Australia: When the best interests of a marriage are not equal to the company's best interests: Court holds the purchase of a boat for a director's spouse to be an unreasonable director-related transaction
Harburn Investments Pty Ltd ("HIPL") was the
sole shareholder of Harburn Group Australia Pty Ltd (in
liquidation) ("the Company"), and was the trustee of the
Harburn Family Trust ("the Trust"). Mr Harburn was the
sole director of HIPL and the Company, as well as the only named
beneficiary of the Trust.
In June 2007, Mr Harburn decided to reduce his workload and in
doing so the Company sold its financial services business client
list. Approximately one month later, Mr Harburn decided to purchase
a boat for his wife and the purchase price of the boat was paid by
the Company in instalments ("the Payments").
Nearly 4 years later, in March 2011, liquidators were appointed
to the Company.
The liquidators claimed relief under section 588FF(4) of the
Corporations Act 2001 (Cth) ("the Act"),
submitting that the Payments constituted unreasonable
director-related transactions. The liquidators submitted in the
alternative that the Payments were a breach of Mr Harburn's
director's duties and sought compensation on behalf of the
Company under section 1317H of the Act. The liquidators were
unsuccessful at first instance and appealed to the Western
Australian Court of Appeal.
DECISION AT FIRST INSTANCE
At first instance it was found that the Payments satisfied three
elements of an unreasonable director-related transaction. However,
when considering 'any other relevant matter' under
section 588FDA(1)(c)(iv) of the Act, the Court found it highly
relevant that at the date of the transactions, the Company was
Further, the Court held that Mr Harburn did not breach his
director's duties because as at the time the Payments were
made, the Company was solvent and there was no reason to suspect it
would become insolvent.
COURT OF APPEAL
The Court of Appeal considered:
the relevance of the financial health of the Company at the
time of the transactions; and
whether the Payments were made in breach of Mr Harburn's
The Court of Appeal confirmed that consideration of the
'any other relevant matter' requirement under
section 588FDA(1)(c)(iv) of the Act will depend on the facts and
circumstances of the particular case. Insolvency is not a necessary
element for a finding of unreasonableness when considering
'any other relevant matter'.
As the director's wife had no connection with the Company,
the Court of Appeal held that prima facie a reasonable
person in the Company's circumstances would not have made the
Payments regardless of the financial health of the Company.
Mr Harburn and his wife submitted that because:
the Company was solvent; and
the Company was wholly owned and controlled by the
the best interests of the Company was on all fours with the
director's best interests.
The Court of Appeal rejected this argument on the basis that
consent of the sole shareholder, HIPL, could not be implied from Mr
Harburn's knowledge of and involvement in the transactions. If
HIPL had consented to the payments it would have been prima
facie in breach of its fiduciary duty as trustee. The Court of
Appeal held that the consent of a corporate trustee shareholder
cannot be implied from the director's knowledge of and
involvement in impugned transactions.
As noted by the Court of Appeal, the commercial and financial
advantages of conducting a business through companies and trusts
has the consequence that those responsible for the administration
of the company are prevented from using corporate and trust
property as if it were their own.
In relation to the financial health of the Company, the Court of
Appeal considered the one-off nature of most of the Company's
income in the 2007 financial year meant questions as to the
Company's continuing solvency could arise in the short to
medium term. This finding further fortified the Court of
Appeal's conclusion that the Payments constituted unreasonable
The Court also found that Mr Harburn did not act in good faith
or for the best interests of the Company as required by section
As a result the Court of Appeal allowed the appeal by the
liquidators and ordered that each of Mr Harburn and his wife pay to
the Company an amount equal to the purchase price of the boat.
This decision illustrates that:
unreasonable director-related transactions can occur even when
a company is solvent;
those responsible for the management of a company are prevented
from using corporate and trust property as if it were their own;
even in company groups with a single controlling mind, a
liquidator may be able to impeach certain transactions in the
winding up of the company.
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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