A Guide to Uncommercial Transactions in Corporate Insolvency
- Justeen Dormer
- 6 days ago
- 4 min read
Insolvency
When a company faces liquidation, a liquidator is appointed to investigate its financial history. Their role is to ensure all remaining assets are distributed fairly among creditors. During this process, they will closely examine past dealings to identify any that may have disadvantaged the company. These are known as uncommercial transactions.
Understanding how these transactions are defined and handled under Australian law is crucial for directors and creditors. At Dormer Stanhope Lawyers, we provide expert guidance on corporate insolvency matters, helping you navigate the complexities of liquidation law with confidence. This guide explains what constitutes an uncommercial transaction and the potential consequences for those involved.
What is an Uncommercial Transaction?
An uncommercial transaction is a dealing that a reasonable person in the company’s position would not have entered into, considering the benefits and detriments to the company. Essentially, if a transaction provided no real financial benefit or was harmful to the company’s financial standing, it may be classified as uncommercial.
The Corporations Act 2001 gives liquidators the power to void these transactions. The primary goal is to recover assets or their monetary value to increase the pool of funds available for distribution to the company’s creditors.
Identifying a Voidable Uncommercial Transaction
For a transaction to be voidable, several specific conditions must be met:
It must be an uncommercial transaction: This means it resulted in little to no financial gain or was detrimental to the company. Common examples include selling an asset for significantly less than its market value or purchasing a service for a price far exceeding its worth.
The company must have been insolvent: The company must have been insolvent at the time of the transaction or became insolvent as a direct result of it. Insolvency, as defined in section 95A of the Corporations Act 2001, means the company is unable to pay its debts as they became due.
The other party should have suspected insolvency: A transaction may be voided if the other party involved knew, or should have reasonably suspected, that the company was insolvent.
Only a liquidator can apply to the court to have an uncommercial transaction voided. This power is not available to provisional liquidators, administrators, or controllers.
The ‘Reasonable Person’ Test
Courts use the ‘reasonable person’ test to determine if a transaction was uncommercial. This objective test assesses the transaction from the perspective of a hypothetical, reasonable individual in the company’s circumstances. This person is assumed to have sufficient knowledge of the company's financial state and would act in its best interests, not to benefit themselves or another party at the company's expense.
If a reasonable person would not have entered into the transaction because it would harm the company or diminish its assets, the court is likely to deem it uncommercial.
Timeframes for Voiding Uncommercial Transactions
A liquidator’s ability to void a transaction depends on when it occurred in relation to the ‘relation-back day’. This day marks the official start of the liquidation process.
The specific timeframes are:
Two years for transactions with unrelated parties.
Four years if the transaction was with a related party of the company (e.g., a director, their spouse, or a related company).
Ten years if the transaction was carried out with the intention to defeat, delay, or interfere with creditors’ rights.
The relation-back day is determined as follows:
For a court-ordered liquidation, it is the day the winding-up application was filed.
For a voluntary liquidation, it is the date of the members' meeting that passed the resolution to wind up the company.
If the liquidation follows a voluntary administration, it is the day the administrators were appointed.
Defences Against an Uncommercial Transaction Claim
If you were a party to a transaction that a liquidator is seeking to void, you may have a defence under section 588FG of the Corporations Act. The burden of proof rests entirely on you to establish all three of the following elements:
You provided valuable consideration: You must demonstrate that you gave something of value in exchange for the payment or asset you received from the company. For a trade creditor, this could be the goods or services you supplied.
You acted in good faith: This means you entered the transaction honestly and without any intention to deceive or gain an unfair advantage. Actions that may challenge good faith include issuing statutory demands, initiating legal proceedings, or suddenly switching to cash-on-delivery terms after a period of credit.
You had no reason to suspect insolvency: You must prove that at the time of the transaction, you had no reasonable grounds to suspect the company was insolvent. A mere suspicion is enough to negate this defence. Indicators that might lead a reasonable person to suspect insolvency include receiving post-dated cheques, payments being dishonoured, or knowledge that other creditors are unpaid and pursuing the company for payment.
Proving all three elements is essential. Failure to establish even one part of the defence means the court can order the transaction to be voided.
How Long Does a Liquidator Have to Make a Claim?
A liquidator must file an application with the court to void an uncommercial transaction within three years of the relation-back day. Simply sending a letter of demand is not enough. While the court can grant an extension, the application for that extension must also be made within this three-year period, and the liquidator must provide a valid reason for the delay.
How Dormer Stanhope Lawyers Can Help
Navigating corporate insolvency and claims of uncommercial transactions requires specialised legal expertise. Whether you are a director facing liquidation or a creditor who has received a demand from a liquidator, the team at Dormer Stanhope Lawyers can provide clear, authoritative advice. We are committed to protecting your interests and guiding you through the complexities of liquidation law to achieve the best possible outcome.
If you are concerned about a past transaction or have been contacted by a liquidator, contact us today for professional support.
