Uncommercial Transactions Under Section 588FB

The Section 588FB Test

Section 588FB of the Australian Corporations Act 2001 applies an objective reasonable person test to the company’s circumstances. The statutory test requires consideration of four matters:

• The benefits, if any, to the company from entering the transaction.
• The detriment to the company from entering it.
• The respective benefits to the other parties.
• Any other relevant matter.

A benefit can extend beyond the cash price. For example, a sale might release the company from expensive storage or bring in cash needed to keep trading. You must weigh that benefit against what the company loses. A director’s preference for helping a friend does not explain a benefit to the company.

What Lewis v Doran Shows

In Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243, the court examined an intra-group debt restructuring. A debt payable on demand was replaced with a debt owed by another group company, repayable six years later. The liquidator argued that the arrangement left the company dependent on voluntary financial support.

The Court of Appeal dismissed the appeal. At paragraphs 156 to 160, it applied the objective test to the commercial circumstances when the restructuring occurred. The court was not satisfied that the finding of no uncommercial transaction was wrong. Later non-payment did not establish that a reasonable person would have rejected the arrangement at the outset.

The judgment also explains, at paragraph 136, why undervalue alone does not decide the question. A forced sale to overcome temporary illiquidity can be reasonable despite a discounted price. Assess the expected consequences using the information available when the transaction was entered into, without hindsight.

When an Uncommercial Transaction Becomes Voidable

For the ordinary uncommercial-transaction recovery claim, section 588FC adds insolvency and section 588FE supplies the relevant look-back period. The company must be insolvent when it enters or gives effect to the transaction, or become insolvent because of those events.

The periods in section 588FE distinguish the following claims. Each period can capture entry into the transaction or an act giving effect to it.

Provision	Look-Back Period	Additional Conditions
Section 588FE(3)	Two years ending on the relation-back day	Both uncommercial and an insolvent transaction. This provision can apply to unrelated parties.
Section 588FE(4)	Four years ending on the relation-back day	An insolvent transaction with a related entity as a party.
Section 588FE(5)	Ten years ending on the relation-back day	An insolvent transaction entered for a purpose including defeating, delaying or interfering with creditors’ rights on winding up.

The relation-back day supplies the reference point for these periods. It is not always the day a liquidator is appointed. A director’s friend is not automatically a related entity. Apply the statutory relationship definition before relying on the four-year period.

Section 588FE also contains separate rules for dealings during administration, deeds of company arrangement and restructuring. Those rules have their own conditions. Identify the company’s appointment history before treating the ordinary two-year provision as the complete answer.

Voidability provides a basis for court relief under section 588FF, subject to relevant defences. It does not automatically reverse the payment or transfer ownership back. The voidable transactions guide compares the other claim categories. Where a payment benefits a director or a covered relative, consider unreasonable director-related transactions, which have a separate route without an insolvency requirement.

Common Examples

Asset sales, gifts, guarantees and debt forgiveness can be uncommercial when the company’s detriment outweighs the benefits in circumstances no reasonable person would accept. The following examples are fictional. All amounts are Australian dollars.

A Vehicle Sold Below Value

A company sells a vehicle worth $40,000 to the director’s friend for $5,000. The vehicle is unencumbered, ordinary buyers are available and the company has no urgent need for cash. It receives $5,000 but gives up an asset worth $40,000. The buyer receives the $35,000 difference, with no offsetting company benefit in this example. Those facts support an uncommercial-transaction claim.

Compare a commercially explained discount. A company sells idle equipment below an earlier valuation after an open sale process produces only lower offers. Ongoing storage costs and an urgent working-capital need make immediate sale reasonable. A disappointing price can still be a bargain a reasonable person would accept.

A Gift of Company Money

A company gives $20,000 to a director’s friend with no repayment obligation or business purpose. The company loses the money and the recipient receives it outright. On these facts, there is no company benefit to balance the detriment. The relationship and reason for the gift remain relevant to the objective assessment.

A Guarantee for a Related Company

A company guarantees a related company’s borrowing without a fee, security or a commercial benefit of its own. Assume it takes on a substantial repayment risk solely to help that company obtain credit. The risk is the guarantor’s detriment and the access to credit is the other company’s benefit. Assess any real benefit to the guarantor before drawing a conclusion about the guarantee.

Forgiveness of an Enforceable Debt

A company releases a collectable $60,000 debt for nothing. The company loses its enforceable claim and the debtor receives relief from payment. Assume there is no disputed liability or commercial settlement rationale. Those circumstances support the view that a reasonable person would have retained the claim.

A settlement of a genuinely disputed debt needs a different assessment. The chance of recovery and the cost of litigation can explain accepting less than the face amount.

Evidence That Proves Undervalue

Bank statements establish the money received and paid, while valuation and transaction documents explain what the company gave up. Compare the agreed price with the deposits that actually reached the company. Then match those deposits to any refunds or payments back to the buyer.

For the fictional vehicle sale, collect the sale agreement and evidence of the vehicle’s value when sold. The $5,000 deposit confirms payment, but it does not establish the $40,000 value. Retain the sale process records and the contemporaneous explanation for accepting that price. Assess the available company benefit against the loss using those records.

Finding a Round-Trip Payment

In a separate fictional sale, an agreement records a $40,000 price and the company receives a matching deposit. Two days later, the company transfers $35,000 back to the buyer. A transaction ledger places both movements together and shows the company retained $5,000 in cash from that sequence.

Investigate the reason for the outgoing payment. An invoice or documented separate obligation could explain it. Without that explanation, the return transfer calls into question whether the recorded price reflects the economic bargain. Follow any intermediate accounts using the supplied statements and preserve the source reference for each leg.

FinTrace saves liquidators and forensic accountants hours of statement review by consolidating supplied PDFs into a searchable ledger and a clear findings report. The analysis follows transfers across accounts and flags suspicious transactions. Each finding cites the source PDF filename and page, putting the payment evidence at hand alongside the transaction documents.

For an uncommercial-transaction assessment, assemble the payment trail with the evidence of value and the company’s circumstances when it entered the bargain. That combination lets you explain both the financial loss and why a reasonable person would have refused the transaction.