A number of creditors have recently contacted our office to ask what forms part of our investigation process within a liquidation. The Corporations Act requires liquidators to investigate and report on the following areas:
This is where a creditor receives an unfair preference over other creditors during the six months prior to liquidation (the Relation Back Period). The creditor suspects or knows that the company is insolvent and receives payments ahead of other creditors. For this situation to be proven, the payments must place the receiving creditor in a more favourable position than other unsecured creditors. Should a creditor refuse to repay any amounts deemed to be preferential, the Liquidator has the ability to obtain a court order to recover the funds.
A transaction of a company is an uncommercial transaction if it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to the following:
- the benefits to the company of entering into the transaction;
- the detriment to the company of entering into the transaction;
- the respective benefits to other parties to the transaction of entering into it; and
- any other relevant matter.
Examples of an uncommercial transaction could include items given for no value, undertaking engagements for no value or selling property at an amount below market value.
Related Party Transactions
A related party transaction is a business deal or arrangement between two parties who are joined by a special relationship prior to the deal. For example, a business transaction between a major shareholder and the business, such as a contract for the shareholder’s company to perform renovations to the corporation’s offices, would be deemed a related-party transaction.
Just because a related party transaction has occurred does not mean that any illegal activity has occurred, the transaction maybe at an “arm’s length” value and therefore acceptable. However, if other creditors have been disadvantaged in the process, and the company is insolvent then these transactions may be deemed to be illegal.
A review is undertaken to assess if insolvent trading has occurred, this review assesses the financial activities of the business and will examine the following factors:
- Continuing losses;
- Liquidity ratio below 1/Negative working capital ratio;
- Inability to produce timely and accurate financial information;
- Ongoing negative net assets;
- Unrecoverable loans to related parties;
- Creditors unpaid outside trading terms;
- Demands, judgements or warrants against the company;
- Dishonoured and post-dated cheques;
- Payments to creditors of rounded sums not reconcilable to specific invoices; and
- Overdue tax balances
The process of conducting investigations is not a quick exercise, creditors must understand that in order for investigations to be completed it may take many, many months for all information to be gathered in order to draw a final conclusion. As the results of investigations may form part of litigation action, it is vital that all activities are reviewed thoroughly in order to draw a conclusion that is acceptable to a court.