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unreasonable director-related transactions

Similarly, to an uncommercial transaction claim, an unreasonable director-related transaction arises when a transaction is entered into by a director or close associate of the company, in circumstances where it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction. Again, the court has regard to the benefits and/or detriments to the company by entering into the transaction. Liquidators have the power under the Corporations Act 2001 (Cth) to avoid such transactions.

The main differences between an unreasonable director-related transaction and an uncommercial transaction claim is that:

  1. For an unreasonable director-related transaction to arise, a director or close associate must be involved;
  2. The transaction does not have to have been entered into when the company was insolvent – meaning the Liquidator does not need to go to the effort of proving insolvency; and
  3. The relation-back period is 4 years.

Elements of unreasonable director-related transactions

The transaction was entered into with a company during the relation-back period

Transaction

A transaction is defined to include payments of money, transfer of property (which can include personal property, equipment, boats, cars and real property) or the entering into agreements

Relation-back period

The relation-back period is the 4 year statutory time period during which a transaction must have occurred, in order for the liquidator to be able to recover the transaction as an unreasonable director-related transaction. The relation-back period is calculated as the period from the earliest of (known as the relation-back day):

  • The date that the company is deemed to have been wound-up (eg the date of the creditor’s voluntary winding-up or the date a winding-up order is filed in court); or
  • The date voluntary administrators are appointed.  
The transaction must have been entered into between the company, the director and/or a ‘close associate

Section 9 of the Corporations Act 2001 (Cth) says that a"director" of a company means a person who: 

  • Is appointed to the position of a director; or
  • Is appointed to the position of an alternate director and is acting in that capacity;

​Regardless of the name that is given to their position; and

Unless the contrary intention appears, a person who is not validly appointed as a director if: 

  • They act in the position of a director; or
  • The directors of the company or body are accustomed to act in accordance with the person's instructions 

"Close Associate" of a director means: 

  • A relative of the director; or
  • A relative of a spouse of the director.
A reasonable person would not have entered into the transaction

The Corporations Act 2001 (Cth) sets out the test required when assessing whether a reasonable person would have entered into the transaction, by having regard to: 

  • “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.”
 

Contact our Voidables team

If you have any questions relating to our Voidables services, please contact one of our expert advisors.

 

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