Unreasonable director related transactions

Liquidators have a variety of voidable transaction provisions available under the Corporations Act 2001 (Cwlth), which allow them to recover certain transactions occurring prior to their appointment. These provisions include the ability to recover an ‘unreasonable director related transaction’.

Section 588FDA of the Act was implemented in response to public concern about unreasonable bonuses received by directors of failed companies. The provision allows a liquidator to recover transactions entered into by directors or their close associates, which were unreasonable and to the company’s detriment.

A ‘transaction’ in this instance is an unreasonable director related transaction if it has three elements.

Element 1

It must be a payment, transfer or conveyance or other disposition of the company’s property, or an issue of securities. Alternatively it may involve incurring the obligation to make such a payment, disposition or issue.

The transaction must be entered into by the company during the four years ending on the ‘relation back day’. For a voluntary liquidation this is the winding up date. Importantly, the liquidator is not required to prove that the company was insolvent at the date of the transaction.

Element 2

The payment or disposition must be made to a director of the company, a close associate of a director or a person on behalf of, or for the benefit of the director.

Element 3

It should be expected that a reasonable person in the company’s circumstances would not have entered the transaction when taking into account the benefits and detriments to the company and the respective benefits to other parties of entering into the transaction and any other relevant matter.

In 2013, the court held that a liquidator must prove a director received a direct benefit from the transaction and found the section did not apply where the person that received the benefit was a company of which the director benefited as a shareholder only. However, a decision delivered by the court earlier this year broadened the scope of the ‘unreasonable director related transactions’ by defining what is considered a benefit. The court noted that, “…According to ordinary acceptation, ‘benefit’ includes both direct and indirect benefits and prima facie, that accords with the apparent objective of the section. If so, why should the notion of benefit be confined to direct benefit for the purposes of the section?”

Consequently, it appears that any benefit could be considered an unreasonable director related transaction for the purpose of this section.

Cristy Houghton