An unreasonable director related transaction is a transaction entered into by a company, which:-
- Is entered into between a company and a director or a close associate of a director; and
- Has little or no benefit to and/or is detrimental to the company.
A Liquidator can pursue a claim for an unreasonable director related transaction if the transaction occurred within 4 years prior to the relation back day.
If a Liquidator successfully pursues a claim for an unreasonable director related transaction they are entitled to various relief including recovering the property which was the subject of the transaction or monetary consideration, subject to the possible exception set out below.
Elements of an Unreasonable Director Related Transaction
In order to recover a transaction as an unreasonable director related transaction a Liquidator must establish that:-
- The transaction was entered into within 4 years prior to the relation back day;
- The transaction must be between the company and a director or a close associate of a director;
- It may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
- (a) The benefits (if any) to the company of entering into the transaction;
- (b) The detriment to the company of entering into the transaction;
- (c) The respective benefits to other parties to the transaction of entering into it; and
- (d) Any other relevant matter.
A close associate of a director is defined as:
- A relative or de facto spouse of a director, or
- A parent or remoter lineal ancestor, son, daughter or remoter issue, or brother or sister of the director.
The relation back day is commonly:
- For a creditors’ voluntary liquidation, the date of liquidation; or
- If the company was in administration prior to being placed in liquidation, the date of the Administrator’s appointment; or
- For a court appointed liquidation, the date of the filing of the winding up application.
No Requirement to Establish Insolvency
A Liquidator is not required to establish that the company was insolvent at the time of entering into a transaction in order to show that the transaction was an unreasonable director related transaction.
Limit on Amount Recoverable as a Result of an Unreasonable Director Related Transaction
A Liquidator will only be entitled to recover the difference between the value of the benefit provided by the company as a result of the unreasonable director related transaction and the value (if any) that a reasonable person in the company’s position would have provided.