Australia: Uncommercial Transactions: Capital Finance Australia Limited - v - Tolcher [2007] FCAFC 185

The Full Federal Court has recently found that a complex arrangement involving the entry into a deed by an insolvent debtor, and payments to particular creditors under that deed, was an uncommercial transaction and voidable under section 588FB Corporations Act 2001.

Under section 588FB, a transaction is "uncommercial" if it may be expected a reasonable person in the company's circumstances would have not entered into the transaction having regard to various factors. The relevant factors include the benefits (if any) and detriment to the company of entering into arrangement. Section 588FB only applies to transactions of "insolvent companies" (that is, for which insolvency is proved under the Act), which can be voided on application of a liquidator.

In the above decision, the Full Federal Court found that a composite set of circumstances constituted an "uncommercial transaction" of the debtor company, "LSE", (now in liquidation). LSE acted as an agent for finance companies (the "Capital companies"). LSE leased photocopying equipment to end-users on behalf of the Capital companies (as undisclosed principals).

After discovering fraud by LSE's director, resulting in mareva (asset-preservation) orders against LSE on another financier's application, the Capital companies insisted that LSE execute a deed requiring the payment of large sums of money to them over several months, and the payout of all equipment rental agreements. Whilst payments of several million dollars were made, ultimately LSE went into liquidation some months later.

The Full Federal Court found that a series of inter-connected steps, including entry into the deed and payments under that deed, were "uncommercial" and voidable on the liquidator's application. The evidence was that LSE was placed under pressure to execute the deed, and the deed resulted in no real benefits (and significant detriment) to LSE, whilst substantially benefiting the Capital companies.

Accordingly, the Capital companies' appeal was dismissed.

Addisons acted for the applicant liquidator who is now to recover over $5million for distribution to creditors.

However, an application for special leave to appeal has been lodged with the High Court of Australia.

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