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Unreasonable Director-related Transactions & PPSA Update

27 Aug 2014

SMITH HANCOCK ANNIVERSARY

We are proud to announce the 20th anniversary of Smith Hancock.

After commencing practice on 1 July 1994, Mike Smith welcomed Peter Hillig as a Partner on 1 October 1999.

Smith Hancock continues to dominate the insolvency landscape in outer Sydney, providing insolvency and reconstruction services to those that seek big city experience, but prefer the convenience and offering of a Parramatta located business.

The partners and staff acknowledge the support of the accounting, legal and banking fraternity for their support and business over the last 20 years and we look forward to continued growth as we continue to be the dominant provider of insolvency services for the Greater Western Sydney region.
 
UNREASONABLE DIRECTOR-RELATED TRANSACTIONS

Section 588FDA of the Corporations Act, 2001 (Cth) (“the Act”) was introduced in 2003 to enable Liquidators to recover unreasonable director-related transactions.

The Section allows a Liquidator to claw back from a director the proceeds of such transactions, for the benefit of the Company and its creditors,.

For a transaction to be caught, the section requires that there be a payment, transfer or disposition of property of the company, or the issue of securities by the company, which was made to:

  • A director of the company (including a shadow director); or
  • A close associate of a director of the Company – this is defined as being a relative of the director, or a relative of the director’s spouse; or
  • A person on behalf of, or for the benefit of, a director or close associate of a director,

and which a reasonable person would not have undertaken having regard to the benefits and detriments to the parties to the transaction.

The Liquidator is able to consider transactions in the four (4) year period prior to the commencement of the winding up.

There is no requirement for the Liquidator to prove insolvency at the time of the transaction.

The defences of good faith, no knowledge of insolvency or valuable consideration, are not available to the recipient or beneficiary of the transaction.

Historically the Courts have held the view that a “benefit” is where a director receives a direct benefit from the transaction.

In a February 2014 decision of the Victorian Court of Appeal, the Court has considered the meaning of “for the benefit of” as dealt with in Section 588FDA of the Act. (Vasudevan & Ors v Becon Constructions (Australia) Pty Limited and Anor [2014] VSCA).

In overturning the Lower Court’s decision, the Court of Appeal found that “for the benefit of” had the meaning that it was for the advantage, profit or good of that person.

The Court also found this “accords to the objective of the section of preventing directors stripping benefits out of companies to their own advantage,” including to a company in which the director has a financial interest.

The Court also found that “the natural and ordinary meaning of “for the benefit of” in section 588FDA is calculated to catch a benefit which legally or financially advantages the director in question regardless of whether it is paid or directed to a close associate of the director.”

In summary, the Court has broadened the meaning of the benefit obtained by a director, as a result of such transactions, to include indirect benefits.

Transactions made with an entity with which the director has an indirect financial interest may now be investigated by a Liquidator; eg where the director (or a close associate of the director) has a shareholding in the recipient entity.

In our view Section 588FDA will make directors personally liable for transactions such as a “phoenix” transaction where a director (or a close associate of the directors) is a shareholder in the recipient company

There are limited defences available to the director and/or the recipient to a Liquidator’s claim under Section 588FDA of the Act.

Conclusion

Directors and their close associates should be aware that transactions in the four (4) years leading up to the commencement of the winding up where a director has a direct or indirect financial interest in the recipient entity may now be attacked by a Liquidator.

PPSA UPDATE

REGISTRATION OF SHORT TERM LEASES

It has come to our attention that a liquidator has successfully argued that he was entitled to possession of assets leased to the company over which he was appointed.

The equipment was subject to a lease, which was for a period of ninety (90) days but contained provisions which extended the lease period to greater than ninety (90) days although less than twelve (12) months.

Section 13(1)(e)(i) of the PPSA refers to “A lease or bailment for a term of 90 days or more;” and Section 13(1)(e)(ii) refers to “A lease or bailment where a combination of all options to renew (automatic or at the request of either party) if any, would extend the aggregate term of possession beyond 90 days.”

These provisions when combined may cause regular lessors of serially numbered goods (eg. Equipment rental companies) a significant workload commitment in the renewal of short term leases or registration requirements on the PPSR.

The present situation is that a lease for ninety (90) days or less in respect of serially numbered goods is not subject to registration on the PPSR and is therefore not collateral property available to an insolvency practitioner.

However, where that lease contains provisions for automatic or requested extension of the lease to a period in excess of ninety (90) days (but less than twelve (12) months) the lease is subject to registration on the PPSR.

If the Lessor has failed to register the lease on the PPSR then the assets are available for use and/or sale by an insolvency practitioner appointed over the lessee.

As part of the Government’s promise to reduce red tape an amendment has been proposed to the PPSA whereby leases of serially numbered goods for periods of less than twelve (12) months will no longer require registration.

The proposed amendment was tabled in the House of Representatives on 19 March 2014.

Until the legislation is enacted these short term leases are subject to registration on the PPSR.






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