The unreasonable director-related transactions provisions are only a recent addition to the Corporations Act when compared to most of the other recovery provisions. Because of this, there is case law on what is or is not an unreasonable transaction.
This lack of authority is party due to transactions that are being examined under section 588FDA being found to be void under other recovery provisions, and not being fully explored under this section. The basis for an unreasonable director-related transaction is very similar to the basis of an uncommercial transaction – uncommercial v unreasonable.
To be an unreasonable director-related transaction there must be a transaction, to a relevant party, that is unreasonable as defined under the Act. So any examination of this section can be focused on:
1. the type of transaction;
2. who was involved; and
3. whether it was ‘unreasonable’.
The Act casts a wide net when looking at the types of transactions involved. It attempts to capture any transaction that reduces the net assets of the company, either by disposing or encumbering assets – or creating an obligation to do so at a later date.
(1) A transaction of a company is an unreasonable director-related transaction of the company if, and only if:
(a) the transaction is:
(i) a payment made by the company; or
(ii) a conveyance, transfer or other disposition by the company of property of the company; or
(iii) the issue of securities by the company; or
(iv) the incurring by the company of an obligation to make such a payment, disposition or issue [including contingent obligations];
Conversely, who is caught by the section is restricted to directors and close associates of directors – or their nominees. Close associates are relatives, spouses or de facto spouses of directors, or relatives of spouses or de facto spouses. Close associates are not the same as ‘related parties’, which is a far wider group of people and entities. Section 588FDA provisions will not be available if the other party to the transaction is not a director or does not fall into the close associate category (but the transaction may still be caught under the uncommercial transaction provisions).
(b) the payment, disposition or issue is, or is to be, made to:
(i) a director of the company; or
(ii) a close associate of a director of the company; or
(iii) a person on behalf of, or for the benefit of, a person mentioned in subparagraph(i) or (ii); and
Is it unreasonable?
The last part is determining whether, at the time the transaction was entered into, it was unreasonable. Unreasonable is decided on whether a reasonable person would have entered into the transaction. Unreasonable is very similar to uncommercial and, in its simplest form, can be narrowed to two issues.
1. The net effect of the transaction given the detriments and the benefits to the company – points (i) and (ii) below. If the result of the transaction is a reduction in the net asset position of the company, it may be fairly assumed that a reasonable person would not have entered into the transaction.
2. But the provisions also examine the benefits to the other parties involved – point (iii). Naturally if the other parties benefited and the company did not, the transaction would likely be unreasonable. But just because the company did also benefit from the transaction, it cannot automatically be assumed that it is reasonable. The benefits to the company should be comparable to the benefit to the other parties. That is, a nominal or minimal benefit to the company may not be sufficient to make the transaction reasonable.
The Act also has a catch-all ‘any other relevant matter’ provision that allows arguments on a whole range of issued. Case law will eventually determine whether is and is not a relevant matter and how that impacts on ‘unreasonable’.
(c) it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
(i) the benefits (if any) to the company of entering into the transaction; and
(ii) the detriment to the company of entering into the transaction; and
(iii) the respective benefits to other parties to the transaction of entering into it; and
(iv) any other relevant matter.
The major difference between Uncommercial Transactions and Unreasonable Director Related Transactions is that the company does not need to have been insolvent at the time of, or become insolvent because of, the transaction. This simplifies the proof that the liquidator has to provide in order to void these transactions.