Unreasonable Director-Related Transactions: Recovering Payments Made to Directors Before Insolvency 

When a Victorian company enters liquidation, payments made to a director, an associate or a related entity may be recoverable if the company received no reasonable commercial benefit in return. An unreasonable director-related transaction in Australia can include direct transfers, asset dispositions, forgiveness of liabilities, excessive payments or an indirect benefit to a director provided through another person or entity. 

Under section 588FDA of the Corporations Act 2001 (Cth), the central question is whether a reasonable company in the same circumstances would have entered the transaction. The assessment considers the benefits and detriments to the company, the benefit received by the director or related party, and any other relevant matter. 

If the transaction occurred within the four-year relation-back period, it may be voidable under section 588FE. A liquidator may then seek a section 588FF recovery order requiring repayment, restoration of property or other appropriate relief. For liquidators and creditors, these provisions provide a recovery pathway where company funds were diverted for a related-entity benefit before insolvency. 

What Makes a Director-Related Transaction Unreasonable and Recoverable? 

The legal framework is contained in Division 2 of Part 5.7B of the Corporations Act 2001 (Cth). Under section 588FDA, a transaction may be an unreasonable director-related transaction where a company makes a payment, transfers property, issues securities or incurs an obligation in favour of a director, certain relatives, or another person acting on their behalf or for their benefit. The provision is not limited to money paid directly into a director’s account. 

The court applies an objective test. It asks whether a reasonable person in the company’s circumstances would have entered the transaction, considering the benefit obtained by the company, the detriment it suffered, the benefits received by other parties, and any other relevant matter. This can capture excessive payments, transfers for inadequate consideration, company-funded personal liabilities and arrangements producing an indirect benefit to a director. 

In Vasudevan v Becon Constructions (Aust) Pty Ltd [2014] VSCA 14, the Victorian Court of Appeal held that a benefit need not be direct. A company granted security for liabilities connected with its director, and the Court treated the resulting advantage to the director as capable of falling within the statutory expression “for the benefit of”. The decision confirms that courts examine the commercial substance of the arrangement, not merely the identity of the immediate recipient. 

However, a connection with a director is not enough by itself. In CEG Direct Securities Pty Ltd v Cooper (as liquidator) [2025] FCAFC 47, the Full Court emphasised that each statutory element must be established on the evidence, including the relevant payment or disposition, the identified director-related benefit and the objective unreasonableness of the transaction. 

Under section 588FE(6A), a qualifying transaction is voidable if it was entered, or given effect to, during the four-year relation-back period. Unlike some other voidable transaction claims, the liquidator does not need to prove that the company was insolvent when the transaction occurred. Once the transaction is established as voidable, the liquidator may seek a section 588FF recovery order, including repayment of money, restoration of property, or an order reflecting the value lost by the company. 

How Do Courts Decide Whether a Director-Related Transaction Was Unreasonable? 

Who received the payment or benefit? 

The first question is whether the transaction falls within section 588FDA of the Corporations Act 2001 (Cth). The payment, property transfer, security, or incurred obligation must benefit a director, a close associate, or another person acting on the director’s behalf or for their benefit. 

The director does not need to receive the money directly. An indirect benefit to a director may arise where company funds discharge a personal liability, support an associated business or improve the financial position of an entity the director controls. 

What did the company receive in return? 

Courts compare the commercial benefit obtained by the company with the detriment it assumed. They consider whether the company received goods, services, property, debt reduction, or another identifiable advantage, and whether that benefit was proportionate to the payment or obligation. 

A transaction is not unreasonable simply because it involves a director or related entity. Director remuneration, loan repayments, and related-party dealings may be legitimate where they are properly authorised, commercially justified, and supported by contemporaneous records. Greater scrutiny arises where there are excessive payments, inadequate consideration, or no credible explanation for the company’s decision. 

Would a reasonable company have entered the transaction? 

The statutory test is objective. The court asks whether a reasonable person in the company’s circumstances would have entered the transaction, considering the benefits and detriments to the company, the benefits received by other parties, and any other relevant matter. 

A director’s belief that the transaction was appropriate does not determine the issue. The court instead examines the company’s financial position, commercial objectives, existing obligations, and the information available when the transaction occurred. Insolvency at that time does not need to be proved, although financial distress may support a finding that transferring value to a director or related party was unreasonable. 

What evidence will the court examine? 

A liquidator must identify the particular transaction, establish the director-related benefit, and quantify the value lost by the company. Relevant evidence may include bank statements, general ledgers, director loan accounts, invoices, employment agreements, board minutes, valuations, tax records, and communications explaining the payment. 

These records are particularly important where the recipient claims the payment represented salary, reimbursement, repayment of a genuine loan, or consideration for services. Documents created after liquidation may carry less weight if they conflict with the company’s accounts or earlier records. 

Do courts examine commercial substance rather than legal form? 

Yes. In Vasudevan v Becon Constructions (Aust) Pty Ltd [2014] VSCA 14, the Victorian Court of Appeal confirmed that a transaction may be “for the benefit of” a director even where the advantage is indirect. 

Courts therefore consider the arrangement’s practical effect, including whether a related-entity benefit improved the director’s position. Routing a payment through several entities will not prevent recovery where the evidence establishes the statutory connection and objective unreasonableness. 

What Director-Related Transactions Commonly Lead to Recovery Disputes? 

Disputes commonly arise where directors receive substantial salary, bonuses, management fees, or termination payments shortly before liquidation. The issue is not whether directors may be paid, but whether the amount was commercially justified by the work performed, the company’s financial position, and the terms approved at the time. Liquidators often encounter payments supported only by general ledger entries, without employment agreements, board approvals, payroll records, or a clear explanation of how the amount was calculated. Where remuneration increases as the company’s position deteriorates, or materially exceeds its earlier payment history, the recipient may need strong contemporaneous evidence to answer an allegation of excessive payments. 

Director loan accounts are another frequent source of dispute. A company’s accounts may record a credit balance in favour of a director, while bank records, tax returns or prior financial statements suggest that the alleged advance was never made or had already been repaid. The dispute then turns on the underlying transactions rather than the label applied in the ledger. Liquidators will usually reconstruct the account from source documents and test whether each claimed advance represented money genuinely provided to the company. 

Claims also arise where company funds are used to pay a director’s mortgage, tax liability, legal fees, or personal expenses. Similar scrutiny applies where money is directed to another business controlled by the director, used to secure that entity’s debts or transferred without clear consideration. These arrangements may produce an indirect benefit to a director, even where the director was not the immediate recipient. Vasudevan v Becon Constructions (Aust) Pty Ltd [2014] VSCA 14 confirms that courts examine the practical benefit created by the transaction, not only its formal structure. Related issues can arise where assets transferred before insolvency are moved beyond creditors’ reach for inadequate value. 

Poor records do not make a transaction unreasonable, but they can weaken the recipient’s position. Legitimate consulting fees, reimbursements, or related-party services may become difficult to defend where invoices are generic, board minutes were prepared retrospectively, or the company cannot identify what it received. For liquidators, the practical task is to trace the payment, identify the director-related benefit, and compare it with the value received by the company under section 588FDA. For directors and related entities, preserving contracts, approvals, valuations, and evidence of performance is often central to resisting a recovery claim. 

What Should Parties Assess Before Pursuing or Defending a Recovery Claim? 

Before commencing a claim, a liquidator should define the transaction precisely, identify each recipient, and trace any indirect benefit to a director. A broad allegation that company funds were misused is rarely enough. The evidence should show what was paid or transferred, when it occurred, what the company received in return, and why a reasonable company would not have entered the arrangement. 

Early reconstruction of the company’s records is critical. Bank statements, general ledgers, director loan accounts, tax records, contracts, board minutes and communications should be compared for inconsistencies. Where records are incomplete, third-party material from accountants, banks, advisers, or related entities may establish the commercial purpose and flow of funds. Valuation evidence may be required where the dispute concerns transferred property, management fees, or allegedly excessive payments. 

Limitation issues should be addressed at the outset. The transaction must fall within the four-year relation-back period, and proceedings for a section 588FF recovery order are subject to separate statutory time limits. Delay can narrow the available recovery options even where the underlying transaction appears strong. 

For directors and recipients, the most effective defence is usually built from contemporaneous evidence rather than retrospective explanations. The response should identify the services, assets, funding, or other value provided to the company and explain how the amount was determined. It is also necessary to test whether the alleged benefit was received by the director or related party. Related insolvent trading claims against directors may require review where the company continued incurring debts during financial distress. 

Commercial strategy matters alongside legal merit. Parties should assess recoverability, insurance, litigation funding, recipient solvency, and the cost of expert evidence before pursuing final relief. In appropriate cases, an early exchange of financial records and focused settlement may preserve more value than prolonged litigation. 

Frequently Asked Questions  

What Should Liquidators, Creditors and Directors Do About a Disputed Transaction? 

Unreasonable director-related transaction claims require a close examination of the payment, the benefit received, and the company’s commercial position at the time. For liquidators and creditors, the strength of a recovery claim will usually depend on tracing the flow of value, establishing the director-related connection, and proving why the transaction was objectively unreasonable. Directors and related entities should respond with contemporaneous evidence showing the legitimate basis and commercial value of the arrangement. 

Pentana Stanton Lawyers advises liquidators, creditors, directors, and business owners on corporate insolvency matters and related commercial litigation. For advice on pursuing or defending a claim under section 588FDA, book a confidential consultation with our team. 

This article is general information only and not legal advice. For advice specific to your circumstances, please contact our team.