Does the transaction have to be at undervalue where a
related party controls a number of corporate entities?
This issue was recently considered in Old Kiama Wharf Company
Pty Limited (In Liquidation) v Betohuwisa Investments Pty Limited
& Anor (2011) NSWSC823.
The facts were as follows, the Old Kiama Wharf Company Pty
Limited's ("Old Kiama") sole director and shareholder
at all material times was Christina Jackman. Ms Jackman was also
secretary of the company and her de-facto partner, Warwick Colbron,
was alleged to be a shadow director of Old Kiama. Prior to Old
Kiama entering into administration, it transferred its main assets
being a restaurant and take away business, to Betohuwisa
Investments Pty Limited's ("Betohuwisa") sole
director, secretary and shareholder, who was Warwick Colbron's
daughter. It was also alleged Mr Colbron was a shadow director of
Betohuwisa. Ultimately Betohuwisa admitted at the trial that the
company was insolvent prior to the impugned transaction
His Honour Justice Pembroke found that the transaction was an
uncommercial transaction pursuant to section 588FB(1) of the
Corporations Act and held that a transaction does not need to be
one at undervalue in order to be characterised as an uncommercial
His Honour also found that the test of section 588FB of the Act
was whether a reasonable person in the company's circumstances
should not have entered into the transaction and this objective
test requires consideration of the following:
Would a reasonable person in the company's circumstances
have entered into the transaction having regard to the
The benefits to the company of entering into the
The detriment to the company of entering into the
Respective benefits to the other parties of entering into the
Any other relevant matter.
His Honour found that the benefit to Old Kiama who entered into
the transaction was negligible as the detriment was significant in
that it was deprived of its sole asset and leaving it without any
reasonable likelihood of payment from Betohuwisa. On the other hand
his Honour found that the benefit to the Colbron family and
Betohuwisa Family Trust were potentially substantial in that the
significant debts and liabilities owed by Old Kiama to its
creditors would have been avoided. His Honour found that the so
called investment by Betohuwisa was no more than a transparent
strategy and designed to avoid Old Kiama's creditors and
preserve its asset. Ultimately his Honour found that the
transaction was manipulated by Warwick Colbron who was found to be
a shadow director of both Old Kiama and Betohuwisa and at all times
exercised effective and practical control over both companies. His
Honour also found that Warwick Colbron was a shadow director within
the meaning of section 9 of the Corporations Act.
The case is important in that it confirms a liquidator may
pierce the corporate veil if he/she can prove that the relevant
individual was a shadow director of either one party or a number of
parties to a transaction. It also confirms a transfer of an asset
does not have to be at undervalue for it to be an uncommercial
transaction within the meaning of section 588FB of the Act.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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