Relevant legal principles
63 Section 588FB CA provides:
(1) 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.
(2) A transaction may be an uncommercial transaction of a company because of subsection (1):
(a) whether or not a creditor of the company is a party to the transaction; and
(b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
64 Section 588FC CA provides:
A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a) any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into; or
(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
(b) the company becomes insolvent because of, or because of matters including:
(i) entering into the transaction; or
(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.
65 The term "insolvent" in s 588FC CA picks up the definition in s 95A CA:
(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.
66 In Kazar (in his capacity as the Liquidator Frontier Architects Pty Ltd (in liq) v Kargarian & Anor (2010) 81 ACSR 158, Flick J observed at [21]:
… The statutory phrase "as and when they become due and payable" makes it clear that "although the issue of prima facie insolvency must be determined as at a particular time, the determination calls for a degree of 'forward looking'. The reference to 'prospective liability' in s 459D(1) is consistent with this": Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 17 ACSR 187 at 198 per Lindgren J. His Honour further observed that s 95A "states a 'cash flow test' rather than a 'balance sheet test' of insolvency". See also: Cooper v Commissioner of Taxation [2009] NSWSC 880 at [20] per Hammerschlag J. The ability to pay debts as and when they become due, it has been said, "is a question of fact, to be decided as a matter of commercial reality in the light of all the circumstances. It is necessary to consider the company's financial position in its entirety, including its activities, assets, liabilities, cash and money which it could procure by sale or on the security of its assets, and its ability to obtain financial assistance by way of loan or subscription for share capital": Trinick (as liquidator of Australian Foods Co Pty Ltd (in liq)) v EM & RM Williams & Sons (A Firm) [2009] WASC 297 at [95] per Murphy J. See also: Lewis v Doran at [93] and [107] to [112], per Giles JA (Hodgson and McColl JJA agreeing).
67 Section 588FE(2) CA sets out the circumstances under which an insolvent transaction is a voidable transaction:
(2) The transaction is voidable if:
(a) it is an insolvent transaction of the company; and
(b) it was entered into, or an act was done for the purpose of giving effect to it:
(i) during the 6 months ending on the relation-back day; or
(ii) after that day but on or before the day when the winding up began.
68 Section 588FE(3) CA sets out the circumstances under which an insolvent transaction, which is also an uncommercial transaction, is a voidable transaction.
(3) The transaction is voidable if:
(a) It is an insolvent transaction, and also an uncommercial transaction, of the company; and
(b) It was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day.
69 In Kazar, Flick J observed at [17]-[19]:
[17] … By way of example, in Parker v Tucker [2010] FCA 263 at [92], [2010] FCA 263; 77 ACSR 525 at 548, Gordon J concluded that a transaction was uncommercial in the circumstances, including the fact that the amount paid was "substantially less" than that originally paid and was paid by instalments with only a "limited amount ... paid up front". "While not dealing exclusively with undervalue", one commentator has said that "undervalue is at the heart of the section": Keay, A, "Liquidators' Avoidance of Uncommercial Transactions" (1996) 70 Australian Law Journal 390 at 397.
[18] When considering when it may be expected that a reasonable person would not have entered into the transaction, Gordon J in Capital Finance observed that:
[129] ... the principles to be applied may be summarised as follows:
(1) as the express words of s 588FB make clear, it is an objective standard to determine if a transaction is uncommercial: ...;
(2) four criteria are to be considered - the benefits enjoyed by the company (s 588FB(1)(a)), the detriment to the company (s 588FB(1)(b)), the respective benefits others received (s 588FB(1)(c)) and any other relevant matters (s 588FB(1)(d));
(3) the objective criteria are not considered in some vacuum but by reference to "the company's circumstances" which must include the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors: ...;
and
(4) for a transaction to be "uncommercial" it must result in "the recipient receiving a gift or obtaining a bargain of such magnitude that it [cannot] be explained by normal commercial practice" or where "the consideration ... lacks a 'commercial quality'": ... [citations omitted]
The objective standard was also referred to by Giles JA in Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243, 219 ALR 555 at 589 as follows:
Was the debt restructuring an uncommercial transaction?
[156] The definition of an uncommercial transaction in s 588FB(1) of the Law raises considerations similar to those material to breach of the directors' duties. The question is objective, whether a reasonable person in the company's circumstances would not have entered into the transaction, and free from the subjectivity involved in some of the directors' duties... The curious introductory words, "it may be expected that a reasonable person ...", were said in Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 not to qualify what a reasonable person would have done, but to emphasise the objective nature of the inquiry: at 366-7.
[157] It must positively appear that the reasonable person would not have entered into the transaction ...
Hodgson and McColl JJA agreed with Giles JA.
[19] Similarly, in Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535 ("Demondrille Nominees"), Foster, Lindgren and Madgwick JJ also referred to the necessity to prove the conferral of a benefit "of such magnitude that it could not be explained by normal commercial practice" as follows at 548:
Demondrille had, at Cornelis' expense, obtained "a bargain of such magnitude that it could not be explained by normal commercial practice". Using those words, the explanatory memorandum stated that it was transactions of such a kind at which s 588FB was aimed (explanatory memorandum, para 1044). On the facts found by the trial judge, the conclusion was inevitable that the transaction embodied in the agreement was an uncommercial transaction.
...
The purpose or object of the provisions with which we are concerned is to prevent a depletion of the assets of a company which is being wound up by, relevantly, "transactions at an under-value" entered into within a specified limited time prior to the commencement of the winding up: ...
See also: Strazdins v Tomazou [2010] SASC 262 at [65].
70 To a similar effect, Black J observed in the matter of Re Employ (No 96) Pty Ltd (in liq) (2013) 93 ACSR 48 at [59]-[63]:
[59] Section 588FB(1) of the Corporations Act provides that a transaction 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 benefit or detriment to the company in entering the transaction, the benefit to other parties to the transaction and any other relevant matter. The Explanatory Memorandum to the Corporate Law Reform Bill 1992 noted that:
The provision is specifically aimed at preventing companies disposing of their assets or other resources through transactions which resulted in the recipient receiving a gift or obtaining a bargain of such commercial magnitude that it could not be explained by normal commercial practice.
[60] Whether a reasonable person in the company's circumstances would not have entered into the transaction is determined by an objective inquiry, by reference to the factors specified in s 588FB(1). In Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535 at 548; [1997] FCA 1220; 15 ACLC 1716, Foster, Lindgren and Madgwick JJ observed that s 588FB of the then Corporations Law sought to balance the interests of the unsecured creditors of a company being wound up and those who would otherwise be the beneficiaries of pre-winding up transactions entered into by the company and its purpose was:
To prevent a depletion of the assets of a company which is being wound up by, relevantly, "transactions at an under-value" entered into within a specified limited time prior to the commencement of the winding up: see explanatory memorandum, para 1014.
Their Honours also observed (at ACSR 548), by reference to the Explanatory Memorandum, that a transaction is uncommercial for the purposes of this section where there is a bargain "of such magnitude that it could not be explained by normal commercial practice". That formulation was also adopted in Skouloudis Group Pty Ltd (in liq) v Planet Enterprizes Pty Ltd [2002] NSWSC 239; (2002) 41 ACSR 369 at [14]- [15] and in Capital Finance Australia Ltd v Tolcher above at [129], where Gordon J also noted that the categories of "uncommercial transaction" are not closed; that the standard to be applied is an objective one, to be assessed by reference to the company's circumstances, including the knowledge of those who were directing the company, such as its controlling director; and that a transaction will be "uncommercial" where the consideration lacks a commercial quality.
[61] In Cussen v Sultan [2009] NSWSC 1114; (2009) 74 ACSR 496, Nicholas J observed (at [22]-[23]) that, in determining whether a transaction of a company is an uncommercial transaction:
[22] Having identified the transaction, it becomes necessary to decide whether it is an uncommercial transaction of the company under s 588FB(1). The question to be asked is whether it was one which it may be expected that a reasonable person in the company's circumstances would not have entered into, having regard to the matters specified under this provision. The matter must be looked at from the point of view of the company (Tosich Construction Pty Ltd (in liq) v Tosich (1997) 23 ACSR 466 at 473). In Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd [2007] NSWCA 167 Hodgson JA (Spigelman CJ, Santow JA agreeing) held that the test was not so high as to require that the transaction be so unreasonable that no reasonable person would enter into it. He said:
The statutory language is that "it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction". The word "may" is weaker than "must" or even "would"; and in my opinion one reason why something "may be expected" is that it is what normally happens. That is, it is not essential that it would always or necessarily happen. For that reason, what is normal commercial practice, while not decisive, is relevant to the question.
[23] Accordingly, the court will look at the totality of the business relationship between the parties, and to what the parties under their relationship intended to effect, and how their intention was effected, in part or in whole, by the impugned transaction (VR Dye & Co para 40).
[62] I am conscious that, in Lewis (as liq of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 219 ALR 555; 54 ACSR 410 at [136], Giles JA (with whom Hodgson and McColl JJA agreed) observed that the description of an "uncommercial transaction" in s 588FB(1) directed primary attention to a balancing of benefit and detriment and only in the broadest sense involved undervalue and (at [154]) that a Court should be slow to pronounce upon the commercial justification of particular executive decisions. That observation appears to be directed particularly to the context where no straightforward comparison of the value of an asset and the consideration received can be undertaken. On the other hand, in Capital Finance v Tolcher above at [73], Lindgren J quoted Professor Andrew Keay's observations as to the importance of undervalue in determining whether a transaction is an uncommercial transaction for the purposes of s 588FB in his article "Liquidators' Avoidance of Uncommercial Transactions" (1996) 70 ALJ 390 at 397, as follows:
While not dealing exclusively with undervalue, undervalue is at the heart of the section [s 588FB], that is, if the company received less than what is reasonable from the transaction the liquidator may attack it. It is likely that in many cases Courts will be pre-occupied with comparing the value of what the company received in exchange for what it gave or vice a versa.
That passage was in turn cited by Nicholas J in Cussen v Sultan above at [19]. In Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 82 ACSR 703 at [82], Young JA also recognised the relevance of the consideration received by the company in a transaction, albeit also observing that an assessment of the adequacy of consideration for the purposes of this section does [sic] did not require "exact equivalence" but only a fair equivalence between what is given and what is received.
[63] The matters to which the Court is to have regard in determining whether a transaction is an uncommercial transaction, in the requisite sense that a reasonable person in the company's circumstances would not have entered into the transaction, are specified in sub-paragraphs 588FB(1)(a)-(d) as any 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. In the present case, Employ 96 received the benefit of obtaining professional services from DVT. On the other hand, it suffered the detriment of obtaining those services at double the usual rate that would be charged by DVT for the provision of those services. For the reasons set out below, in my view, the relevant circumstances were not of such a character that an agreement to pay double rates could be explained by normal commercial practice.