A thriving business environment relies on fairness, transparency and trust. When you supply goods, provide finance or offer services, you need confidence that your financial interests are protected—even if a debtor company faces financial distress.
Liquidators and the Australian Securities and Investments Commission (ASIC) champion this integrity. Armed with powers under the Corporations Act 2001 (Cth), liquidators and the regulator actively ensure a level playing field by addressing Creditor-Defeating Dispositions (CDDs). This proactive approach helps safeguard honest businesses, ensuring creditors are not unfairly left out of pocket.
This article breaks down Liquidators and ASIC’s role in combatting these complex transactions and highlights how businesses and their advisors can effectively protect their interests.
What are Creditor-Defeating Dispositions?
A creditor-defeating disposition occurs when a company disposes of its property for less than its market value or the best price reasonably obtainable and the transaction hinders or prevents creditors from accessing those assets during the company’s subsequent winding-up process.
ASIC has the authority to investigate and take action on such transactions particularly when they are deemed voidable under section 588FE of the Corporations Act. This includes making orders to recover funds or property improperly transferred ensuring that creditors’ interests are protected.
ASIC’s powers under Section 588FGAA
Rather than forcing liquidators into drawn-out and costly court battles, section 588FGAA of the Corporations Act provides a powerful alternative. It grants ASIC the authority to intervene, upon request of a liquidator or of its own volition, directly when a creditor-defeating disposition is uncovered.
When a liquidator identifies such a transaction, they can request ASIC to make an order under section 588FGAA(3). This order can direct the recipient of the improperly transferred property to return it or pay an equivalent amount to the company in liquidation.
Importantly, ASIC’s decision to issue such an order is not taken lightly. It must consider:
— The conduct of the company and its officers.
— The conduct of the recipient of the property.
— The circumstances, nature, and terms of the disposition.
— The relationship between the company and the recipient.
To ensure procedural fairness, ASIC also ensures that the recipient of the property is allowed to be heard before making any order.
ASIC support for action
In a recent case, William Buck’s team of insolvency specialists worked closely with ASIC to address a creditor-defeating disposition involving a company in liquidation. This disposition was identified as having prevented creditors from accessing the company’s assets during the winding-up process.
The transaction involved a sale and lease-back of assets. The company agreed to sell the assets to a third party, who in turn agreed to lease the same assets to a related entity controlled by the Company’s director. No clear business purpose for the transaction was identified and the consideration for the sale was transferred out of the company to another separate entity controlled by the Director. The sale and lease back and transfer of funds occurred at a time when the company was insolvent. The main creditors impacted by the creditor-defeating disposition included equipment finance providers and statutory authorities.
The liquidator applied to ASIC under section 588FGAA for an order to recover the assets. After a thorough investigation, ASIC issued an order under that section directing the recipient to repay the improperly transferred assets to the company in liquidation. This legally binding order ensures that the improperly transferred assets are recovered and returned to the company, ultimately safeguarding the interests of its creditors.
What does this mean for you, your business and your advisors?
Creditor-defeating dispositions can occur even without malicious intent. Transactions that may seem like routine business decisions can be scrutinised if the company is facing financial difficulties.
To protect your interests:
- Be proactive: Regularly review your company’s financial health and ensure that all transactions are conducted transparently and at fair market value.
- Document everything: Maintain clear records of all transactions, including the purpose, terms, and any consideration received. This will help demonstrate that the transaction was legitimate if it is ever questioned.
- Be vigilant for transactions that involve:
- Transfers of assets for little or no consideration.
- Transactions with related parties especially when the company is in financial distress.
- A lack of documentation or clear business purpose for the transaction
- Exercise creditor rights: If you suspect a debtor of your business has undertaken a suspicious transaction, consider exercising your right to appoint a liquidator to review the transaction or reporting the allegations to ASIC or the Australian Taxation Office.
- Seek advice early: If your business is experiencing financial distress, consult with your accountant or insolvency specialist before making significant financial decisions. They can help you navigate the complexities of the Corporations Act and avoid potential pitfalls.
Every business is unique and may require tailored advice based on its specific circumstances. If your company is experiencing financial challenges or you suspect a potential issue with creditor-defeating dispositions, we encourage you to reach out to your local William Buck Restructuring and Insolvency (R&I) advisor to explore your options and receive expert guidance.
