What if you made a great deal with a company for a purchase of their asset, but then that company goes into liquidation, and the liquidator demands that you pay the difference between the market value of the asset and what you actually paid?
In some cases, the liquidator may claim that the company was insolvent at the time the transaction was made. Liquidators can scrutinise transactions made up to two years prior to the liquidation of the company.
There are defences that could be available, such as acting in good faith with no suspicion of the company’s insolvency. However, where possible, it is always better to ensure that your transactions are structured when you enter them rather than face unexpected liquidators’ claims in the future.
You negotiate a great deal, and then the vendor goes into liquidation.
Can the liquidator come back and say, “You paid $100,000, but the asset was worth $200,000. Pay the difference.”?
In some cases, yes, they can.
Now, if the company was insolvent at the time that you did the deal, and let’s be honest, if you got $100,000 undervalue it probably was struggling at the time, the liquidator can say that this was a transaction at undervalue and you need to reimburse the company for the fair market value.
Now, there are some defences to these undervalue transaction claims.
You might have a defence if:
But the liquidator can look back two years before the liquidation for these types of claims.
There are some other really concerning types of ways that this provision can be used. Let’s say, for example, you have a contract with entity one, and you get paid from entity two, and entity two goes into liquidation.
Now, the liquidator over here is going to say, “You provided no goods or service or value to this entity. Pay back the entire amount that you received”.
That’s going to be a really hard reality to deal with.
So, it’s really important that you look to protect yourself from undervalue transaction claims.
Make sure that you have contracts in place, you invoice the right entity, you get paid from the right entity. There are contractual terms that you can have in place, like personal guarantees. If this type of thing happens, you can look to company directors to reimburse you if a liquidator comes knocking on your door.
These are just some of the claims that liquidators can pursue, and these types of claims will become more common in the market that we’re in.
If you are facing legal challenges or need expert guidance regarding transaction undervalue, book a consultation with us today.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
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