In Rathner in his capacity as Official Liquidator of Kalimand Pty Ltd (in liq) v Hawthorn [2014] FCA 1067, the Federal Court considered the elements of voidable transactions under Pt 5.7B of the Corporations Act, and the meaning of becoming insolvent “because of” entering into a transaction. In doing so, the Court reaffirmed the importance of presenting “clear evidence” of each relevant transaction and the overall solvency of a company.

Facts

The Liquidator of Kalimand Pty Ltd (in liquidation) (Kalimand) sought to recover certain payments made by Kalimand to High Country Meats (Vic) Pty Ltd (HCMV) on the basis that the transactions were voidable transactions pursuant to section 588FE of the Corporations Act. The relevant transactions were:

  1. a transfer of $60,000 in cash (Transfer); and
  2. a transfer of assets including stock in the sum of $1,090,400 and trade debtors in the sum of $959,079 for nil consideration (Assets).

The evidence presented by the Liquidator was comprised of the Liquidator’s Report, business activity statements, tax returns, bank statements and other records obtained pursuant to a subpoena to Kalimand’s accountants.

Principles for proof

A transaction will be voidable if it is an uncommercial transaction which is also an insolvent transaction.  This may be established where:

  1. there is a “transaction”, or conduct or dealing engaged in by a company that effects a change in that company’s rights, liabilities or property;
  2. that transaction is “uncommercial” insofar that it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction; and
  3. the transaction is entered into when (i) the company is insolvent; or (ii) the company becomes insolvent because of entering into the transaction or the giving effect to the transaction (section 588FC(b) of the Corporations Act).

The Liquidator was expected to present “clear evidence as to how a transaction affects a company’s solvency” and identify “with some precision” the transactions in issue.

The outcome

The Liquidator successfully met this standard with respect to the Transfer, but not the Assets. 

With respect to the Transfer, the Liquidator unsuccessfully attempted to demonstrate that Kalimand was insolvent at the time the Transfer occurred by reference to the Liquidators Report.  The Court rejected this evidence on the basis that the Report in itself is not evidence of the truth of its contents (sections 48(1)(b) and 59 of the Evidence Act 1995 (Cth)). 

Furthermore, the balance of the evidence was considered insufficient as it failed to disclose the debtors and the assets of Kalimand at the time of the transaction.

However, the Liquidator was able to demonstrate by reference to bank statements dated before and after the transaction occurred that the Transfer caused Kalimand to become insolvent.

The evidence presented in relation to the Asset transactions was less convincing.  The Liquidator failed at the first hurdle by insufficiently indentifying with precision the content of the Assets alleged to have been transferred to HCMV. 

In the Court’s view, the most the Liquidator could show was highly suspicious activity that resulted in a significant reduction in the payments received and stock held by Kalimand, in circumstances where HCMV received considerable payments into its accounts.  Crucially, the Court concluded that “without the source documents and, for example, a matching of the invoices issued by Kalimand and evidence of payment by the payees of that invoice into HCMV’s account, it is not possible to conclude that the payments into HCMV’s account in fact belonged to Kalimand.

Comment

This decision confirms the importance of adducing specific evidence of a company’s insolvency and identifying with precision the material circumstances of each voidable transaction.  The insolvency should be closely related to the transaction, and clear evidence establishing a nexus between the detriment alleged to have been suffered and the corresponding benefit received is essential to any action under Pt 5.7B of the Corporations Act.