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It might be fair to assume that a liquidator concerns themselves solely with transactions that occurred during the period of insolvency.
Not so.
One of the liquidator’s duties is to investigate whether the company has entered into any unreasonable director-related transactions in the four years preceding the liquidation. This has important implications in the use a director’s loan account, or when transferring assets between related entities.
But what is considered ‘unreasonable’?
An unreasonable director-related transaction of the company is a transaction made to a:
- company director (person appointed as a director or someone acting in the capacity of a director)
- close associate of a company director (a family member or de facto family member)
- person acting on behalf of (or for the benefit of) either (i) or (ii)
that a reasonable person with any regard to the benefit to the company would not be expected to enter into.
A liquidator will deem a transaction unreasonable if any benefit to the company is outweighed by the detriment to the company. One simple test is whether the net asset position of the company decreased as a result of it entering into the transaction.
The most common transactions liquidators seek to recover are:
- directors transferring cash and other assets to related entities
- transactions involving a director’s loan account, whether to repay a credit loan account or increase a debit loan account.
The most a liquidator can recover is the excess of the value provided by the company in the transaction over the consideration given to the company. And the full amount of the value provided can only be recovered if no consideration was paid.
For example, if a director paid $50,000 to the Company for assets valued at $150,000, then only $100,000 ($150,000 less $50,000) would be recoverable.
An important factor for liquidators is they don’t need to prove a company was insolvent when the alleged transaction was entered into. This differs from other recovery mechanisms available to liquidators, such as uncommercial transaction (e.g. unfair preferences) and insolvent transactions.
Implications for accountants and business advisors
When dealing with a director’s loan account, or transferring assets between related entities, it’s important to be aware of a liquidator’s recovery powers regarding unreasonable director-related transactions. A liquidator can seek to recover transactions up to four years before the liquidation, so even though your client may not be suffering financial stress now it’s important to plan such transactions so there aren’t any nasty surprises down the track.
If you’d like further clarification on how to deal with such scenarios, don’t hesitate to get in touch with us.