquidation) v Hawthorn [2014] FCA 1067 (Rathner).  

Facts

In 2012, Kalimand Pty Ltd (Kalimand) was wound up in insolvency by an order of the Supreme Court of Victoria and Mr Rathner was appointed as official liquidator (Liquidator).

The first respondent (Mr Hawthorn) was the sole director of Kalimand, and was also the sole director and shareholder of High Country Meats (Vic) Pty Ltd, the second respondent (HCMV).

The Liquidator sought to void the following transactions pursuant to section 588FE of the Corporations Act 2001 (Cth) (Act): 

• a transfer of $60,000 from Kalimand to HCMV (Funds); and
• a transfer of assets from Kalimand to HCMV, namely stock in the sum of $1,090,400 and trade debtors in the sum of $959,079 Kalimand held at the end of the 2011 financial year (Assets).

The Liquidator sought the following orders in relation to the Assets (at [5]):

1.                 A declaration that HCMV holds the Assets on trust for Kalimand;

2.                 Further, an order that HCMV pay to Kalimand those monies held on trust by HCMV for Kalimand;

3.                 Further, or in the alternative, an order that HCMV pay to Kalimand an amount equal to the Assets;

4.                 Alternatively, an order that HCMV pay to Kalimand an amount representing the benefit obtained by it as a result of the transfer of Assets.

Evidence tendered by the Liquidator to establish the transfer of the Funds and Assets included various books and records, financial statements and working papers for Kalimand over the relevant period. 

Issues and legal analysis

A transaction which is an uncommercial transaction under section 588FB of the Act is voidable if:

• the transaction is an “uncommercial transaction” (meaning it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to the benefits (if any) to the company of entering into the transaction, the detriment to the company of entering into the transaction, and respective benefits to other parties to the transaction); and
• it was an “insolvent transaction” (meaning it was entered into when the company was insolvent, or if the company became insolvent due to the entrance into the contract or the giving effect of the transaction).

In order to establish that the transfer of the Funds and the Assets were voidable transactions, the Liquidator was required to “prove facts justifying a conclusion that Kalimand became a party to an uncommercial transaction”, and “identify, with some precision, the “transaction(s)” in issue” (at [29]).

The Liquidator adduced sufficient evidence to satisfy the Court that the transfer of the Funds was a voidable transaction. 

However, the Liquidator did not adduce sufficient evidence regarding the transfer of the Assets.  Her Honour Gordon J stated at paragraph [43]:

[t]he [Liquidator] did not identify with precision the stock or the trade debtors of Kalimand that were allegedly transferred to HCMV for nil consideration. Additionally, the [Liquidator] did not identify the transactions by which the stock or debtors were transferred to HCMV. That is unfortunate. The Court can only proceed on the evidence available to it.

Lavan Legal comment

This decision confirms the need for liquidators to ensure that the evidence adduced in support of any claim for recovery of a voidable transaction specifically identifies both:

• the assets that are being transferred (ie in the case of invoices, the invoice numbers, date of invoice, and the name of the creditor etc); and
• the transaction pursuant to which the assets were transferred.   

Accordingly, liquidators should ensure that they have sufficient evidence to establish both of the above factual matters before commencing proceedings in order to ensure there are no adverse costs orders made against them (as was the case in Rathner).