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Report on Voidable Corporate Transaction

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An overview on voidable transactions in Australian Law

442 Downloads I Published: 13 Feb ,2019

Introduction

Laws and legislation introduced by Australian government is high significant that provides guidance to the individuals in which they need to take action. Section 588 FA and FB of Corporation Act 2001 clearly presents that liquidator can recover certain transactions which are made by the firm within specified time frame. Hence, voidable transactions are those that made within the period of liquidation commencement. This report is based on the case situation which will develop understanding about the sections related to voidable transaction and voluntary administration.

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Question 1

Identifying the date of commencement in relation to the winding up of Lounge Lizards

Given case situation entails that one of the creditors of Lounge Lizards Pty Ltd such as Small Guys Pty Ltd has applied for winding up the business operations on 12 December, 2016.  In accordance with the Companies Act (1965) date of winding up is the one which is ordered by the court. Hence, section 219 presents that date of compulsory winding up is highly influenced from the court’s order. The given case scenario clearly presents that on 14th February curt placed order for the liquidation of Lounge Lizard’s Pty Ltd. Hence, it can be concluded that data of commencing winding up business is 14th February 2017.

Assessing ‘relation back day’ and applies it to Lounge Lizards

Corporation Act 2001, section 513 defined relation back day as voidable transaction in which company enters during prescribed period prior to the commencement of liquidation. Hence, such period which is determined by the Act is called as ‘Relation back day (Insolvency under section 459a and the relation-back day, 2016).’ By considering the given case situation it can be said that application was filed by one of the creditors namely Small Guyz Pty Ltd on December 2017. In this, issue is that on 30th November 2016, furniture was sold by Lounge Lizards to Dodgy Brothers. On the other side, date on which order was placed by court is 14th February 2017. Hence, by considering all such aspects it can be presented that Relation Back Day not applies to Lounge Lizards. Moreover, such transaction was not made by Lounge Lizard within the prescribed time period.

Evaluating whether transaction is voidable or not

Case scenario entails that on 30th November 2016, furniture worth of Australian $100000 sold to Dodgy Brothers. Hence, by referring the section 292 of liquidation and 588 FB it can be presented that transaction is voidable when it was made within the two years prior to the liquidation. Further, if transaction made within the duration when application is for liquidation considered as voidable. In the current situation, transaction was made on 30th November, whereas application for the purpose of liquidation filed on December 2016. However, laws and legislation presents that unreasonable director related transaction are recognized as voidable transactions (Osborne, 2016). It is clearly mentioned in the case study that 60% shares held by Steve, director of Dodgy Brothers, is the husband of one of the directors of Lounge Lizard. Thus, by keeping such aspect in mind it can be articulated that transaction is voidable. Moreover, 5.7 (B) presents that payment which is related to director and the one who is near to the Director is recognized as voidable.

Question 2

Purpose of the report

Purpose of the report prepared by DSG (Dick Smith Group), an Australian public company, is to furnish details to the creditors regarding the financial and non-financial aspects of business. Further, report will also provide deeper insight to creditors about the opinions of administrator that they can present in the second meeting.

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Identifying the date of second Creditors meeting

Second creditors meeting were held by DSG on Monday, 25 July 2016 at 11 am. Resolving all the issues related to future of entities is one of the main objectives behind conducting meeting in accordance with voluntary administration. Section 439A entails that meeting must be held organized before or within 5 business days at the end of convening period.   Along with this, rules and regulations regarding this clearly present that information regarding the meeting must be published within 5 business days (Legg, Day and Emmerig, 2017). On the basis of 439 A notices regarding the meeting must be accompanied with administrator’s report. This section clearly exhibits that convening period is 20 days after the commencement of administration.

Concluding the selling aspect of Dick Smith Group as going concern

From assessment, it has been identified that DSG could not be sold as a going concern business. Hence, to offer satisfactorily solution to the stakeholders such as employees and secured creditors receivers of embark took decision in relation to winding up the business operations and functions.

Assessing whether administrator should consider DSG as insolvent or not

Through the means of investigation, it has been identified that on 23rd December 2015 DSG became insolvent. Administrator has identified that DSG became insolvent before the time of 23rd December; 2015.This aspect clearly shows that DSG was considered as insolvent during the period of 2015. On the basis of 588E (4) if business unit failed to maintain proper financial records in accordance with  286 (1) or (2) then it is considered as insolvent.

Defining any kind of transaction which is voidable

According to the Liquidation Act, voidable transaction is the one that occurred prior to the appointment of administrator. In this, according to 5.7B of the Act liquidator has right to recover the amount of related transaction. Hence, transactions which were made by DSG before the appointment of administrator includes unfair preference payment and loan, uncomnmercial transaction as well as unreasonable director related transaction (Leshinsky and Leshinsky, 2016).

Recommendations

There are several recommendations which are provided by administrator are enumerated below:

Deed of company arrangement (DOCA): It is binding arrangement that takes place between the company and its creditors. By undertaking DOCA creditors can assess the manner in which financial aspects will be dealt.
Administration to end: By ending the administrations and returning the control of DS Australia to the current directors business unit can wind up the business operations more effectually (Butler, Mason and Murray, 2016).
Company to be wound up: By resolving all the financial aspects DSG can wind up business activities.

Hence, by presenting all the alternative course of actions provided by administrator creditors of DSG can generate high return. Section 440 A (1) shows that business unit does not have right to wound up voluntarily if creditors want to resolve issues in second meeting. In addition to this, section 440 D (1) exhibits that unsecured creditors cannot take action in against to the company. Hence, legal administrator offers benefit to both organization and creditors to the significant level.

Evaluating the likely outcome for unsecured creditors on the basis of recommendations provided by administrator

By making in-depth evaluation of Administrators report to Creditors pursuant to s 439A it can be depicted that there will be no recoveries are available for unsecured creditors. Moreover, there is no material asset that is out of the bank security. In the case of liquidation net recoveries would exceed $26.7 million if any dividends are provided to unsecured creditors (Administrators Report to Creditors pursuant to s 439A, 2017). This aspect shows that administrators recommendation has significant impact on the decision making aspect.

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Conclusion

From the above report, it has been articulated that transaction made by Lounge Lizard with Dodgy Brothers is voidable. Besides this, it can be inferred that liquidation Act clearly and related sections help in identifying the period within which meeting to be held. Hence, by complying with the all the legislation meeting has been organized by DSG.

References

Butler, S., Mason, R. F. and Murray, M., 2016. Recent developments: Maritime law and insolvency law: Averting collisions?. Insolvency Law Journal. 24(1). pp.70-75.
Legg, M., Day, J. and Emmerig, J., 2017. Corporate law: High court of Australia determines extent to which class members are bound by class action judgment. Governance Directions. 69(2). p.114.
Leshinsky, R. and Leshinsky, R., 2016. Touching on transparency in city local law making: Experiences from waking up each day in City of Melbourne, Australia. International Journal of Law in the Built Environment. 8(3). pp.194-209.
Osborne, M., 2016. Bankruptcy administration in Australia. Australian Restructuring Insolvency & Turnaround Association Journal. 28(2). p.22.

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