Will your transaction stand up?
Why is this an important discussion?
One of our duties as liquidators and trustees of bankrupt estates is to investigate and review past transactions.
The basis for these investigations centres on the way that the Corporations Act for companies, and Bankruptcy Act for individuals, operates to determine whether a sale transaction is appropriate.
The relevant sections are:
These sections predominantly dictate how transactions are viewed and incorporate terms such as “reasonable person”, “benefits”, “detriment”, and “consideration”.
So what are these pillars we speak of?
The key theme is the transaction should be for proper value, paid for by the purchaser and preferably the purchaser is a third party.
1. Market value
Effectively if an asset is sold from one entity to another it should be for market value. But what is the appropriate value?
A few key points can assist in determining value:
Obtain a valuation of assets.
If the transaction is to include contracts, then determine their value.
It is also very beneficial to document the decisions and rationale of the parties concerned. Whether in the form of minutes of a directors meeting, formal sale agreement or other means—it not only goes to show the mindset of the directors at that point of time but explains how they arrived at a sale value.
Cash is King! Care should be taken when a sale transaction is structured there is actual “consideration” paid for the business or assets.
Offsetting creditors, especially those of a non-secured nature, can be very problematic and result in the transaction being deemed uncommercial.
Consideration should be real and not in the form of fictitious “V Class Shares”.
3. Good faith
The third pillar is effectively that the transaction is to be an “arms length” transaction.
When the first two pillars are present and solid, it is less likely that significant consideration will be given to the third arm of the consideration. This pillar may be more important in circumstances where assets have a limited market and the sale value is for less than an ordinary person may expect.
The sale of a company’s assets prior to the appointment of a liquidator or trustee in bankruptcy is not inherently bad. It is the way that the sale is structured and conducted, and the actions that surround the transaction that cause problems, it may be illegal and be in contravention of the Bankruptcy or Corporation Acts.
In summary, a transaction will be reviewed and judged on the sum of its parts, especially those of value and consideration. Accordingly, care should be taken by directors and advisors where entering into transactions, not only to ensure that these issues are addressed but also that they are documented.