Question

Company Law

ILAC

With reference to relevant provisions of the Corporations Act 2001 (Cth), explain the differences between unfair preferences and uncommercial transactions.

Answer 1

Difference between Unfair preference and Uncommercial transaction

Unfair preference

Under section 588FA of the Corporations Act 2001 (Cth) (Act) an Unfair Preference received by a creditor can occur when:

a debtor company owes a creditor an unsecured debt; and

the debtor company and the creditor are parties to a transaction (usually payment of some or all of the unsecured debt); and

receipt of the payment results in the creditor receiving more than it would have received had the debtor company been in liquidation and the liquidator paid all unsecured creditors a dividend, such as $0.10 for every dollar of debt owed to them.

An Unfair Preference can only occur within the context of an insolvent transaction involving an unsecured debt.

​​​​​Uncommercial transaction

As per section 588FB of the corporation act 2001, a transaction of a company is an uncommercial transaction of the company if, and only if, it may be e expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(a) the benefits (if any) to the company of entering into the transaction; and

(b) the detriment to the company of entering into the transaction; and

(c) the respective benefits to other parties to the transaction of entering into it; and

(d) any other relevant matter.