Expanding the transactions that a liquidator can recover as an unreasonable director-related transaction.
Recently our firm has been instructed in a matter where the limits of a liquidator’s powers under the unreasonable director-related transaction provisions were put under the spotlight. One of the main roles of a liquidator is to investigate and seek to recover company property that has been transferred from the insolvent company prior to liquidation in order to secure a dividend for distribution to the company’s creditors.
Background to S 588FDA
One such recovery power is contained in s 588FDA of the Corporations Act 2001 (Act) and permits liquidators to recover unreasonable payments made to or for the benefit of directors or a close associate of a director at the expense of the company’s creditors. The key points of this section are:
- transactions made during the 4 years prior to the relation-back day (usually the date of liquidation) are liable to be challenged;
- insolvency at the time of the transaction is not a factor (i.e. does not have to be proven by the liquidator);
- the transaction must be unreasonable (e.g. a reasonable person would not have entered into the transaction); and
- the defences generally available under s 588FG of the Act are not available to defendants.
In our experience, the dispute or challenge to a liquidator’s claim under this section each usually relates to the interpretation of ‘transaction’ or ‘benefit’. Recently, the Courts have changed their approach to what constituted a benefit for the purposes of this section which has seen an increase in a liquidator’s reach to claw back certain transactions.
Application of S 588FDA – What has changed?
Prior to the recent change, the accepted position from relevant case law was that only direct benefits to a director or their close associates could be pursued by liquidators (see, for instance, Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd and Re Great Wall Resources Pty Ltd (in liq)). An example of this interpretation of a benefit was where a director using company funds to purchase property for another company of which that director was the sole director and shareholder was held to be too indirect to be caught under this section.
However, the 2014 Victorian Supreme Court of Appeal case of Vasudevan v Becon Constructions (Australia) Pty Ltd significantly widened the net that liquidators could cast to pursue unreasonable director-related transactions. In that case, the Court interpreted that the word “benefit” in the section as encapsulating both direct and indirect benefits. Vasudevan involved a debt that the director of the insolvent company was personally liable for but that he had secured against the insolvent company. The Court found that this transaction provided the director with an indirect benefit which fell within the scope of section 588FDA and thus was pursuable by the company’s liquidator.
Importantly, Appeal Justice Nettle in Vasudevan observed that “the very point of the section was and is to catch director-related transactions of kinds not otherwise liable to avoidance as unfair preferences, uncommercial transactions or unfair loans” which likely led the Court to expand its interpretation of ‘benefit’ to include indirect benefits.
The result of the change in judicial interpretation to the word ‘benefit’ in s 588FDA now means that a liquidator can seek to claw back as voidable under s 588FE a transaction which was made in the 4 years preceding the relation-back day and which:
- was unreasonable on an objective standard; and
- was made to a person on behalf of, or for the benefit (either direct or indirect) of, a director or close associate of the director of the insolvent company.
Should you have any queries or would like any further information on the sections of the Act set out in this article, or insolvency advice more generally, please contact Sophie Inwood or Thomas Sapountsis of our office on 03 8692 9000.
The information in this article is provided for informative purposes only – it does not constitute legal advice. If you have any further questions on this issue, please contact our office.
 Ibid at .
 Ibid at .
  NSWSC 457.
  NSWSC 354.
  VSCA 14.