A wider ambit for the unreasonable director-related transactions provisions of the Corporations Act?
In Vasudevan & Ors v Becon Const & Anor  VSCA 14, the Victorian Court of Appeal adopted a broader interpretation of the phrase ‘for the benefit of … a director’ in s 588FDA of the Corporations Act 2001 (the Act) than has been accepted in previous cases. The decision has the potential to widen the ambit of the unreasonable director-related transactions provisions of the Act.
Warren Thompson was the sole director and shareholder of Wulguru Pty Ltd (Wulguru), Mulgrave Commercial Pty Ltd (Mulgrave) and Richmond Commercial Pty Ltd (Richmond). Mulgrave and Richmond were in default of obligations owed to a creditor, Becon Constructions (Aust) Pty Ltd (Becon). Thompson had guaranteed the obligations of Mulgrave and Richmond and was being sued by Becon under the guarantee. Wulguru, Thompson, Richmond and Becon entered into a Deed whereby Wulguru became jointly and severally liable for the debt owed by Mulgrave, and jointly liable for interest payments of $6,190 per month. Wulguru also executed a mortgage over property as security for performance of its obligations under the Deed. Becon covenanted not to continue proceedings against Thompson, and to release him from various liabilities.
Approximately thirteen months later, Wulguru was wound up in insolvency and the company liquidators sought to have the Deed and Mortgage set aside as an ‘unreasonable director-related transaction’ under s 588FDA. Relevantly, that section provides that a payment, disposition or issue of shares by a company is an unreasonable director-related transaction if it is made to:
- A director of the company;
- A close associate of a director of the company; or
- A person on behalf of, or for the benefit of [one of the afore-mentioned]; and
it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to relevant factors.
Section 9 of the Act provides that, unless the contrary intention appears, ‘on behalf of’ includes ‘on the instructions of’.
The issue before the court was whether the entry into the Deed and Mortgage by Wulguru was a transaction ‘on behalf of’ or ‘for the benefit of’ the director Thompson.
An associate judge found for Becon at first instance. However, on appeal, Nettle JA (with whom Beach JA and McMillan AJA agreed) upheld the liquidators’ appeal. The court found that the Deed and Mortgage constituted an unreasonable director-related transaction, and the appropriate remedy was to declare it void ab initio.
In so finding, the Court of Appeal rejected the respondents’ arguments based on Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd & Anor (2006) 57 ACSR 693 and Re Great Wall Resources Pty Ltd (in liq)  NSWSC 354. In Ziade, Gzell J in the NSW Supreme Court found that ‘for the benefit of’ in s 588FDA included direct benefits, but not derivative benefits, like that obtained by a company director who was a shareholder of another company that received the benefit of the transaction. Ziade was referred to with approval in Great Wall Resources, where Brereton J also found that the concept of a ‘benefit’ involves the notion of separation of legal and beneficial interests. A director/shareholder in the afore-mentioned scenario did not receive a beneficial interest, and therefore a transaction would not be for her or his ‘benefit’.
In this case, Thompson had received a direct benefit by Becon covenanting not to enforce the guarantee against him, therefore Ziade and Great Wall were distinguishable . However, the Court of Appeal noted that, while the provenance and objectives of s 588FDA implied that ‘on behalf of’ required a benefit to flow to a director or close associate, there was no reason to confine that to direct benefits .
The court went further and disagreed with the approach in Ziade and Great Wall of confining s 588FDA to transactions resulting in direct benefits as, ‘according to ordinary acceptation’, ‘benefit’ refers to both direct and indirect benefits . Contrary to Great Wall, the court opined that ‘for the benefit of’ should not be confined to situations where an equitable interest passed to the director or close associate -.
The court also rejected an argument that its preferred interpretation would create an unintended overlap with other voidable transactions provisions in the Act, or that it would open s 588FDA to an impermissibly broad range of transactions -.
The Court of Appeal’s decision in Vasudevan indicates a possible widening of the scope of the unreasonable director-related transactions provisions of the Act.
The interpretation given to ‘for the benefit of’ indicates a move away from the more restrictive interpretations adopted by the NSW Supreme Court in Ziade and Great Wall Resources. Although not necessary to the outcome, the court expressly doubted whether ‘for the benefit of’ should be confined to transactions resulting in direct, as opposed to indirect, benefits. Transactions resulting in a benefit to a director or close associate, whether direct or indirect, will now be subject to closer scrutiny if entered during the relation-back period.
Dr Kylie Weston-Scheuber – CommBar profile