Restructuring & Insolvency

Unreasonable Director related transactions

A liquidator has the powers to recover funds from certain voidable transactions, including unreasonable director related transactions.

What is an unreasonable director-related transaction?
On review by a liquidator, there may be transactions identified as having little or no benefit to the company which were made by a director or close associate (as defined by the Corporations Act 2001 (the Act)) of the company. In the event that the transaction was detrimental to the company, it may be categorised as a ‘unreasonable director related transaction’.

The Act provides the liquidator with the power to recover the asset or recover funds from the director or associate. In recovering such assets, it seeks to return the company to a position as if the transaction had not occurred. If it’s not practical to recover the asset, the liquidator may instead seek payment of the difference between the value given by the company and the consideration it received.

A critical distinction with this type of voidable transaction, compared with other types of voidable transactions, is that the liquidator does not need to prove the company was insolvent at the time the transaction occurred. 

Types of unreasonable director-related transactions
This type of transaction might include:

  • selling an asset of the company for less than market value;
  • forgiving a debt where it could reasonably be recovered; and
  • transferring an asset for no value.

What must the liquidator prove?
The liquidator must prove 3 elements:

  1. a transaction was entered into;
  2. a director or close associate of the director was involved in the transaction; and
  3. either there was no benefit to, or there was a detriment to the company.

Who is a close associate?
The Act provides that a close associate is:

  • a relative or de facto spouse of a director; or
  • a relative of a spouse or of a de facto spouse, of the director.

A relative is a: spouse; parent or remoter lineal ancestor; son, daughter or remoter issue; or brother or sister of the person.

Time limit to make a claim
The liquidator has four years from the relation-back date to make a claim against a director or associate. Issuing a demand letter within that period is not sufficient. Legal proceedings must be commenced.

There are three possible dates for the relation-back day:

  1. For a liquidation following a voluntary administration, the relation-back day is when the administrator was first appointed to the company.
  2. For a creditor’s voluntary winding up, the relation-back day is the date of the members’ meeting that resolved to wind up the company.
  3. For a Court appointment, the relation-back day is the day the winding up application was filed.

The company solvency at the time of the transaction
Importantly, the Act does not require the company to be insolvent at the time of an unreasonable director-related transaction for a liquidator to pursue its reversal.

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