01 Nov 2015

Section 588FDA—who can liquidators attack?


3 min

Case law widens the net.

Section 588FDA of the Corporations Act 2001 provides that a payment or disposition by a company is void as an unreasonable director-related transaction where it is made to—a company director, or—their close associate—or someone on behalf of the director/close associate.

A "close associate" is as a relative of the director or a relative of a spouse of the director for the purpose of section 588FDA.

Transactions that occur within four years of the winding-up can be attacked under this section, which might include payments, transfers of assets, or the granting of a security over the company.

An unreasonable director-related transaction is where a person would not enter into the transaction, when considering:

  • The benefits (if any) to the company of entering into the transaction.
  • The detriment to the company of entering into the transaction.
  • The respective benefits to other parties to the transaction of entering into it.
  • Any other relevant matter.

One of the key benefits of this section is that a liquidator does not have to prove that the company was insolvent at the relevant time—only that it was an unreasonable transaction. There are also limited defences available under this section.

Until quite recently, the courts formed the view that “only a direct benefit” to directors (or close associates) could be attacked under this section (Ziade Investments Pty Limited & Anor v Welcome Homes Real Estate Pty Ltd, and Ors [2006] NSWSC 457 & Great Wall Resources Pty Ltd (in liq) [2013] NSWSC 354).

That is, unless the transaction the liquidator was looking to set aside was made directly to the director or close associate, the section could not be utilised. As a result, liquidators would have to look to other Corporations Act antecedent provisions.

This interpretation left the section quite short on attacking transactions to say a related entity, where the director (or close associate) only had a financial interest in the transaction as a shareholder.

However, the Victorian Court of Appeal in Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14 may have solved this problem.

The Courts considered the phrase “for the benefit of” within section 588FDA. Unlike the Ziade and Great Wall cases, Vasudevan considers the section is not limited to direct benefits and covers indirect benefits received by a director (or a close associate).

In other words, a benefit to a company in which the director is a shareholder would be covered by section 588FDA.

With this extended interpretation, Vasudevan has significantly extended the operation of section 588FDA to include indirect benefits received by a director, or by a close associate of a director.

The section may now allow unreasonable payments, transfer of assets and securities granted direct to directors (or close associates) or their related entities within four years of the winding-up to be set aside.

Given a liquidator does not have to show insolvency under the section—it is likely this section will be used more extensively in the future.

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