No clear evidence of uncommerciality Law Reporter

Setting aside transactions which are uncommercial. The debate on whether the Corporations Act should be amended to set aside payments to directors and officers by way of bonuses or other payments where a company goes into liquidation will probably intensify later this year.

The announced review of the Corporations Act to consider a number of areas, including disclosure and insolvency, will highlight the importance of these matters. A recent decision of the New South Wales Supreme Court in Skouloudis Group Pty Ltd (in liq) v Planet Enterprizes Pty Ltd ((2002) 41 ACSR 369) shows that it will not be very easy to have transactions set aside. The main reason is that the evidence that the price that was received was not as high as another price that may have been paid for the relevant assets of the company in the context of uncommercial transactions will not be regarded as conclusive. The court will want to assess all the relevant information, and at times this information will be quite limited. The onus is on the person wishing to have the transaction set aside and the court will not easily be moved to set aside transactions unless there is clear evidence of uncommerciality. The facts in the Skouloudis case are taken from the Butterworths Law Report.

Skouloudis Group Pty Ltd (the company) ran a business that published a Greek language newspaper (the business). An order winding up the company was made in November 2001 and a liquidator appointed. The company had been insolvent from 30 June 2001 until it was wound up, and at some time in July 2001 the business was transferred to Mrs Skouloudis, the wife of the company's director and shareholder. Consideration for the transfer was the taking over of the company's liabilities relating to the business (estimated at about $60,000), as well as the entitlements owed to its employees. There was evidence that other potential purchasers were willing to pay around $50,000 for the business in addition to accepting liability for employee entitlements. Around the time of the transfer Mrs Skouloudis obtained control of Planet Enterprizes Pty Ltd, and the business was re-registered as a business conducted by Planet. The liquidator brought proceedings to have the transfer set aside as a voidable transaction on the basis that it was uncommercial. Evidence was given that a creditor of the company – a company that owned a competing newspaper, and had spent a considerable sum in funding the liquidator's proceedings – was prepared to offer $100,000 for the business if the transfer was set aside. The business could not, however, have been sold to this creditor in July 2001 as the company's purchase of the business in 1998 had been conditional upon it not selling to this creditor for a period which did not expire until December 2001.

Windeyer J dismissed the summons and in doing so made a number of important rulings. In the first place he held that the relevant section of the Corporations Act under which the liquidator had applied to set aside the transaction (section 588FB) required the court to take what he described as a purposive approach. He had to interpret the relevant section with regard to the objective of preventing companies from disposing of assets through transactions that result in the person who bought the assets received a gift or obtained a bargain of such commercial magnitude that it could not be explained by normal commercial practice. In the court's view if the recipient was in some way related to the company this would immediately throw up some doubt as to the commerciality of the transaction. However in this case, the transfer benefited the company because the liabilities of the business which the company was unable to meet were also transferred. The only possible detriment was that perhaps a higher price could have been obtained for the business at the time it was transferred.

The available evidence about the proper price of the business, in this case, was that other potential purchasers might have paid around about the same price. The business could not have been sold in July 2001 to a creditor who gave evidence of an offer of $100,000. There was no evidence, as far as the court was concerned, to support the view of the liquidator on the value of the business. Nor was there any evidence generally as to the assets and liabilities of the company or of its business. In the court's view the liquidator had failed to establish the onus that was on him that the transactions was uncommercial. The following language from the judgment of Windeyer J is very interesting and helpful in showing just how this type provision (and there will be others no doubt which are based on a similar approach) will be interpreted in future cases. "If the newspaper business were the only asset of the company which it held beneficially, as appears to be the position, and if the company was unable to pay the debts of that newspaper business as appears to have been the case, then the disposal of that business for a sum sufficient to pay the liabilities, which the company was unable to pay was not necessarily an unreasonable transaction. This was a one person company business being transferred to either one person or a new one person company. It was not some major transaction. It is not being suggested that it was a transaction entered into for the purpose of defeating creditors." (para 17)

The judge noted that the court can only proceed on the evidence that was available to it and while more evidence could have been produced if more time was available this evidence was not available. The liquidator had sought an urgent hearing in this matter and this meant that the court could not set aside the transaction. It was not appropriate in his view for the court to make the orders that were being sought and unless there could be some guarantee of funds to enable the business to continue (which was the result that was achieved through this sale), the sale should not be set aside. The approach taken by the court is a sensible and pragmatic one. Clearly, the court should not encourage transactions which lead to the company being deprived of proper consideration for its assets. If the transaction was not at arm's length then this would help illustrate that particular point. There was no evidence to that effect in this case and in all the circumstances the transaction was allowed to proceed.

Professor Baxt is a partner of Allens Arthur Robinson

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