In the recent decision of Vasudevan (as Joint and Several Liquidator of Wulguru Retail Investment Pty Ltd) (In liq) & Ors v Becon Constructions (Australia) Pty Ltd & Anor [2014] VSCA 14, the Victorian Court of Appeal considered the requirements of the unreasonable director-related transactions provision of the Corporations Act 2001 (Cth) (Corporations Act) and the circumstances in which a transaction is made “for the benefit of” a director.

BACKGROUND

In this case, a company (Wulguru) entered into a deed under which it assumed joint liability for obligations owed by its director to a third party. Wulguru also granted a mortgage in favour of the third party to secure performance of the assumed liability.

Wulguru was later wound up in insolvency and the liquidators applied to the courts to set aside the deed and mortgage on the basis that they were unreasonable director-related transactions within the meaning of s 588FDA(1)(b) of the Corporations Act.

Section 588FDA(1)(b)(iii) provides that a transaction is an unreasonable director-related transaction if a payment, conveyance or disposition of property of a company is made by the company to a person on behalf of, or for the benefit of, a director of the company.

The only issues were whether the deed and the mortgage were made:

  • on behalf of the director, because they were executed on his instructions; or
  • for the director’s benefit, because they had the benefit of relieving the director of his obligations to the third party.

Courts have previously held that a transaction will only be considered to be made “for the benefit of” a director where the benefit is a direct one, rather than an indirect or derivative benefit. For example, in Re Great Wall Resources Pty Ltd (in liq) [2013] NSWSC 354, Brereton J held that a benefit to a company of which the director is a shareholder is not a benefit within the meaning of s 588FDA.

At first instance, the Victorian Supreme Court found that the transaction was not “on behalf of, or for the benefit of” the director. The fact that the transaction may be in the financial interest of the director was not enough.

DECISION

The Court of Appeal overturned the decision of the Supreme Court at first instance and ordered that the deed and mortgage be declared void.

The Court rejected the argument that the deed and the mortgage were made “on behalf of” the director because they were executed on his instructions. Something more is required. A disposition to a person “on behalf of a director” connotes a disposition which is of some benefit to the director.

The decision turned on the interpretation of the phrase “for the benefit of” within s 588FDA. The Court found there was a direct benefit – the director obtained a covenant not to sue from the third party. This distinguishes this case from the line of authority considering indirect shareholder benefits.

The Court went on to consider and reject the “direct benefit” notion in any event. It held that if a director channels benefits from a company under his charge to another company in which he is financially interested, that results in a benefit to the director within the meaning of s 588FDA. In other words, a benefit to a company in which the director is a shareholder will be a relevant benefit.

COMMENT

This decision has the potential to significantly broaden the scope of section 588FDA of the Corporations Act. Liquidators can now use this provision to attack transactions by directors to other entities in which the director has a financial interest.