Blog

Section 588FDA: Keeping it in the Family (Court)?

A recent Federal Court decision has considered the interaction between Family Court orders and the unreasonable director-related transactions provisions in the Corporations Act

On 25 November 2016 his Honour Justice Moshinsky of the Federal Court of Australia handed down his reasons in D Pty Ltd (in liq) v Calas (Trustee) in the matter of D Pty Ltd (in liq) [2016] FCA 1409. The approach suggested in this decision has the potential to weaken the reach of the unreasonable director-related transactions provisions.

In particular, the decision may affect future situations in which a liquidator intends to prove that an unreasonable director-related transaction arises from the charging of company property pursuant to an agreement to settle Family Court proceedings. Specifically, even in situations where a liquidator is otherwise able to establish the elements of an unreasonable director-related transaction, the Court may be unlikely to set aside that transaction where it is in conflict with Family Court Consent Orders. This potentially presents an “asset protection” opportunity for directors in similar circumstances.

Background

On 7 December 2012, the Family Court made orders by consent that the Husband would pay a sum of $500,000 into a trust account in the name of the Wife with the initial $300,000 being paid from the proceeds of a sale of a property by C Pty Ltd with the shortfall to be paid from proceeds of a sale of a property by D Pty Ltd, both companies which the Husband was associated with. On 4 December 2012 both parties signed Minutes of Proposed Consent Orders, however these were not signed on behalf of D Pty Ltd and were different from the Consent Orders made by the Court.

On 10 July 2014, the Wife brought an application in the Family Court seeking to enforce the orders. On 22 August 2014, D Pty Ltd was placed into liquidation and in further proceedings before the Federal Court, the Liquidator argued that when the Husband and Wife agreed to settle Family Court Proceedings with terms including the giving of a charge over the property belonging to D Pty Ltd, that this amounted to an unreasonable director-related transaction within the meaning of s588FDA of the Corporations Act 2001 (Cth).

Decision

His Honour dismissed the Liquidator’s application for the following reasons:

  1. The Minutes of Proposed Consent Orders that apparently created a charge were not signed on behalf of D Pty Ltd and there was insufficient evidence from which to infer that D Pty Ltd was party to the agreement. Even if orders had been signed, the document did not demonstrate the intention to create the charge separately.
  2. Even though D Pty Ltd agreed to orders in the same terms as the Consent Orders, it was not established that the parties reached an agreement that independently created a charge over the Property in advance of making the Consent Orders.
  3. The Liquidator was unable to establish that it was not expected that a reasonable person in the circumstances would not have entered into the same alleged transaction, even if the Liquidator could independently establish the charge was created.
  4. If the liquidator’s case was otherwise made out it would not be appropriate to make declarations setting the charge aside as ‘in circumstances where the Consent Orders themselves create a charge over the Property, the declarations sought by the Liquidator would conflict, or appear to conflict, with the Consent Orders, being orders made by another superior court in the Australian legal system.’

Conclusion

The liquidator was unable to make out all of the elements of s588FDA and the result in the case, therefore, turned mainly on the facts. What is of greater concern to the liquidators, however, is that Moshinsky J expressed the view that if, on the facts, s588FDA had otherwise been made out, his course would not have been to set the transaction aside, but rather to transfer the proceedings to the Family Court. It is not clear what approach the Family Court would be expected to take upon becoming seized of such a matter. At a minimum further costs would need to be incurred in circumstances in which the liquidator had otherwise established all the elements required to obtain relief.

If this type of approach was followed generally, it could complicate any claim under s588FDA involving company transactions carried out by Family Court Orders, potentially weakening the reach of s588FDA as a result. It could even present new “asset protection” options to directors.

Make an Enquiry

Contact us to find out more.

Back to top