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 ‘comfortably solvent’.
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 director’s duties.
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 director,
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 director-related transactions.
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 181(1)(a).
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; and
- 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.