Unreasonable director related transactions

02/03/2015

Under the Corporations Act 2001 (Cwlth), liquidators have access to a number of voidable transaction provisions, allowing them to recover some transactions that had transpired prior to their appointment. One of these provisions is the ability to recuperate an ‘unreasonable director related transaction’.

As a result of public concern over unreasonable bonuses received by directors of failed companies, Section 588FDA of the Act was implemented to allow liquidators to claim back any transactions instructed by directors or their close associates, which are considered unreasonable and does not contribute towards the company’s advantage.

Here are three elements that can help identify if a ‘transaction’ is recoverable:

Element 1

The transaction would have to be in the form of payment, or transfer of the company’s property, or an issuance of securities. It could also be in the form of an obligation made to perform the above-mentioned transactions.

As for the date regarding these transactions, it should be within four years ending on the ‘relation back day’. In the case of a voluntary liquidation, the ending date refers to the winding up date. It is good to note that the liquidator is not required to prove the insolvency of the company during the date of the transaction.

Element 2

The transaction in question would have benefited either a director of the company, a close associate of the director, or a person on behalf of the director.

Element 3

What can be considered as a reasonable person would be someone who would not have entered into a transaction after considering the benefits and detriments that it would cost the company, as well as the respective benefits to other parties of entering into the transaction.

Earlier this year, the court delivered a decision to broaden the scope of definition for ‘unreasonable director related transactions’ by providing more clarification on what can be deemed as ‘benefits’. This is after the court had found in 2013 that, Section 588FDA cannot be applied when a person receiving the benefit was in fact a company of which the director benefited as a shareholder. It was noted by the court 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?

As a result, an unreasonable director related transaction can now apply to any benefit for the purpose of this section.

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