Creditor-defeating dispositions

Requesting an order from ASIC

Before making a request, liquidators should carefully review Information Sheet 261 ASIC orders about creditor-defeating dispositions (INFO 261).

Information Sheet 261 ASIC orders about creditor-defeating dispositions (INFO 261).

Requests should be supported by sufficient information and evidence to enable ASIC to assess:

• whether the disposition is a creditor-defeating disposition
• whether it is a voidable transaction, and
• whether any factors that would limit or prevent ASIC from making an order.

The most credible and useful sources of evidence will generally be the books and records that a company is required to keep under the Corporations Act.

Request must include all relevant information and evidence

The information and evidence included in the request need to be sufficiently detailed to enable ASIC to assess the matter, including whether section 588FGAA applies to the disposition of property.

Before submitting a request, consider whether you have included:

• details of the property disposed of
• evidence that the property belonged to the company
• details of the recipient of the property
• information about whether the recipient still possesses or controls the property
• evidence of the property's value at the time of disposition
• evidence of any consideration paid
• an explanation of why you believe the disposition is a creditor-defeating disposition
• an analysis of why you believe the transaction is voidable
• details of any other matters you believe are relevant to ASIC's decision, and
• confirmation that you are not aware of any factors that would prevent ASIC from making the order(s) sought.

Important: ASIC assesses requests based on the information and evidence provided by the liquidator. ASIC will not use its information-gathering powers to supplement the evidence included in a request.

If further information and evidence is needed for the request

If the liquidator does not have sufficient information and evidence to support a request, they may wish to consider:

• requesting ASIC’s assistance to obtain company books and records
• applying for funding through the Assetless Administration Fund, to conduct investigations, such as public examinations, to obtain further information, and
• arranging a pre-submission meeting with ASIC to discuss the prospective request.

Pre-submission meeting with ASIC

Liquidators should consider whether they wish to meet with ASIC to discuss the prospective request before submitting a request for ASIC to make an order.

While we may be able to provide general guidance on the proposed request, clarify questions about publicly available information issued by ASIC, and discuss the types of evidence that may be relevant to support the request, we will not:

• provide advice on how to complete the request or whether the evidence to be provided will satisfy the requirements for an order to be made, or
• provide any indication about the prospects of success of the request if submitted.

Liquidators who wish to arrange a pre-submission meeting with ASIC, can find more information at Registered liquidator inquiries and assistance.

Submitting a request

Completed request forms and supporting evidence should be submitted to ASIC.CDD.requests@asic.gov.au.

Important: This mailbox is used only for lodgement of creditor-defeating disposition requests and is not monitored for general enquiries or technical advice.

Example 1: Was the property transferred owned by the company?

Background

ABC Pty Ltd (“the company”) was ordered by a court to be wound up and a liquidator was appointed.

Only a small amount of funds remained in the company’s bank account. The liquidator reviewed the company’s records and found that the company had acted as trustee of the director’s family trust.

In the months before the liquidator’s appointment, several payments totalling $175,000 were made from the company’s bank account to individuals and entities associated with the director. The liquidator has found no evidence in the company’s books and records that the funds were paid in exchange for goods or services provided to the company.

The Report on company activities and property stated that the company had no assets and owed creditors about $650,000. It also noted that the company had acted as trustee of the director’s family trust.

What should the liquidator consider?

A creditor-defeating disposition must involve the disposition of property of the company.

Before making a request to ASIC, the liquidator should consider whether there is sufficient evidence to establish:

• the source of the funds and the basis on which they were held,
• whether the funds were beneficially owned by the company or held on trust, and
• the company was trading or otherwise dealing with the funds in its own right rather than as trustee.

Key point

Money in a company bank account, or other property held by the company, is not necessarily company property where the company acts as trustee. Where the company acts as trustee, the liquidator must establish ownership of the funds (or other property held in the company’s name) before submitting a request to ASIC for orders undoing the effect of a creditor-defeating disposition.

Example 2: When is more than one request form required?

Background

Six weeks before the commencement of winding-up proceedings that resulted in the appointment of a liquidator to DEF Pty Ltd (“the company”), the director facilitated two transactions:

• the company sold its business, plant and equipment to another company controlled by the director, and
• under a separate agreement, the company transferred a vehicle to the director for $25,000.

A “sight unseen” valuation estimated the value of the vehicle at between $40,000 and $50,000.

The liquidator believes both transactions may be creditor-defeating dispositions and is considering submitting a request to ASIC for orders undoing the effect of the transactions. In considering how to proceed, the liquidator has identified the following issues:

• should the liquidator submit a separate request for each transaction?
• is the ‘sight unseen’ valuation sufficient evidence of the value of the motor vehicle?

A separate request is needed for each transaction

The business sale and the vehicle transfer were separate transactions. They involved different property, different recipients and different evidence is required to establish that each disposition is a creditor-defeating disposition.

The liquidator should submit a separate request form for each transaction. Each request should explain the circumstances of that transaction and include the evidence needed to demonstrate that it was a creditor-defeating disposition.

More evidence of the vehicle’s value is needed

The liquidator must provide evidence showing that the amount paid for the vehicle was less than both:

• its market value, and
• the best price reasonably obtainable in the circumstances.

The “sight unseen” estimate is unlikely to be enough on its own because it does not take account of important details such as the vehicle’s condition and odometer reading necessary to determine the actual value of the vehicle.

If available, the liquidator should provide evidence from a physical inspection, together with information about the vehicle’s condition and odometer reading.

Key points

It is important to submit separate request forms to allow ASIC to assess whether the statutory requirements are met for each disposition when the circumstances surrounding the disposition of separate company assets are different, or when assets are transferred to different parties.

Each request should include enough evidence to establish that the disposition of company property is a voidable creditor-defeating disposition, including whether the consideration payable for the disposition was less than both the market value and the best price reasonably obtainable in the circumstance.

Example 3: Agreed sale price or payment received

Background

DEF Pty Ltd (“the company”) operated a scenic-flight business in Cairns. Four months before a liquidator was appointed, its sole director transferred the company’s Cessna 150 aircraft to another company, of which he was also a director.

The director informed the liquidator that the agreed price for the aircraft was $52,000. An independent valuation assessed the aircraft’s market value at $50,000. The director’s statement is supported by a sale agreement found in the company’s records.

The liquidator's investigations have confirmed that the company owned and maintained the aircraft and has identified no record of the company receiving payment for its transfer.

What should the liquidator consider?

To be a creditor-defeating disposition, the consideration payable to the company for the disposition must be less than both the market value and the best price reasonably obtainable in the circumstances at the time the relevant agreement for the disposition was made or, if there was no agreement, at the time of the disposition.

A liquidator should consider whether there is sufficient evidence to establish:

• the terms of the disposition and the amount of the consideration payable (e.g. a sale agreement or other document setting out the arrangement entered into by the parties)
• the value of the property at the relevant time, supported by sufficient valuation evidence, and
• whether the transfer of the property occurred for consideration that was less than both its market value and the best price reasonably obtainable in the circumstances.

The agreed consideration payable for the transfer of the aircraft of $52,000, is higher than the independent valuation of $50,000. Therefore, the disposition of the aircraft does not meet the requirements to be a creditor-defeating disposition even though the consideration payable has not been received by the company.

However, the unpaid sale price remains a debt owing to the company. The liquidator should consider taking appropriate steps to recover that debt in the same way as any other amount owing to the company.

Key point

In deciding whether a disposition of company property is a creditor-defeating disposition, it is the consideration payable for the disposition, and not whether the agreed amount has been paid, that is relevant. The fact that the buyer has not paid the agreed sale price does not, by itself, make the transfer a creditor-defeating disposition.

Example 4: Is the transaction voidable on the grounds of insolvency?

Background

XYZ Pty Ltd (“the Company”) was placed into liquidation by resolution of its shareholders and a liquidator appointed.

The liquidator’s investigations have revealed that, three months prior to their appointment, the company’s sole director transferred a motor vehicle from the company into his personal name.

The company records identified that the vehicle was company property.

The transfer form lodged with the Transport Department disclosed the motor vehicle was transferred for $25,000.

The company books and records did not disclose that any consideration had been paid to the company for the transfer of the vehicle.

The liquidator arranged an inspection and obtained an independent valuation of the vehicle. The valuation put the auction value of the vehicle at $45,000 and a market value of $57,000.

The liquidator formed the view that the consideration payable for the disposition of the company’s motor vehicle was less than both the market value and the best price reasonably obtainable in the circumstances and that the transfer was a creditor-defeating disposition that occurred at the time the company was insolvent.

Is the transaction voidable and evidence required to establish insolvency?

A creditor-defeating disposition may be voidable if:

1. the transaction was entered into during the relevant period at a time when the company was insolvent
2. the company became insolvent as a result of a transaction that occurred during the relevant period, and/or
3. within 12 months of the transaction the start of an external administration of the company occurs as a direct or indirect result of the transaction.

The liquidator decided to submit a request for ASIC to make orders undoing the effect of the disposition and considered the evidence available to establish that the company was insolvent at the time of the transaction.

The liquidator reviewed the company records to obtain sufficient evidence to support a reasonable conclusion that the company was insolvent at the time the agreement to dispose the motor vehicle was entered into. The liquidator considered evidence relevant to the indicators of insolvency set out in ASIC v Plymin, Elliott & Harrison [2003] VSC 123, including:

• financial statements showing ongoing trading losses, a net asset deficiency and insufficient cash and other readily realisable assets that could be sold to meet current liabilities
• evidence that debtors dispute the amounts disclosed as owing in the company records, or evidence that related party loans are unrecoverable
• evidence of overdue tax and superannuation payments
• evidence of amounts owed to creditors outside agreed trading terms
• correspondence from creditors demanding payment of overdue amounts, and
• payment of round amounts to creditors or evidence of repayment agreements.

The liquidator also considered the circumstances surrounding the disposition and the relationship between the parties. The liquidator provided evidence with the request, that supported the reasonable conclusion that the recipient knew, or had reasonable grounds to suspect (or a reasonable person in the recipient’s circumstances would have grounds to suspect), that the company was insolvent at the time, or would become insolvent and that ASIC would not be prevented from making the order requested.