The recent controversy concerning the liquidation of Mitchell-based building company Sublime Constructions and Development (“Sublime“) has highlighted the strict regulation of directors of companies under the Corporations Act (“the Act“).

According to the liquidators’ report, Sublime may have been trading while insolvent for almost two years. Among other things, the report also found that the directors of the company ‘engaged in loans between the company and related entities (including themselves) at a time when the company was insolvent.’

This is likely to mean that these loans are ‘voidable transactions’ under s 588FE of the Act.

For example, ‘unreasonable director-related transactions’ are voidable. Section 588FDA of the Act defines unreasonable director-related transactions:

(1)  A transaction of a company is an unreasonable director‑related transaction of the company if, and only if:

(a) the transaction is:

(i) a payment made by the company; or

(ii) a conveyance, transfer or other disposition by the company of property of the company; or

(iii) the issue of securities by the company; or

(iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and

(b) the payment, disposition or issue is, or is to be, made to:

(i) a director of the company; or

(ii) a close associate of a director of the company; or

(iii) a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and

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

(i) the benefits (if any) to the company of entering into the transaction; and

(ii) the detriment to the company of entering into the transaction; and

(iii) the respective benefits to other parties to the transaction of entering into it; and

(iv) any other relevant matter.

If a transaction is held to be void as an unreasonable director-related transaction, the liquidator can apply to the Court for an order requiring the person to pay the company an amount equal to the transaction or, in the case of a loan made to the company, to discharge the amount of that loan: section 588FF of the Act.

Other examples of voidable transactions include uncommercial transactions, insolvent transactions, if an unfair preference is given by the company to a creditor of the company, and unfair loans to the company.

Andrew Fletcher has completed the Australian Restructuring Insolvency & Turnaround Association (ARITA) run Insolvency Education Program, is a current member of ARITA and is qualified to provide advice in relation to restructuring, turnaround and insolvency.

 

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