LAWS2203 Lecture Notes - Lecture 12: Reasonable Person, Trading While Insolvent, Debenture
Remedies
Section 588FF(1)1 allows a liquidator to apply to a court for the following orders
• Requiring a person to pay to the company an amount that fairly represents the
benefits the person received because of the transaction (s 588FA(1)(c));
• Declaring void or varying an agreement (s 588FA(1)(h));
• Releasing or discharging a debt or a security or guarantee given by the company
under or in connection with the transaction (s 588ff(1)(e));
• directing a person to pay to the company an amount equal to some or all of the
money that the company has paid under the transaction (s 588ff(1)(a)).
• Application for these orders must generally be made within 3 years of the relation
back day
• Note too s 588FI, which prevents the court making an order which prejudices the
right of a creditor to prove for an unfair preference once the money is paid into the
general pool for creditors
o So if a creditor has returned an unfair preference, or b/c of any order under
s 588FF or for any other reason the creditor has put the company into the
same position as if the transaction had not been entered into, the creditor
may prove its debt in the winding up
o The creditor's rights or interests cannot be prejudiced by any further order
of the court under s 588FF.
Defences- s 588FG
S 588FG(2) prevents the court making a s 588F order against a person who is party to a
voidable transaction (other than an unfair loan or unreasonable director related
transaction) provided:
o was involved in good faith, and
• had no reasonable grounds for suspecting the company was insolvent at that
time or would become insolvent; and
• a reasonable person in the person’s circumstances would have had no such
grounds for so suspecting and
o the person provided valuable consideration or relied on transaction
• In relation to s 588FG(1), court can’t make an order if it is proved that a person other
than a party to a transaction:[third parties]
o Received no benefit; or
o If one was received, it was in good faith and no reasonable grounds to suspect
insolvency and a reasonable person wouldn’t have so suspected.
1 http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s588ff.html
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• If an unfair loan or unreasonable director-related transaction is alleged, the person has
provided valuable consideration under the transaction, or has changed their position in
reliance on the transaction.
Good faith
• The other party believe the company wasn't insolvent.
• Test is subjective.
• Creditor did not believe that the company was insolvent by paying the creditor: Downey
v Aira Pty Ltd
Reasonable for suspecting insolvency
• Test is objective
• Reasonable person in the creditors position would suspect the debtor company was
insolvent: Downey v Aira Pty Ltd
Super Art v Foden
Facts
• Liquidators made an application under s 588FF against director Foden, who was a
former director, secretary and shareholder of SAA, and was also accountant of SAA
before order for winding up
• During the relation-back day period SAA made 3 payments, which were alleged to be
accountancy fees provided by Foden to SAA from mid-september 2007
• The liquidator alleged SAA the borrower, and Foden as the lender, executed a loan
agreement where F agreed to lend S a sum of $215,000.
• It was alleged that SAA executed a debenture agreement which charged all of the
company's undertaking and all of its assets in favour of F to secure the repayment of the
loan amount
• The liquidators argued
o Loan agreement, mortgage and 3 payments: uncommercial under s 588FB,
insolvent transactions under s 588FC, and/or unreasonable director-related
transaction under s 588FDA
o Loan agreement - unfair lona under s 588FD
o Mortgage is a circulating security interest in property of SAA under ss 588FJ,
266, 1504
• Davies J found
o Loan agreement and mortgage were uncommercial b/c no benefit obtained by the
company in re to the dealing with F as no loan funds were advanced pursuant to
the loan agreement
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o Converting liability from unsecured debt to secured debt meant benefit to F was
large and no commercial benefit for SAA, a reasonable person in the company's
circumstances would not have entered into those transactions
• So also unreasonable director-related transactions as Foden was a director at
the time of these transactions
o The company was also insolvent relying on a report provided by the liquidator b/
from Decem 2007 the company was unable to pay its debts as and when they fell
due applying S95a.
• Net cash deficiency from Dec 2007 to Dec 2008
• Inability to fulfil orders that were paid in advance by customers
• Loan, mortgage and payment 1 were insolvent transaction
• Pay 1 also unfair preference, considering no returns to the creditors of the
company was expected
o But unfair loan was not made out b/c there was no loan in fact by F to SAA b/c no
funds were advanced by Foden
• Failed on defence claim and it was found a reasonable person in his position would
have 'reason to suspect' insolvency at the relevant time b/c an inquiry was called for into
SAA's capacity to pay its liabilities due to an earlier default in repayment of monies
which necessitated further borrowings.
Dividends
Section 588G(1A): a debt is incurred when a dividend is paid or declared
• Most of the sections in the Corporations Act relating to dividends now take the form of
replaceable rules. These can be altered by the corporate constitution.
• For example s 254U (Replaceable Rule) provides that the directors may determine that
a dividend is payable as well as fixing the amount to be paid and the time and method
of payment.
Section 254U (replaceable rule -- see section 135)
(1) The directors may determine that a dividend is payable and fix
(a) the amount; and
(b) the time for payment; and
(c) the method of payment.
The methods of payment may include the payment of cash, the issue of shares, the grant
of options and the transfer of assets.
(2) Interest is not payable on a dividend.
Dividend
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