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 occurring.

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 transaction.

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 following:
    • The benefits to the company of entering into the transaction;
    • The detriment to the company of entering into the transaction;
    • Respective benefits to the other parties of entering into the transaction;
    • 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.