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01 Sep 2015

Is a charitable donation by an insolvent company an uncommercial transaction under section 588FB?

by Peter Sise

Whether a charitable donation by an insolvent company is an “uncommercial transaction” may depend on whether the donation is monetary or “in kind” and other circumstances surrounding the donation.

We often think of “uncommercial transactions” under section 588FB of the Corporations Act 2001 (Cth) as morally questionable. A classic example of an uncommercial transaction would be a director providing company property to a business which they operate on highly favourable terms or making a gift to a relative. This sort of nepotism is understandably frowned upon. A donation to a charity, however, does not fit within this conception of an uncommercial transaction. Most would consider it admirable rather than morally questionable to make a charitable donation. Such good intentions, however, may not save a charitable donation by an insolvent company from being an uncommercial transaction, not least because section 588FB does not require any intent to defeat creditors or favour an associate of the company.

If a company were to provide a donation while it was insolvent and during the applicable relation-back period, could it amount to an “uncommercial transaction”? If so, what prospects would the recipient charity have of establishing the defence under section 588FG? It is these questions which this article will address. Although the outcome is dependent upon the particular circumstances, this article will submit that in most cases a monetary donation made by an insolvent company is likely to be an uncommercial transaction while there are better prospects of an “in kind” donation not being an uncommercial transaction. It will submit that a charity is unlikely to establish the defence under section 588FG because it has not provided valuable consideration for the donation, but it may be able to establish the defence on the basis that it has changed its position in reliance on the donation. The article will also submit that section 588FB(1)(d), which allows the court to consider “any other relevant matter” when determining whether a transaction is uncommercial, should not be used to give special leniency to charitable donations by insolvent companies.

The relevant provisions of the Act

Section 588FE(3) of the Act provides that an “insolvent transaction”, which is also an “uncommercial transaction”, is voidable if it was entered into during the two years ending on the relation-back day. This period extends to four years ending on the relation-back day if a related entity of the company in liquidation is a party to the transaction. [1] 1 Section 588FC defines an insolvent transaction as including an uncommercial transaction that occurred when the company was insolvent or caused the company to become insolvent.

Section 588FB(1) defines an uncommercial transaction as follows:

"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."

A “transaction” is not exhaustively defined by the Act; rather, section 9 gives examples of transactions. The examples include a payment and a disposition of property. It does not matter that the transaction may be legally unenforceable. [2] This is significant for a donation since it may be legally unenforceable due to a failure to fulfil the contractual requirement of consideration.

A “benefit” is defined by section 9 as “any benefit, whether by way of payment of cash or otherwise”. This is significant since any benefit provided by a charity to the donor company is unlikely to be in a monetary or even tangible form. A “detriment” is not defined by the Act.

If a transaction is declared voidable under section 588FE, a court may make one or more of the orders in section 588FF(1), including: 

  • ordering the recipient of money paid by the insolvent company to repay all or some of that money to the company;
  • ordering the recipient of the insolvent company’s property to transfer the property back to the company; and
  • ordering the recipient to pay the insolvent company an amount that fairly represents some or all of the benefits that the person has received because of the transaction. [3]

How has section 588FB been interpreted?

Section 588FB(1) states that a transaction is an uncommercial transaction “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 the four factors listed in paragraphs (a)-(d) of the subsection. The words “if, and only if” indicate that the test focuses on what may be expected of a reasonable person and not some conception of what is commercial or uncommercial. In this regard, the Full Federal Court in Tosich Construction Pty Ltd (in liq) v Tosich [4]  said:

"What the Court must do is to consider each of the matters to which reference is made in section 588FB(1) and, having regard to them, reach a conclusion as to whether a reasonable person in the company’s circumstances would not have entered into the transaction. The company’s circumstances must include the state of its knowledge, that is, of the knowledge of those who were relevantly its directing mind. Only if the Court can conclude that a reasonable person in the company’s circumstances would not have entered into the transaction does the section make that transaction uncommercial." [5]

Other decisions have confirmed that the test is what might be expected of a reasonable person. [6]

The test is not whether the transaction is so unreasonable that no reasonable person would enter into it, but rather whether a reasonable person would normally enter into such a transaction. [7]

Several points should be noted when determining how a reasonable person might be expected to act. First, the standard is objective and must be applied with reference to the company’s circumstances including the state of knowledge of those who were the directing mind of the company. [8] Secondly, “normal commercial practice” is relevant to determining how a reasonable person may act. [9]Thirdly, the courts have taken a purposive approach to determining how a reasonable person may be expected to act. Decisions have identified two purposes for section 588FB. The first identified purpose is to prevent gifts and bargains which do not accord with normal commercial practice. [10] Decisions have referred to the following statement in the explanatory memorandum of the Bill that introduced section 588FB as the source of this purpose:

"The provision is specifically aimed at preventing companies disposing of assets or other resources through transactions which resulted in the recipient receiving a gift or obtaining a bargain of such magnitude that it could not be explained by normal commercial practice. Where consideration is given by the other party to the transaction but the consideration is nominal or trivial or lacks “a commercial quality” then … the liquidator may apply to a court to have the transaction set aside or another order made under proposed section 588FF so that the body of unsecured creditors is not prejudiced by this transaction."[11]

The second identified purpose is to prevent the assets of the company being depleted through transactions at an undervalue. The Full Federal Court in Demondrille Nominees Pty Ltd v Shirlaw [12] said:

"The purpose or object of the provisions with which we are concerned is to prevent a depletion of the assets of a company which is being wound up by, relevantly, “transactions at an under-value” entered into within a specified limited time prior to the commencement of the winding up: see explanatory memorandum, para 1014."[13]

Intermediate appellate courts have said that undervalue is “at the heart” of section 588FB [14]and the “primary target of the provisions”. [15] The explanatory memorandum referred to uncommercial transactions as “transactions at an under-value" [16]and said “the element of undervalue is expressed more clearly in proposed section 588FB” than its predecessor. [17]

The purposive approach to interpreting section 588FB appears to have been partly motivated by section 109H of the former Corporations Law which stated that when interpreting a provision of the law, “a construction that would promote the purpose or object underlying the law (whether that purpose or object is expressly stated in the law or not) is to be preferred to a construction that would not promote that purpose or object”. Presently, there is no equivalent provision in the Act. However, it is submitted that this does not undermine the validity of a purposive approach since case law indicates that purpose is relevant to interpretation. [18] Further, section 15AA of the Acts Interpretation Act 1901 (Cth) is effectively the same as section 109H of the Corporations Law and section 15AB of the Acts Interpretation Act allows reference to be made to explanatory memoranda.

Is a charitable donation an uncommercial transaction under section 588fB?

In light of the above, is a charitable donation an uncommercial transaction? In answering this question, it is convenient to separately consider the two forms in which a donation can be made: a monetary donation and a donation “in kind”.

Monetary donations

It is submitted that a monetary donation is likely to be an uncommercial transaction. If the transaction is being challenged as voidable, it will have occurred when the company was insolvent. It is submitted that a reasonable person in the position of an insolvent company would not deprive the already-financially-stricken company of funds by providing them to another person for no consideration. The donation is perhaps less vulnerable to challenge if the directing mind of the company was not aware of the company’s insolvency or the company was not hopelessly insolvent. [19]However, it is submitted that this is unlikely to provide much assistance since a reasonable person in the company’s position would surely be aware of the company’s financial position. This proposition is not only logical but supported by:

  • the obligation under section 286(1)(a) of the Act of a company to keep financial records that “correctly
  • record and explain its … financial position and performance”;
  • the duty of directors to prevent insolvent trading; and
  • the duty of an officer under section 180 to act with due care and diligence. [20]

The duty of care and diligence requires a director to be familiar with the financial position of the company. [21]

The conclusion that a monetary donation is an uncommercial transaction is reinforced by the four factors listed in paragraphs (a)-(d) of section 588FB(1). The first factor requires a consideration of the benefits to the insolvent company of the donation. It is unlikely that there will be any material benefit to the company arising from the donation and almost certain that the donation will not be made with a clear proviso that the charity provide some benefit in return. However, it is possible that there may be an indirect benefit from the donation. For example, a business may gain publicity through its philanthropic activities or the donation may assist in building relationships with people involved in the charity who are potential customers. However, these benefits are indirect, by no means certain and likely to be insubstantial. In this regard, it is worth noting the statement of Hodgson JA in Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd. [22]

"The circumstance that a transaction does not define or require benefits that are said to be expected from it, and to justify it, is a factor strongly suggesting that the transaction is not one that a reasonable person in the company’s circumstances would enter into."

The second factor requires a consideration of the detriments to the insolvent company. The obvious detriment is the loss of the donated funds. This loss may be ameliorated by any applicable tax deduction, but it is still a clear detriment.

The third factor is the “respective benefits to other parties to the transaction”. It is submitted that this factor is of no significance since the only parties to the transaction are the insolvent company and the charity. [23] Any benefit that flows to the beneficiaries of the charity’s activities is irrelevant since they are not parties to the transaction.[24]

The fourth and final factor requires a consideration of “any other relevant matter”. It is arguable that the fact the recipient is a charity is relevant and that special leniency should be shown towards charitable donations. However, it is submitted that such an argument should be rejected. To have a special rule for charities could amount to depriving creditors of funds, which they are legally entitled to receive, so that those funds can be retained by a charity, which was given them in the absence of any legal right to receive them. The charity has no legal right to demand the donation and only receives it due to a sense of moral duty felt by those controlling the insolvent company. To have a special rule for charities is hence allowing a sense of moral duty to trump legal rights. If a charity is to retain the proceeds of an uncommercial transaction, it should be required to make out the defence under section 588FG, like any other entity.

In addition to the four factors listed in paragraphs (a)-(d) of section 588FB(1), we should consider the purpose of section 588FB. Section 588FB is intended to prevent dispositions at an undervalue. [25] It is submitted that donating money for no tangible return is clearly a disposition at an undervalue. Section 588FB is also intended to prevent a “recipient receiving a gift or obtaining a bargain of such magnitude that it could not be explained by normal commercial practice”. [26] Is a monetary donation a gift? A gift has been defined as a voluntary transfer of property, as opposed to one occurring as a result of a contractual obligation, where “no advantage of a material character was received by the transferor by way of return”. [27]  It does not matter whether the material advantage “by way of return” emanates from the transferee or from a third party. [28]  If the donation is truly altruistic and results in no material advantage for the company, it is then a gift and likely to be an uncommercial transaction. [29]  If some material advantage does flow to the insolvent company, one must ask whether the “bargain [is] of such magnitude that it could not be explained by normal commercial practice”. It is submitted that the concept of a “bargain” cannot apply to a charitable donation because there is no obligation on the charity to provide anything in return to the donor. Any return will be incidental and not emanating from the charity. If the insolvent company has bargained for the charity to provide it with a benefit, such as publicity for the company’s business, it is submitted that the situation would be more akin to a sponsorship arrangement than a charitable act. Hence, the question of whether a transaction is a “bargain of such magnitude that it could not be explained by normal commercial practice” is of no real assistance for determining whether the donation is an uncommercial transaction.

Donations “in kind”

A donation “in kind” can be either goods or services provided by the insolvent company. It is submitted that a donation of goods is likely to be an uncommercial transaction for the same reasons as a monetary donation. The same considerations apply because donating goods depletes the assets of the insolvent company, just like donating money. The situation is different if the donated goods were of no value to the insolvent company; for example, perishable goods which could not be sold and were donated so that they did not go to waste. In that situation, the insolvent company has suffered no detriment and hence the donation is unlikely to be an uncommercial transaction.

A donation of services may not be an uncommercial transaction if it created no additional costs for the insolvent company. If the staff of the insolvent company who provided the service were employed on annual salaries and providing the service did not prevent the company from undertaking paying work, there would appear to be no detriment to the company. There may even be benefits to the insolvent company, such as giving its staff further experience and demonstrating the capabilities of its business to people who may be potential customers. However, one should not attach too much significance to these benefits due to the cautionary words of Hodgson JA in Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd regarding a transaction that does “not define or require [the] benefits that are said to be expected from it”. [30] Of course, it is possible that the donation of services may cause detriment to the insolvent company. For instance, the insolvent company may forego paying work to provide the service and incur additional costs.

If the provision of services does amount to an uncommercial transaction, a court may order the charity under section 588FF(1)(c) to pay the insolvent company an amount that fairly represents some or all of the benefits it has received.

Defence under section 588FG

Section 588FG(2) provides a defence for a party to an uncommercial transaction. The defence prevents the court making an order under section 588FF that would materially prejudice a right or interest of a party to the transaction. The defence has the following requirements:

  • the defendant became a party to the transaction in good faith;
  • when the defendant became a party to the transaction, they had no reasonable grounds for suspecting that the company was insolvent or would become insolvent by entering into the transaction, and a reasonable person in their circumstances would have had no such suspicion; and
  • the defendant provided “valuable consideration” under the transaction or has changed their position in reliance on the transaction.

Although each case will depend on its circumstances, establishing the first and second of the above three requirements may be simpler for a charity than a commercial entity. A reasonable person would not expect a company that is in financial difficulties to make donations, particularly monetary donations. Further, some of the common indicators of a company’s insolvency, such as a company paying the counterparty’s invoices selectively, in rounded figures or outside of usual terms, [31] will not be visible to a charity since it does not trade with the insolvent company. However, a charity is likely to have difficulties establishing that it provided “valuable consideration” or changed its position in reliance on the donation.

It may be particularly difficult for a charity to establish that it provided “valuable consideration” if that phrase requires the consideration to be substantial as opposed to simply nominal. Unfortunately, there appears to be no reported cases considering the meaning of “valuable consideration” in the context of section 588FG(2). However, there are decisions which consider its meaning in the context of the previous version of section 120(1) of the Bankruptcy Act 1966 (Cth), which provided:

"A settlement of property, whether made before or after the commencement of this Act, not being –

(a) a settlement made … in favour of a purchaser … in good faith and for valuable consideration; …

is, if the settlor becomes a bankrupt within two years after the date of the settlement, void as against the trustee in the bankruptcy. "[emphasis added]

 

In Barton v Offıcial Receiver, [32]  the High Court concluded that a “purchaser … for valuable consideration” is someone who has given consideration “which has a real and substantial value, and not one which is merely nominal or trivial or colourable”. [33]In the context of section 120, a “purchaser” does not refer to a “purchaser in the limited sense of a purchase and sale, but to a person who in a commercial sense provides a quid pro quo”. [34]The learned authors of McPherson’s Law of Company Liquidation say, in the absence of authority to the contrary, the interpretation of “valuable consideration” in Barton should apply to those words in the context of section 588FG(2). [35]  As stated by the learned authors, section 120 was part of the previous voidable transaction regime for company insolvency, and it has been said in decided cases that case law regarding the previous regime is relevant to interpreting the present regime.

It is submitted that there are additional reasons for the interpretation of “valuable consideration” in Barton applying to section 588FG. First, the interpretation in Barton is consistent with the purpose of section 588FB, which is to prevent a depletion of the company’s assets through undervalued transactions. If a defendant must provide substantial consideration to make out the defence under section 588FG, the extent of the depletion may be less. Secondly, the explanatory memorandum states that section 588FG provides a defence similar to that under the former section 122 of the Bankruptcy Act, [36]  which suggests that the interpretation of section 122 is applicable to section 588FG. Thirdly, the explanatory memorandum states that section 588FG requires “adequate consideration" [37]as opposed to consideration which is merely sufficient. It is often said that contractual consideration need only be “sufficient” and not “adequate”. The High Court in Barton upheld the Full Federal Court’s conclusion that the level of consideration required for a contract is not “valuable consideration” for the purposes of section 120. [38]  The statement in the explanatory memorandum that consideration must be “adequate” is therefore consistent with the view in Barton regarding contractual consideration.

It is difficult to see how a charity could provide “valuable consideration” for a donation, in the sense identified in Barton. In some circumstances, a charity might provide limited publicity for the insolvent company, such as erecting a plaque acknowledging the company’s donation. However, this is unlikely to be of “substantial value”; rather, it appears to be of “nominal” value since it does little more than acknowledge the insolvent company. The other benefits of a donation mentioned in this article, such as the opportunity to meet potential customers or demonstrate the capabilities of the insolvent company’s business, are not provided by the charity and simply arise incidentally if at all. This indicates an important distinction between ss 588FB and 588FG: section 588FB does not require a benefit received by the insolvent company to be provided by the charity while section 588FG requires the charity to provide the valuable consideration. In light of these matters, it appears very unlikely that a charity could establish that it provided “valuable consideration”.

A charity has better prospects of establishing that it changed its position in reliance on the donation. For example, a charity may have changed its positions by contractually committing to a project which will be funded by a monetary donation. As a further example, a charity may have changed its positions by passing over the opportunity to purchase goods or services at a highly favourable price because it was offered them as an “in kind” donation. However, in the latter example, the court may still order the charity, pursuant to section 588FF(1)(c), to pay the insolvent company the favourable price it was offered rather than the standard market price. In that case, there is arguably no material prejudice to the rights or interests of the charity since it has not lost the opportunity to avail itself of the favourable price. As noted above, section 588FG(2) is only a defence to an order under section 588FF that materially prejudices a right or interest of a party to the transaction.

Although it will depend on the circumstances of each case, it is submitted that a charity is unlikely to be able to establish a change of position except in unusual circumstances, such as those in the aforementioned examples. It is difficult to see how a charity could establish a change of position if the donation was one of many donations that was simply used to fund its day-to-day activities. Section 588FG(1) provides a defence to a person who is not a party to the impugned transaction. This defence may be relevant to a beneficiary of a charity, where the beneficiary receives property from the charity and the property was received by the charity under an uncommercial transaction. Section 588FG(1)(a) applies to a person who received no benefit from the impugned transaction while section 588FG(1)(b) applies to a person who did receive a benefit. Since the beneficiary received a benefit, section 588FG(1)(b) would apply. For section 588FG(1)(b), the beneficiary will have established the defence if they prove that they received the benefit in good faith, they had no reasonable grounds for suspecting the insolvency of the company and a reasonable person in their circumstances would have had no such suspicion. There is no need for the beneficiary to provide “valuable consideration” or change their position. Since the beneficiary is unlikely to be aware of the insolvent company’s financial position, it is likely that they will be able to establish this defence.

Must a liquidator pursue a charitable donation under section 588FB?

A liquidator may feel some unease in pursuing a charitable donation since it may be perceived as attacking a worthy cause and hence lead to criticism. However, it is submitted that this concern must yield to the duty of a liquidator to augment the assets of the company. In this regard, Lord Romily said in Re Tavistock Iron Works Co.[39]

"The duties of an official liquidator are very plain and simple. Generally they may be thus stated: He is to do everything he can to augment the disposable assets of the company …" [40]

The statement of Lord Romily was cited by the High Court in Stewart v Atco Controls Pty Ltd (in liq) where the Court unanimously said:

"A liquidator is to do what he or she can to augment the disposable assets of the company. It is the duty of a liquidator to realise assets and, to that end, a liquidator has the power to bring proceedings." [41]

The power to bring proceedings in relation to an uncommercial transaction is clearly one of the ways in which a liquidator can augment the assets of the company and, further, a power which only the liquidator can exercise. The duty of the liquidator to augment the assets of the company is underscored by section 474(1) of the Act, which requires an official liquidator to take into their control all property that appears to be company property, and section 480(a), which states that an official liquidator may only apply to be released from their role as liquidator once they have realised all the property of the company. [42]

If the liquidator decides through the proper exercise of their discretion that pursuing a charitable donation is justified given the time and costs of pursuing it, the prospects of success and the benefits to creditors, it is submitted that they must pursue it. If the liquidator does not do so because they believe they would be attacking a worthy cause, they are effectively preferring a potential debtor of the company and their own feelings over the interests of unsecured creditors. This is not only a breach of the duty stated in Re Tavistock Iron Works Co but may exhibit a lack of impartiality. [1]Although  these are significant failings, it is unlikely that a liquidator would breach one of their most significant duties, being the fiduciary duty owed to creditors. [44]  This is because fiduciary obligations are proscriptive rather than prescriptive and hence do not compel a fiduciary to act. [45]For this reason, the fiduciary duty is unlikely to compel the liquidator to commence proceedings for an uncommercial transaction.

If the liquidator believes creditors may not wish for them to pursue a charitable donation, they may convene a general meeting of creditors under section 479(2) of the Act to ascertain their wishes. [46]  The liquidator is required by section 479(1) to have regard to any direction given by a resolution of the creditors, but is not bound to follow it particularly if it conflicts with the execution of their duties. [47] For this reason, a direction from creditors may not be sufficient to excuse the liquidator from pursuing the donation as an uncommercial transaction.

Conclusion

In summary, it is likely that a monetary donation by an insolvent company to a charity will be an uncommercial transaction as there is invariably a clear detriment to the company with little to no countervailing benefit. There is some prospect that an “in kind” donation by an insolvent company will not be an uncommercial transaction because it does not necessarily inflict a detriment on the company, but this will depend on the particular circumstances of the case. Any benefit received by the insolvent company as a result of a donation, whether monetary or “in kind”, is likely to be incidental and slight. Given the comments of Hodgson JA in Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd regarding benefits that are not defined or required, it is unlikely that these benefits will offset any detriment to the insolvent company. Depending on the circumstances, the charity may be able to establish the defence in section 588FG on the basis that it has changed its position.

This article was first published in the Company and Securities Law Journal, Vol 33 No 6, September 2015

 


 

[1] See Corporations Act 2001 (Cth), section 588FE(4).Back to article

[2] Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83 at [120]; Sparks v Berry (2001) 19 ACLC 1,430; [2001] QSC 251 at [13].Back to article

[3] See Corporations Act 2001 (Cth), section 588FF(1)(c).Back to article

[4] Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363.Back to article

[5] Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 at 367.Back to article

[6] See Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd [2007] NSWCA 167 at [50], [53]; Lewis v Cook (2000) 18 ACLC 490 at [46]; McDonald v Hanselmann (1998) 144 FLR 463 at 466-467.Back to article

[7] Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd [2007] NSWCA 167 at [54].Back to article

[8] Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83 at [129]; Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 at 366-367; Lewis v Cook (2000) 18 ACLC 490 at [46].Back to article

[9] Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83 at [129]; Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 at 366-367; Lewis v Cook (2000) 18 ACLC 490 at [46].Back to article

[10] Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83 at [129]; Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 at 548; McDonald v Hanselmann (1998) 144 FLR 463 at 466.Back to article

[11] Explanatory Memorandum, Corporate Law Reform Bill 1992 (Cth) at [1044].Back to article

[12] Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535.Back to article

[13] Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 at 548, citing Explanatory Memorandum, n 11.Back to article

[14] Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83 at [73] (per Lindgren J in dissent). His Honour was quoting Keay A, “Liquidators’ Avoidance of Uncommercial Transactions” (1997) 70 Australian Law Journal 390 at 397. Professor Keay also remarked that “undervalue is clearly at the centre of [Corporations Act 2001 (Cth), section 588FB]” (at 400).Back to article

[15] Lewis v Doran (2005) 219 ALR 555; [2005] NSWCA 243 at [136].Back to article

[16] Explanatory Memorandum, n 11, at [1014].Back to article

[17] Explanatory Memorandum, n 11, at [1043].Back to article

[18] Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; 83 ALJR 1152 at [47], citing Commissioner for Railways (NSW) v Agalianos (1955) 92 CLR 390 at 397 and Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [69]; Federal Commissioner of Taxation v Unit Trend Services Pty Ltd (2013) 250 CLR 523; 87 ALJR 588 at [47]; Certain Lloyd’s Underwriters Subscribing to Contract No IH00 AAQS v Cross (1998) 194 CLR 355 at [24].Back to article

[19] See Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83 at [129]; Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 at 366-367; Lewis v Cook (2000) 18 ACLC 490 at [46].Back to article

[20] A person who is the directing mind of a company falls within the definitions of “director” and “officer” in Corporations Act 2001 (Cth), section 9. A “director” includes a person upon whose instructions or wishes the directors of a company are accustomed to act. An “officer” includes a director and a person who participates in making decisions that affect a substantial part of the business of the company.Back to article

[21] Australian Securities and Investments Commission v Healey (2011) 196 FCR 291 at [166]: “[A] director is under a continuing obligation to keep informed about the activities of the corporation … and a director should maintain familiarity with the financial position of the corporation”; Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at126: “[T]he stage has been reached when a director is expected to be capable of understanding his company’s affairs to the extent of actually reaching a reasonably informed opinion of its financial capacity”; Re Lawrence Waterhouse Pty Ltd (in liq); Shaw v Minsden Pty Ltd (2011) 29 ACLC 11-064 at [266]: a director’s failure to maintain records as required by section 286 was founds to be a breach of section 180.Back to article

[22] Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd [2007] NSWCA 167 at [56].Back to article

[23] This factor has generally been interpreted restrictively: see De Jong L, “The Corporations Act Approach to Uncommercial Transactions – Is it Working?” (2003) 11 Insolvency Law Journal 199 at 209-210.Back to article

[24] In Anderson C and Morrison D, “Uncommercial Transactions – Developments in the New Regime?” (1999) 7 Insolvency Law Journal 184, the learned authors say it is “clear that the issue of the uncommercial transaction is to be judged with respect to the parties to the transaction with the company, not with respect to some beneficiary of a subsequent transaction” (at 195).Back to article

[25] See n 12 to 17 above.Back to article

[26] See Explanatory Memorandum, n 11, at [1044].Back to article

[27] Federal Commissioner of Taxation v McPhail (1968) 117 CLR 111 at 116.Back to article

[28] Cyprus Mines Corp v Federal Commissioner of Taxation (1978) 36 FLR 295 at 314; Leary v Federal Commissioner of Taxation (1980) 41 FLR 80 at 84.Back to article

[29] Professor Keay has stated that a gift is “likely to be challenged successfully” as an uncommercial transaction: see Keay A, “Liquidators’ Avoidance of Uncommercial Transactions” (1997) 70 Australian Law Journal 390 at 398.Back to article

[30] Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd [2007] NSWCA 167 at [56].Back to article

[31] Australian Securities and Investments Commission v Plymin (2003) 175 FLR 124 at [386]. See also ASIC, “Insolvency: A Guide for Directors” (Information Sheet 42, December 2008) p 3.Back to article

[32] Barton v Offıcial Receiver (1986) 161 CLR 75.Back to article

[33] Barton v Offıcial Receiver (1986) 161 CLR 75 at 86 (Gibbs CJ and Mason, Wilson and Dawson JJ).Back to article

[34] Cook v Benson (2003) 214 CLR 370 at [31], citing Barton v Offıcial Receiver (1986) 161 CLR 75 at 84.Back to article

[35] Keay A and Mason R, McPherson’s Law of Company Liquidation (Thomson Reuters, 2014) at [11.1650].Back to article

[36] Explanatory Memorandum, n 11 at [1061].Back to article

[37] Explanatory Memorandum, n 11 at [1038].Back to article

[38] Barton v Offıcial Receiver (1986) 161 CLR 75 at 80.Back to article

[39] Re Tavistock Iron Works Co (1871) 24 LT 605.Back to article

[40] Re Tavistock Iron Works Co (1871) 24 LT 605. Although Lord Romily refers to an official liquidator, there seems to be no reason why this duty should not apply to a liquidator conducting a creditors’ voluntary winding up.Back to article

[41] Stewart v Atco Controls Pty Ltd (in liq) (2013) 252 CLR 307; 88 ALJR 594 at [58]-[59]. See also Commissioner for Corporate Affairs (Vic) v Harvey [1980] VR 669 at 691; Wimborne v Brien (1997) 23 ACSR 576 at 582.Back to article

[42] In Commissioner for Corporate Affairs (Vic) v Harvey [1980] VR 669, Marks J stated that the “duties and functions of a liquidator are to be understood primarily by reference to what is contained in the Companies Act” (at 692).Back to article

[43] In Bovis Lend Lease v Wily (2003) 45 ACSR 612; [2003] NSWSC 467, Austin J stated that “[t]he liquidator must act, and be perceived to act, impartially in the discharge of the duties and responsibilities of his or her office” (at [123]) and this obligation extends to “every facet” of their activities (at [131]). See also Australian Restructuring Insolvency and Turnaround Association, ARITA Code of Professional Practice (3rd ed, 2014) cl 5.3, which states that ARITA members must exercise their judgment impartially and uninfluenced by personal feelings.Back to article

[44]Keay A and Mason R, McPherson’s Law of Company Liquidation (Thomson Reuters, 2014) at [8.400], [8.560].Back to article

[45] See Radan P and Stewart C, Principles of Australian Equity and Trusts (2nd ed, LexisNexis Butterworths, 2013) at [9.9]; Ong D, Ong on Equity (Federation Press, 2011) p 120; Glover J, Commercial Equity: Fiduciary Relationships (Butterworths, 1995) at [5.2]; McGhee J (ed), Snell’s Equity (Thomson Reuters, 2010) at [7-011].Back to article

[46] Corporations Act 2001 (Cth), section 479 applies to a winding up in insolvency or by the court but extends to voluntary winding ups due to section 513.Back to article

[47] Keay A and Mason R, McPherson’s Law of Company Liquidation (Thomson Reuters, 2010) at [9.130].Back to article

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