Campbell Street Theatre (in liq) v Commercial Mortgage Trade [2012] NSWSC 669

The liquidators of the borrower sought a declaration that a loan and charge was an uncommercial transaction and insolvent transaction and therefore liable to be set aside under the Corporations Act.

Was it uncommercial?

The judge noted a transaction is uncommercial under s 588FB:

A transaction is an uncommercial transaction if it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to the benefit or detriment to the company in entering the transaction.

Typically it must be a is a bargain of such magnitude that it could not be explained by normal commercial practice.

In finding the agreement was uncommercial the judge commented:

The effect of this clause was an unconditional obligation to pay CMT no less than $400,000 arose on execution of the agreement, irrespective of whether funds were advanced. The loan agreement did not impose any obligation on CMT to advance any funds. In the event, no funds were advanced.

The agreement did not identify the consultancy or other services to be provided alongside the loan with any specificity, and imposed no obligations on CMT as to the quality, quantity or outcome to be secured by those services. It has also not been established that, the sole director and principal of CMT, was qualified to provide the relevant services.

Was the transaction insolvent?

A transaction is an insolvent transaction of a company, as defined in s 588FC of the Corporations Act, if, it is an uncommercial transaction (which this one was) and the transaction is entered into at a time the company is insolvent or the transaction made it insolvent.

In determining solvency the test is, a company is solvent if it was able to pay all its debts, as and when they became due and payable. This is cashflow test which is directed to income sources available to the company and expenditure obligations it has to meet, rather than a balance sheet test which focuses on the value of the company’s assets and liabilities.

The liquidators relied, and succeeded on, a presumption of insolvency said to arise as a result of Campbell Street’s failure to maintain proper books and records in accordance with s 588E(4) Corporations Act and additionally the argument that entering into the transaction made the company insolvent as it had no money to pay the $400,000 that was payable upon executing the loan agreement.

Whether the loan was a voidable transaction

A transaction which is an uncommercial transaction (which this one was) is voidable if it was an insolvent transaction (which this one was) and, it took place during the two years relation-back period under s 588FE(3) of the Corporations Act (which this one was).

Section 588FF of the Corporations Act allows the Court to set aside or discharge the Loan Agreement the Charge and the judge was satisfied that this is the appropriate relief.

It is important to note that no money was advanced under the loan.

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