By Andrew Hack, Solicitor, and Stephen Mullette, Principal, of Matthews Folbigg Lawyers, in our Insolvency, Restructuring and Debt Recovery Group.
In our last two blogs we discussed the liability on directors and third party facilitators for failing to prevent creditor-defeating dispositions. We now discuss the defences that may be available to directors and third party facilitators who would otherwise be liable.
Extension of market value
As mentioned in our previous blogs, the definition of ‘market value’ is extended to include the concept of the ‘best price reasonably obtainable’. The objective is to take into account circumstances where a company has an urgent need of cash-flow and may not be in a position to sell its assets at the market price, such as that deemed by a qualified valuer. If a company considers it is forced to sell off an asset which may be at a price less than real market value, due to time constraints in needing to realise cash, companies and advisers should consider making careful records evidencing the steps taken to attempt to realise it for as much of its market value as possible. This should include the circumstances the company was in requiring it to sell the asset potentially at under value.
It must have been made either within 12 months of an insolvency event (the relation-back period) where the company was insolvent at the time or became insolvent because of the disposition. Alternatively, it is also satisfied if the company was placed in external administration within 12 months either as a direct or indirect result of the disposition. Thus transactions falling outside these periods would not be captured. However, care needs to be taken where only certain parts of the overall transaction have occurred within the relevant period, putting the transaction as a whole at risk.
Prevention of double recovery
There may be overlap between other forms of voidable transactions as well as the fact that claims can potentially be brought by liquidators, ASIC or even creditors. The amendments prevent double recovery from being possible in respect of compensation.
Deed of Company Arrangement
Transactions entered into by administrators, liquidators as well as deeds of company arrangement and schemes of arrangement are expressly excluded from being creditor-defeating dispositions. Thus the potential risk can be wholly avoided if the company appoints a voluntary administrator with the intent of proposing a DOCA to give effect to the intended transfer. However, that places the ultimate decision-making power into the hands of creditors.
The safe harbour provisions of the Corporations Act have also been amended to provide protection against claims for creditor-defeating dispositions under sections 588GAB and 588GAC, just as they apply in respect of a director’s liability for insolvent trading. It will be prudent for the external advisers of distressed companies to consider and make careful records of compliance with the safe harbour provisions, if it appears likely that they may need to rely on safe harbour in defence of any potential allegation that a transaction they advised on was a creditor-defeating disposition.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Andrew Hack at email@example.com or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or firstname.lastname@example.org
Stephen Mullette on (02) 9806 7459 or email@example.com.