Liquidator Alert: court narrows unreasonable director related transactions

Commercial Disputes eBulletin - 14 November 2013

Summary

In this eBulletin we discuss a recent Supreme Court of NSW decision: In the matter of Great Wall Resources Pty Limited (In Liq) [2013] NSWSC 354. This decision provides useful insight into the scope of unreasonable director-related transactions.

In particular, this decision is authority for the surprising proposition that payments made by a company prior to going into liquidation to another company where the director of the company making the payments was also a director and shareholder of the company receiving the payments, does not constitute an unreasonable director-related transaction.


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Background

  • Mr Capocchiano was the sole director of Great Wall Resources Pty Ltd (GWR) and the sole director and shareholder of Comserv (No 1074) Pty Ltd (Comserv). 
  • Prior to GWR going into liquidation, Comserv purchased properties using funds obtained from GWR (Payments). 
  • GWR's liquidator subsequently commenced proceedings against Comserv claiming, among other things, that the Payments made to Comserv were unreasonable director-related transactions.

What is an unreasonable director-related transaction?

Under the Corporations Act 2001 (Cth), an unreasonable director-related transaction is a transaction where:

  1. the company makes a payment or other disposition of company property; 
  2. the payment or disposition is made to: 
    (a) a director of the company; 
    (b) a close associate (i.e. a relative or spouse of the relevant director) of the director; or 
    (c) a person on behalf of or for the benefit of a director or close associate; and 
  3. it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction (having regard to the benefits and detriment to the company and respective benefits to the other parties to the transaction).

Were the Payments made for the director's benefit?

In determining whether the Payments were unreasonable director-related transactions, the central issue was whether the Payments made by GWR to Comserv were made to a person for the "benefit" of a director of GWR, namely Mr Capocchiano, in circumstances where Mr Capocchiano was the sole director and shareholder of Comserv.

His Honour Justice Brereton considered that "only a direct benefit will suffice, and that a benefit to a company of which the director is a shareholder, even the sole shareholder, will not" constitute a "benefit" for the purpose of constituting an unreasonable director-related transaction. Further, a payment to a company is one to the company as a separate legal entity.

In applying this narrow interpretation, Justice Brereton found that as the Payments were made to Comserv, they were not made for Mr Capocchiano's benefit, notwithstanding that Mr Capocchiano was the sole director and shareholder of Comserv. 
Accordingly, it was held that the Payments did not constitute unreasonable director-related transactions, although GWR's liquidator was ultimately successful in recovering the subject funds from Comserv on other grounds.

Implications for liquidators

This case provides useful insight for liquidators in relation to the scope of unreasonable director-related transactions.

It also provides guidance in the situation where a payment is made by a company prior to going into liquidatation, to another company where the director of the company making the payments is also a director and shareholder of the company receiving the payments. The finding that such payments do not constitute an unreasonable director-related transaction sets a new precedent going forward and it will be interesting to see how this case is applied in future decisions.

Authors
Nathan Day, Lawyer
Reiteke Grosser, Graduate

Further information

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