It is not uncommon for businesses to receive a demand from a liquidator claiming they have benefited from an uncommercial transaction however they should not be taken lightly. Recipients should immediately seek specialist legal advice as there can be serious, detrimental effects for failure to act.
I have outlined below some of the factors that you and your lawyer will need to consider when dealing with the liquidator and defending an uncommercial transaction.
What is an uncommercial transaction?
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.
If you are found to have entered into an uncommercial transaction with the company (now in liquidation), then you may be required to pay back to the liquidator the amount of the benefit you received plus the liquidator’s costs of Court proceedings.
What is the relevant timeframe?
A liquidator can bring a claim for any uncommercial transactions two years prior to an external administrator being appointed, or a winding up application being made with a Court. This is known as the ‘relation back period’.
The date on which the relation back period begins (on the relation back day) depends on how the liquidator was appointed and you should seek advice in this regard.
If the uncommercial transaction was with a related company or for the purpose of defeating creditors, then the time period is longer, depending on the circumstances.
Are there any defences?
Some of the common defences are as follows:
- A reasonable person in the company’s (now in liquidation) position, taking into account all of the circumstances, would have entered into the transaction.
- You received no benefit from the transaction.
- You entered into the transaction in good faith.
- You provided valuable consideration for the transaction or changed your position in reliance on the transaction.
- At the time of the transaction:
- You ‘had no reasonable grounds for suspecting that the company was insolvent’; and
- A reasonable person in the circumstances would have no reason for suspecting the company’s insolvency.
It is important to set the right strategy and know your rights when you respond to a demand letter and / or Court proceedings from a liquidator. It is important to engage a lawyer who has extensive experience in this area to ensure that you have the right strategy from the start.