If you are selling company property, or you are involved with a company selling its property, particularly in the context of concerns about business performance, you need to be aware of the government’s crack down on sales at an undervalue.
On 18 February 2020, new law came into effect in Australia making “creditor-defeating dispositions” voidable against a liquidator and ASIC, and penalising anyone who is engaged in or facilitates such dispositions.
The key element of a “creditor-defeating disposition” is the sale of company property at an undervalue, to the detriment of creditors in any subsequent insolvent liquidation.
If the company is insolvent at the time of such sale and within 12 months the company is wound up, or if external administrators are appointed within 12 months as a result of the sale (and insolvent liquidation follows), then that sale can be unwound. Moreover, you as an officer of the company or a person involved with the sale, are at risk of being personally liable for any loss suffered by the company’s creditors. Such liability arises if the disposition was made when the company was insolvent, or if it results in the winding down or cessation of business within 12 months (and insolvent liquidation follows). Reckless involvement can result in imprisonment.
There are some important exceptions, in particular, if the transaction is made while the safe harbour provisions apply. Transactions entered into by an administrator, liquidator, under a scheme or a deed of company arrangement are also protected.
As a result of the new law, we recommend:
- be sure to keep and retain strong records that justify the sale price of company property
- if there are any concerns at all about solvency, or the sale is a part of a broader wind down initiative, then we can help you to consider whether the safe harbour provisions apply, or whether an alternative structure can be implemented
The key elements of a creditor-defeating disposition are:
- there is a transfer of property
- at less than market value, or at less than the best price reasonably obtainable having regard to the circumstances at the time, and
- which either prevents, hinders or significantly delays the availability of that property, for the benefit of the company’s creditors in its winding up
A disposition which meets this criteria will be voidable against a liquidator or ASIC if:
- the company was insolvent at the time, or became insolvent as a result of the disposition, and within 12 months the company is wound up*, or
- within 12 months of the disposition, the company enters into external administration* as a direct or indirect result of the disposition
* The date when the company is wound up is the date determined under the deeming provisions of the Corporations Act. External administration means provisional liquidation, liquidation, voluntary administration or a deed of company arrangement.
A new legal duty has been introduced for company officers and persons involved in the disposition:
- a company officer has a duty to not engage in conduct which results in a creditor-defeating disposition
- a person has a duty to not engage in conduct of “procuring, inciting, inducing or encouraging” the making of a creditor-defeating disposition by a company
These duties are breached if the creditor-defeating disposition occurs:
- while the company is insolvent, or becomes insolvent as a result of the disposition,
- if within 12 months, the company enters into external administration as a direct or indirect result of the disposition, or
- if within 12 months, the company ceases to carry on business altogether as a direct or indirect result of the disposition
The test for civil liability is an objective test, based on what the officer or person knew, or what an officer or person in the position of that officer or person, would know. The consequence of a breach includes civil penalty, personal liability for any loss to company creditors, and if reckless, criminal sanction.
Exceptions and defences
Dispositions entered into by an administrator, provisional liquidator or a liquidator, or under a scheme or a deed of company arrangement, are excluded.
Similarly, an exception applies to transfers entered into while the safe harbour provisions apply. That is, while a course of action that is reasonably likely to lead to a better outcome than administration or liquidation is being pursued and all other safe harbour requirements are being met, the disposition cannot be avoided and it is a defence to any contravention of the new duty.
In addition, the defences under sections 588H, 1317S and 1318 of the Corporations Act apply; it being a defence if the person did not take part in management because of illness or some other good reason, or took all reasonable steps to prevent the company from making the disposition of property, or acted honestly and in all of the circumstances ought fairly be excused. It is also a defence if at the time of the disposition, the person had a reasonable expectation of solvency, unless it is found that the external administration or cessation of the company’s business within 12 months was a result of the disposition.
*This article is general in nature and is not to be taken as legal, financial, governance or other advice. You should consider seeking independent legal, financial, governance, taxation or other advice to check how the information relates to your unique circumstances. Vantage Performance is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly.