+ Unreasonable Director Related Transactions

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The Corporations Amendment (Repayment of Directors’ Bonuses)  

         Act 2002

This Act commenced operation in April 2003 and it introduces Section 588FDA.  That section provides that a “transaction” of the company is an “unreasonable director-related transaction” if:

(a)        the relevant transaction is a payment of company money or disposition of company property to

(b)        a director or “close associate” of the director (that is, to a director or to the director’s  spouse, de facto spouse, parent, child, sibling or relative of the director’s spouse or de facto spouse, or to another   person for the benefit of, a director or his “close associate”); and

(c)        a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(i)          the benefits to the company; and

(ii)        the detriment to the company; and

(iii)        any other relevant matter; and

(d)       it was entered into within   four years of when the company’s  winding up began.

The Court can order the repayment of the difference between the total value of the benefits provided under the transaction and the value “... that it may be expected that a reasonable person in the company’s circumstances would have provided ...”.

Commentary

(a)        The test of what is reasonable is applied when the transaction is undertaken (i.e. when the payment is made or when the disposition of property is effected) rather than when the obligation is incurred (i.e. when the employment agreement was signed off by the company and the director, which could have been many years beforehand.) 

(b)        As such even if a proposed payment is perfectly reasonable at the time the company agrees to pay it (e.g. at the time the director enters into a service agreement providing for future bonuses), it may still be voidable if circumstances have changed before the payment is actually made.

(c)         A transaction can be an “unreasonable director-related transaction” even though the transaction  was effected through an earlier Court order.

(d)        The definition of “transaction” is broad and includes (without limitation) base salary payments, options or “any other form of accommodation provided to or for the benefit of a director” which the Court considers excessive.

(e)         To qualify as an “unreasonable director-related transaction”, the legislation permits evidence to be introduced regarding the state of knowledge of the company’s directing mind (usually the mind of each of its directors).

(f)          The matters to which the Court must have regard are the same as the matters to which the Court must have regard for  an  “uncommercial transaction” (Section 588FB), except that   there is no requirement that the company be insolvent at the date of the transaction (payment) or of the incurring of the obligation to pay.

(f)         The appropriateness of any director’s remuneration is, on one view, subjective and subject to vagaries and imponderables.  Accordingly, the Court may well be faced with experts’ reports that conflict on the appropriate remuneration in the relevant circumstances. This will make it difficult for the Court to conclude whether the transaction was unreasonable and, if so, by how much.

There have been at least two cases on this section. The first, Ziade Investments Pty Ltd v Welcome Homes Real Estate [2006] NSWSC 457 before Gzell J, involved the company giving the father and mother of its sole director, a quarter interest in a registered first mortgage of the company’s real estate, securing past loans.

He held the mortgage was voidable as an unreasonable director-related transaction under Section 588FE(6A).

A further case discussing the section is Universal Finance Group v Mortgage Elimination Services [2006] NSWSC 1132.

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