Unreasonable director-related transaction provision to the rescue!
In a recent liquidation, the company’s properties had mortgages registered to the former director’s mother who, we later found out, died before our appointment.
The first point of contact is usually speaking with the company director; however, in our case the director’s lawyer advised us the director was newly immigrated to Australia, had no knowledge whatsoever of the company affairs and was essentially the “fall guy”. We then spoke with the former director (i.e. the director before the ‘fall guy’ agreed to be appointed), who confirmed he threw the documents in the rubbish and that he had no interest to fill out any questionnaires or to assist the liquidators. Shortly thereafter, we learned that he was imprisoned for fraud and was also an undischarged bankrupt. In contacting his bankruptcy trustee, we were told it was understood the mother was deceased; however, had no further details to help us in our investigations.
This is where our task as liquidators became quite…well, curious. Equally so, for the handful of solicitors we contacted to explore the issue.
To deal with the company’s properties, we had to deal with the mortgage by confirming that the mother was in fact deceased, and determine if there was a Will.
We tracked down the former director’s brother, who told us that he had effectively ‘cut ties’ with the family and therefore had no information to give us. He said he last saw his brother when his he arrived at his house, to tell him that their mother had died and that he could say goodbye as she was in the boot of his car—in an urn. Surprisingly, this information assisted our investigations because the mother’s passing could be narrowed down and therefore search the register of Deaths to ensure we had the correct person.
Numerous searches later, we obtained a death certificate from the Registry of Births, Deaths and Marriages. Armed with the death certificate the Public Trustee then confirmed they were administering the deceased estate, however they had no information regarding the mortgages and retired as administrators just days prior to us serving our court application on them. This was just another twist in the road as it forced us to serve the court application on the brother and the imprisoned director.
Eventually, the former director’s former solicitors gave us a copy of the loan documents that showed that the loan was granted to the former director and the company was merely guarantor to the loan. We did not find any evidence that the loan was ever advanced or repaid.
We then applied to court on the basis that the transaction was an unreasonable director-related transaction as the company received no benefit from granting the director’s mother the mortgages. Section 588FDA of the Corporations Act 2001 provides that a payment or disposition by a company is voidable as an unreasonable director-related transaction when made to a company director, their close associate, or someone on behalf of the director/close associate.
One key benefit of section 588FDA is that a liquidator must only prove that it was an unreasonable transaction—not that the company was insolvent at the relevant time. Also, quite helpfully for liquidators, this section also has limited defences available. In fact, even if the transaction is required to be made because of a court order or agency direction it can still be an unreasonable director-related transaction that can be voided.
We successfully obtained a court order that voided the mortgage from its inception and ordered the mortgages’ removal leaving us free to sell the real property. The moral of this story is that section 588FDA is a powerful tool for liquidators to void transactions that are not in a company’s best interests, which may include removal of mortgages.