What to consider before selling and transferring assets prior to a liquidation

How directors benefit by dealing directly with a liquidator.

When a liquidator investigates an insolvent company, it’s not uncommon to discover that some or all the company's assets were sold or transferred to a related party before the liquidator's appointment. Assets often include company motor vehicles being used by a director or tools of trade, intended for future ventures. 

Engaging in pre-appointment transfers can expose both the director who initiated the transfer and the purchaser to potential liquidator claims, including: 

1. Uncommercial transactions: where the transactions are deemed to have provided inadequate benefit or result in a detriment to the company.

2. Unreasonable director-related transactions: where the asset dispositions from a company to a director or close associate do not provide a benefit or result in a detriment to the company.

3. Creditor-defeating dispositions: where transfers of property or assets were made for less than its current market value.

4. Preferential payments: where payments (or asset transfers) made to a creditor (such as a related party) exceed the dividend amount they would have received in the liquidation.

5. Offences under the Corporations Act 2001: various offences related to a director duties breaches from improper transactions.

Considering the potential risks and consequences associated with pre-appointment transfers, why would a director engage in such actions instead of approaching the liquidator to buy back the assets after the liquidation process?

One reason often cited is the concern that a liquidator may be unwilling to engage with the director (or a related party) when it comes to the sale of company assets. However, this concern is unfounded, and in practice, a liquidator would generally be open to a sale of company assets with a related party, provided that: 

• The sale price is fair market value.

• It does not go against the interests of creditors.

Buying assets from a liquidator provides directors with peace of mind, as the transaction would not be vulnerable to potential liquidator claims and eliminates the possibility of committing any potential offences under the Corporations Act related to the sale of assets. 

Directors should carefully consider the potential risks and consequences before engaging in pre-appointment transfers of assets. It is often in their best interest to simply approach the liquidator and explore the possibility of buying back the asset/s after the liquidation commences. This approach ensures transparency, fairness, and protection against potential claims and legal offences.