Question

Question 4

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 preferences

(1) A transaction is an unfair preference given by a company to a

creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.”

“Uncommercial transactions

(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be 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.

(2) A transaction may be an uncommercial transaction of a company because of subsection (1): (a) whether or not a creditor of the company is a party to the transaction; and (b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.”

For example :-

The liquidator of Ashala Model Agency Pty Ltd (the Company) commenced proceedings against the Company's shadow director, Mr Featherstone, claiming that Mr Featherstone had caused the Company to enter into an uncommercial transaction by paying Company funds in a way which resulted in the purchase of a residential property, held in the name of Mr Featherstone's de facto partner (Ms Marks) and trustee of their family trust. The liquidator was seeking possession of the property.

Mr Featherstone directed the Company pay $460,000 to himself to clear a loan account which he had with the Company. The loan account related to rent payable by the Company. The $460,000 was used to purchase a property in the name of Ms Marks who was the main shareholder of the Company. The largest creditor of the Company was the Tax Office.

In making the transfer to Mr Featherstone, the Company was rendered insolvent, with very little assets or funds to settle the Company's debts to other creditors.

The liquidator claimed that the payment to Mr Featherstone was an uncommercial transaction. The liquidator did not claim that the payment constituted an unfair preference.

Mr Featherstone argued that the transaction was not uncommercial, as an uncommercial transaction requires undervalue. The Company received a benefit from the reduction of Mr Featherstone's loan account in the form of a reduction in its creditors.

The Court accepted Mr Featherstone's argument that the payment in itself was not an uncommercial transaction as the detriment to the Company from the payment did not outweigh the benefit. The payment had a neutral effect on the Company's net asset position.

The Court went on to find however that the payment did constitute a voidable preference as it was an insolvent transaction of the Company that resulted in one creditor, Mr Featherstone, receiving a repayment of his loan account at the expense of the Company's other creditors who were set to receive no dividend. In this respect, the Court also found that the transaction was put in place for the purpose of defeating, delaying or interfering with the Company's remaining creditors.

The Court found that an unfair preference could be an uncommercial transaction in certain circumstances. For example like in this case where certain creditors (usually related parties) are paid first to avoid having to pay other creditors. The Court commented that the principal element is to look at the purpose and intention of the payment. Any purpose which was intended to defeat, delay or interfere with a creditor's rights as a whole would be deemed an uncommercial transaction, and as a consequence, a voidable transaction.

The Court ordered the property be transferred to the Company.