Recently, the Victorian Court of Appeal handed down a decision in Vasudevan & Ors v Becon & Anor on s.588FDA (unreasonable director-related transactions) of the Corporations Act 2001 (Cth) (Act).  While the Court held that the director received a direct benefit as a result of the transaction, the Court also rejected the approach taken in previous decisions that only a direct benefit to a director will be sufficient to bring a transaction under s.588FDA.

Facts

On 21 March 2012, Wulguru Pty Ltd (Wulguru) was ordered to be wound up in insolvency and liquidators were appointed. The liquidators commenced proceeding against a third party, Becon Constructions (Australia) Pty Ltd (Becon), claiming that a transaction it entered into, prior to the liquidators’ appointment, with Wulguru constituted an unreasonable director-related transaction.  The transaction was a restructure of a debt, by way of deed, that was owed to Becon by two entities related to Wulguru and their common director, Mr Thompson (who guaranteed the debt).  The debt had been the subject of proceedings that Becon had commenced against Mr Thompson.

Before entering into the deed, Wulguru had no obligation or liability to Becon. As a result of entering into the deed:

  • Wulguru became jointly and severally liable with the director and other related entities to Becon to pay the debt of its related entity (including interest);
  • Wulguru granted Becon a mortgage over its property as security for performance of its obligations under the deed; and
  • Becon released and discharged Mr Thompson from his various liabilities as guarantor and discontinued the proceedings him.

Prior to Wulguru being wound up, it had entered into a contract to sell part of the mortgaged property.  Becon claimed the proceeds of sale of the mortgaged property.

The liquidators took the position that the entry into the deed and mortgage was voidable as an unreasonable director related transaction.  They were unsuccessful at first instance and the decision was appealed to the Victorian Supreme Court of Appeal.

Key considerations

The central question before the Court of Appeal was whether the transaction entered into by Wulguru was ‘for the benefit of’ Mr Thompson.  The liquidators contended that this was the case because:

  • the transaction was entered into ‘on the instructions of Mr Thompson’ and therefore ‘on his behalf’; or
  • Becon’s agreement to release Mr Thompson from all liability, was enough to conclude that the transaction was for his benefit.

The Court of Appeal did not accept the argument that a transaction being effected on a director’s instructions was sufficient for it to be deemed to be a transaction on behalf of that director.

   The Court of Appeal then considered the liquidators’ second argument and considered previous cases such as Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd & Anor (2006) 57 ACSR 693.  In Ziade, a director of a company, on behalf of that company, executed a mortgage in favour of two related entities (of which he was the sole shareholder).  The Court held that the benefit received by the director as sole shareholder of a company was not a direct benefit but an indirect benefit and thus did not fall under s.588FDA.

In Vasudevan, the Court of Appeal held that Mr Thompson did receive a direct benefit in the form of Becon’s covenant not to sue him and the possibility of his ultimate relief from his obligations to Becon as surety.  The Court of Appeal further commented that, in any event, ‘for the benefit of’ in s.588FDA of the Act included both direct and indirect benefits.

In reaching this conclusion, the Court of Appeal considered the ordinary meaning of ‘for the benefit of’ (i.e. ‘for the advantage, profit or good’ of a person) and Parliament’s objective in enacting s.588FDA (preventing directors stripping benefits out of companies to their own advantage).  The Court further commented that the section was calculated to catch a benefit that legally or financially advantages the director in question – and this can include indirect legal or financial benefits.

Decision

The Court of Appeal held that a reasonable person in Wulguru’s position would not have entered into the transaction and that the transaction was an unreasonable director-related transaction under the Act.

The Court of Appeal ordered that the transaction be declared void under s.588FF of the Act, that the proceeds of sale of the property be paid to the liquidators and that Becon pay the costs of the liquidators’ proceedings.

Commentary

It is uncertain how the Courts will interpret ‘for the benefit of’ under s.588FDA of the Act from this point forward.  However, this case does mark a potential widening of a provision that to date has been treated narrowly.  This new interpretation may offer some relief to liquidators who are unable to rely on other avoidance provisions under the Act to challenge certain transactions.