TGIF – Unreasonable director-related transactions left creditors hanging out to dry - Insolvency/Bankruptcy

This week's TGIF considers the decision of In the matter of Bryve Resources Pty Ltd [2022] NSWSC 647, which illustrates the circumstances in which liquidators can recover payments made by the company to, or for the benefit of, directors.

Key takeaways

The fact that payments are made to a director who is also a creditor does not preclude the transactions from being unreasonable director-related transactions.
A payment will be 'for the benefit of' a director if the payment legally or financially advantages them, regardless of whether it is paid or directed to a close associate of the director.
While payments to a creditor may benefit a company by reducing its indebtedness, a court will weigh this against the detriment that the payment causes to the company when considering whether it was reasonable.

What happened?

The company Bryve Resources Pty Limited (in liq) (Bryve Resources), was established in 2014 for the purpose of investing in Shaw River Manganese Limited (Shaw River), an ASX-listed company that conducted manganese exploration, production and development at its open cut mine in Namibia known as the Otjozondu Project. Bryve Resources was placed into voluntary administration on 14 March 2017 following the collapse of Shaw River.

Brent Stanton was the sole director of Bryve Resources. Mr Stanton was also a director and sole shareholder of a company registered in Namibia known as Qube Logistics Services (Pty) Ltd (Qube). Qube was incorporated in 2014 for the purpose of operating a logistics business transporting ore for the Otjozondu Project.

The Liquidator commenced proceedings against Mr Stanton and Qube in relation to payments, including A$421,501, paid to or for the benefit of Mr Stanton, including many payments made to reduce Mr Stanton's indebtedness to his personal creditors.

Unreasonable director-related transactions

The Liquidator claimed that the payments by Bryve Resources constituted unreasonable director-related transactions within the meaning of section 588FDA of the Corporations Act 2001 (Cth).

Section 588FDA(1) provides that a transaction is an unreasonable director-related transaction if it is a payment made by the company to a director or another person on behalf of, or for the benefit of, a director that would not have been entered into by a reasonable person in the company's position.

Relevant factors when considering reasonableness include the benefits and detriments to the company of entering into the transaction and the respective benefits to other parties to the transaction.

Section 588FDA applies to payments made within four years prior to the relation back day and it is not necessary to establish that the company was insolvent at the time of the transaction or became insolvent as a result of the transaction.

Importantly, according to section 588FDA(3), a transaction may be an unreasonable director-related transaction whether or not a creditor of the company is a party to the transaction.

The decision

The Court found that the impugned payments were unreasonable director-related payments within the meaning of section 588FDA and therefore voidable pursuant to section 588FE(6A).

In outlining the applicable principles, the Court noted that a payment is made 'for the benefit of' a director within the meaning of section 588FDA(1) if the payment legally or financially advantages the director, regardless of whether it is paid to a director or another party. For example, payments made to a financial institution conferred a financial advantage on Mr Stanton by reducing his indebtedness to the bank in respect of his credit card accounts.

Mr Stanton was a substantial creditor of Bryve Resources, having provided unsecured loans totalling A$4,888,305. Despite this, William J found that a reasonable person in the company's circumstances would not have made the payments.

While there was a benefit to Bryve Resources in that the payments reduced its indebtedness to Mr Stanton, no repayments were being made to other significant creditors. The Court found that almost all of the cash available to Bryve Resources during the relevant period was applied to, or for the benefit of, Mr Stanton or Qube, leaving the company without funds to reduce its liabilities to other creditors.

Mr Stanton was found to have effectively left the company 'hanging out to dry' by using its available funds and was consequently ordered to pay Bryve Resources an amount equal to the payments that had been made to him or for his benefit.

Separately, Qube was ordered to repay the A$1,547,158.39 paid to it by Bryve Resources ostensibly in the form of a loan. These loans were also found to constitute a breach of Mr Stanton's director's duties.

Comment

This decision is a useful reminder of the utility of section 588FDA to recover historical payments made to, or for the benefit of, a director even where the company was not insolvent at the time of the payments.

Even payments made to a director who is also a creditor may fall under the ambit of section 588FDA as unreasonable director-related transactions. A court will weigh the benefit of reducing the company's indebtedness to the company with the detriment to the company's ability to pay its other creditors.

Courts will also interpret 'for the benefit of' a director broadly to include payments that legally or financially advantage the director, regardless of whether it is paid to a director or another party.

Liquidators are therefore well placed to scrutinise such payments which may secure substantial amounts for 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.