Unreasonable Director Related Transactions in Liquidations

When a company goes into liquidation, a party to a transaction with the company may be required to repay the assets or payments to the liquidator. When might this occur?

One of the situations is where there has been an unreasonable director related transaction prior to the appointment of a liquidator.

 

What is an unreasonable director related transaction?

This type of transaction occurs if it involves a director or “close associate” of the company and the transaction had no or little benefit to the company, or caused detriment to the company.

A “director” includes a person who is acting in the position of director, even if that person is not validly appointed as a director. A “close associate” includes a relative or de facto spouse of a director, or a relative of a spouse or de factor spouse of a director.

A transaction can involve a payment, a transfer or disposition of property, issue of securities or entering into an obligation or commitment to make a payment, disposition or issue.

 

Who recovers these transactions and why?

Liquidators may recover relevant assets or payments under these transactions. This mechanism is not available to voluntary administrators, deed administrators, controllers, provisional liquidators or trustees in bankruptcy.

One of the functions of a liquidator is to examine whether there were any unreasonable transactions that decreased the assets available for distribution to creditors in the process of winding up the company. If these transactions occurred, the liquidator will seek to recover those assets or payments so that there is a fairer distribution to creditors.

 

How much and what kind of relief can the liquidator seek?

The liquidator can only recover the difference between the value of the assets/payment that was provided by the company and the value provided to the company in the transaction, that is, the unreasonable benefit of the transaction to the other party.

The legislation allows the liquidator to seek various remedies, but usually, the liquidator seeks the payment of money, that is, the return of that part of the transaction that was “unreasonable”. The entire transaction is not void unless no part of the transaction was reasonable.

 

When would a transaction be considered “unreasonable”?

Where the detriment to the company caused by the transaction is greater than the benefit, it may be deemed an unreasonable transaction. The liquidator will consider whether there has been a reduction in the net position of assets of the company. A court assumes that a reasonable person in the position of the company, with knowledge of its financial position, would not enter into a transaction that would cause a detriment to the company or reduce its assets.

 

What if the transaction occurred a long time before the liquidation?

An unreasonable director related transaction may only be recovered if it was entered into within 4 years before the legal commencement of the liquidation, or between the legal commencement of the liquidation and the appointment of the liquidator.

The company does not need to be insolvent at the date of the relevant transaction, or to have become insolvent as a result of that transaction.

 

How long after the liquidation can a claim be made?

The liquidator has 3 years from the date of the legal commencement of the liquidation to make a claim in relation to an unreasonable director related transaction. An application for recovery must be made within that time period. It is not sufficient for the liquidator to simply issue a demand for repayment.

 

If you require advice or assistance concerning a liquidation or recovery of unreasonable director related transactions, please contact Sam Pandya on 1300 676 787 for a no obligation, fee free discussion.