Unreasonable Director-related Transactions Provisions
The unreasonable director related transactions provisions under the Corporations Act 2001 enables a liquidator to attack unreasonable transactions entered into by a company where there has been a payment, disposition, transfer or right granted to:
- A director of the company or their close associate; or
- A third party on behalf of, or for the benefit of a director or close associate.
Furthermore, such a transaction will only fall within the provisions if a reasonable person would not have entered into the transaction having regard to:
- The benefits and detriment the transaction may have on the company;
- The benefits to other parties to the transactions; and
- Any other relevant matters.
A recent example is seen in the case of Smith v Starke, in the matter of Action Paintball Games Pty Ltd (“APG”) (In Liquidation) (No 2) (2015) FCA 1119. The liquidators in this case made a claim that the payments of approximately $500,000 by the directors of the company were unreasonably made to a financier from whom they previously borrowed money to purchase land.
The liquidator argued that:
- The company was not legally obliged to make the repayments; and
- The continuation of the company making the repayments deprived the company of the resources to fund a more appropriate purpose, such as paying creditors.
During the period between 2008 and 2010, the business suffered a major downturn, with superannuation guarantee charges over $110,000 becoming payable.
The Federal Court believed the directors of the APG should have considered whether the loan repayments should have continued to be given priority over the superannuation payments. Further, they should have determined whether it was possible to maintain both payments at the same time.
The Court decided that APG should have taken steps to sell the property and that a reasonable person in their position would have ceased making payments by 31 December because of the decline in business performance. It was ordered that all payments made between 1 January 2011 and 25 May 2012 were recoverable as unreasonable transactions.
If you require any further information in relation to the above, please contact our team of lawyers at The Quinn Group on (02) 9223 9166 or submit and online enquiry form today.