WARNING TO DIRECTORS

New Powers for Liquidators to Recover “Unreasonable Transactions” from Directors

Recent changes to the Corporations Act 2001 now enable Liquidators to pursue "unreasonable payments" made to directors or "close associates" during the four year period leading up to a company's insolvency and add to the circumstances where Liquidators can recover assets of companies for the benefit of creditors.

The changes target transactions that a reasonable person in the company's circumstances would not have entered into and include not just bonuses but conveyances, transfers, dispositions of property and issuing of securities including shares and options.

The term "close associates" is defined to mean a relative or defacto spouse of a director as well as a relative of a director's spouse or defacto spouse.

The reasonableness of a transaction will be determined with regard to a number of factors including the respective costs and benefits of the transaction to the company and the benefits to the recipient of entering into the transaction.

The amendments overlap with the provisions enabling recovery of “uncommercial transaction” by a company which can be set aside by a Liquidator under s588FB of the Corporations Act.

Although for an un-commercial transaction the company must be shown to have been insolvent at the time, there is no need for the company to be insolvent when the payment to the director or close associate is made.