Unreasonable director related transactions
While the corporate veil usually separates a director from the separate legal entity that is their company (Salomon v Salomon), directors may be liable to claims for recovery of property or assets where financial transactions have occurred between a director’s personal assets and company assets in a four year period prior to a company’s winding up which was to the detriment of the company and creditors.
Unreasonable director related transactions are voidable, and may be clawed back in order to properly and fairly satisfy the debts of an insolvent company, ensuring creditors are paid back in the correct order of priority at law.
The provision against unreasonable director related transactions was introduced to the Corporations Act in 2003, in the wake of public outrage at the bonuses which directors of One Tel paid themselves before the company’s collapse.
Section 588FDA of the Corporations Act 2001 (Cth) determines unreasonable director-related transactions to be:
“(1) A transaction of a company is an unreasonable director-related transaction of the company if, and only if:
- (a) the transaction is:
(i) a payment made by the company; or
(ii) a conveyance, transfer or other disposition by the company of property of the company; or
(iii) the issue of securities by the company; or
(iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and
- (b) the payment, disposition or issue is, or is to be, made to: (i) a director of the company; or
(ii) a close associate of a director of the company; or
(iii) a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and
- (c) it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
(i) the benefits (if any) to the company of entering into the transaction; and (ii) the detriment to the company of entering into the transaction; and
(iii) the respective benefits to other parties to the transaction of entering into it; and
(iv) any other relevant matter.”