Most Read Contributor in Australia, September 2016
The unreasonable director related transaction provisions in
section 588FDA of the Corporations Act 2001
(Act) are among its most powerful, with long arms
that can reach back years. Transactions that were entered into up
to four years before the appointment of a liquidator can be set
In 2013, the NSW Supreme Court decision of Great
Wall1 seemingly significantly reduced the
usefulness of this section. In that case, Justice Brereton took the
view that payments to companies could not be unwound, even if the
miscreant director was the sole shareholder of the company which
wrongfully received funds.
However, the recent Victorian Court of Appeal decision in
Vasudevan2 has corrected this situation. A
court may take into account any benefit that a director receives,
including a benefit as a shareholder of a company, when deciding to
render void an unreasonable director related transaction.
Under section 588FDA of the Act, a transaction can be set aside
if it is unreasonable and made to any of the following:
a director of the company; or
a close associate of a director of the company; or
a person on behalf of, or for the benefit of, a person
mentioned in (i) and (ii) above.
In Vasudevan, the Court looked at the object of the
section, which was 'to assist in the recovery of funds, assets
and other property to companies in liquidation where the payments
or transfers of property to directors are unreasonable.'
The Court then interpreted the meaning of the phrase
'for the benefit of' more broadly than the
interpretation adopted in Great Wall, and, in a unanimous decision,
concluded that the provision is designed to catch a benefit which
legally or financially advantages the director in question
regardless of whether it is paid or directed to a close associate
of the director.
Accordingly, a benefit to a company in which the director is a
shareholder can now be considered a benefit for the purposes of the
The facts in Vasudevan provide a good example of the
breadth of the meaning of "benefit". The director in
question had entered into an arrangement with his personal creditor
whereby the director's debts were to be forgiven upon the
registration of a mortgage over land owned by one of his companies.
The forgiveness of a debt and promise not to sue was considered a
benefit within the meaning of the Act, and the transaction was set
It is important to note at this point that courts have extremely
broad powers to ensure that a company's assets are returned or
transactions set aside. In circumstances where a court finds that a
director related transaction was unreasonable, the court has the
power to declare an agreement void or unenforceable, or to make
orders against any person to do any of the following:
transfer property back to the company; or
discharge a debt.3
However, a defence of good faith is available to third
parties.4 If someone received a benefit in good faith
and had no grounds to suspect that the company was insolvent, then
the Court must not make an order against that person. Of course,
this will not protect the director, her husband or her family's
trust fund because it is unlikely that those parties will be acting
in good faith in circumstances where the court finds that the
transaction was unreasonable.
This decision has restored s588FDA as an effective weapon
against the misuse of corporate structures. Liquidators are now in
a better position to attack unreasonable-related transactions, and
directors should be aware of the risks they face when entering into
1In the matter of Great Wall Resources Pty
Limited (in liq)  NSWSC 354 2Vasudevan & Ors v Becon Const & Anor
 VSCA 3Section 588FF of the Act. 4Section 588FG of the Act.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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