Section 588FDA of the Corporations Act 2001 (Cth) permits transactions benefiting directors or their close associates to be challenged in a liquidation. Its reach extends beyond direct payments to a director: a benefit may be indirect, contingent or received through another person. However, identifying a benefit is only one part of the claim and does not, by itself, make the transaction recoverable.

What is an unreasonable director-related transaction?

Broadly, it is a specified company transaction made to a director or close associate, or another person on their behalf or for their benefit, which a reasonable person in the company’s circumstances would not have entered into.

Unlike unfair preference and uncommercial transaction claims, insolvency is not required. A transaction may therefore be challenged even if the company was solvent when it was entered into and no creditor was preferred. Transactions entered into during the four years ending on the relation-back day may be caught.

What must be established?

The Federal Court has described the statutory requirements as “progressive filters”. Each must be satisfied:

• The company must have made a payment, disposed of company property, issued securities, or incurred an obligation to make such a payment, disposition or issue.
• The payment, disposition or issue must be made to a director or close associate (being a relative of the director or of the director’s spouse), or to another person on behalf of or for the benefit of one of them.
• It must be expected that a reasonable person in the company’s circumstances would not have entered into the transaction.

Each “filter” must be met. An unfair outcome or flow of value is not a substitute for identifying the precise transaction, its legal effect and the recipient or beneficiary. In particular, it is important to distinguish the movement of economic value through a group from the payment or other transaction legally made by the company.

When is a transaction objectively unreasonable?

The Court considers the benefit to the company, the detriment to the company, the benefits to other parties and any other relevant matter in the company’s actual commercial circumstances. The assessment is not whether the transaction was ideal or whether a better bargain might have been available. It asks whether a reasonable person in the company’s position would not have entered into it.

The transaction’s purpose, the risks undertaken, available alternatives, group arrangements and the value received by the company may all be relevant. A director’s benefit or company detriment is not enough by itself; a supported commercial explanation may be decisive. The legal onus remains on the claimant, making the contemporaneous evidence particularly important.

What can the Court order?

The Court may order payment of money or transfer of property. If the transaction is voidable solely on this ground, recovery is limited to the difference between the benefits the company provided and what a reasonable person would have provided. This can make the proper valuation of the transaction as important as liability.

The good-faith defence ordinarily available to certain recipients of other voidable transactions does not apply to an unreasonable director-related transaction. That does not prevent the statutory elements, the evidence, causation or the amount claimed from being disputed.

What does “benefit” mean?

The word “benefit” is interpreted broadly. It is not confined to money or property received personally. A payment, disposition or issue will provide a benefit if it legally or financially advantages the director or close associate. The advantage may be direct, indirect, immediate, contingent, primary or secondary, and can include the chance of an advantageous outcome.

Examples may include the release or reduction of a personal liability, protection from enforcement action, or the prospect that proceeds realised under company security will reduce exposure under a personal guarantee. The director need not receive the company’s property and need not obtain a net benefit from the overall arrangement. The relevant question is whether the identified transaction conferred a legal or financial advantage.

Does the benefit need to be direct?

No. In Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14, the company assumed liabilities connected with its director and granted a mortgage. In return, a creditor discontinued proceedings against the director and agreed to release him from liabilities. The Victorian Court of Appeal held that this benefited the director even though he did not receive the mortgaged property. The case illustrates that benefit concerns the advantage obtained, rather than the identity of the person who physically receives the property.

What is the current leading authority?

The present leading authority is CEG Direct Securities Pty Ltd v Cooper as liquidator of Runtong Investment and Development Pty Ltd (in liq) [2025] FCAFC 47.

Runtong granted a mortgage over its land to secure loans made to other companies with common directors. Those directors had personally guaranteed the loans. The mortgage benefited them because enforcement proceeds could reduce their contingent liabilities under the guarantees.

The Federal Court confirmed that a benefit may be indirect, contingent or secondary. It rejected the argument that the directors needed to receive a net benefit after all aspects of the wider arrangement were taken into account. The possibility that the directors’ guarantee liabilities would be reduced was enough to satisfy the benefit element.

Importantly, the claim still failed. The evidence supported a commercial relationship between the companies, including co-operative financing of their property developments and the use of cross-security. The liquidator had not established that a reasonable person in Runtong’s circumstances would not have granted the mortgage. The case shows why a broad benefit does not make every related-party transaction unreasonable.

The High Court refused special leave to appeal in September 2025 ([2025] HCADisp 196), leaving the Federal Court’s construction as the leading statement of the law.

What limits remain on the broad meaning of benefit?

The Federal Court’s decision in Yang v Wong [2026] FCAFC 39 confirms that the broad meaning of benefit does not remove the need to prove the identified payment or other statutory transaction.

Axis North paid another group company, which later repaid a debt to the mother of an Axis North director. The pleaded case was that Axis North had paid the mother. The movement of value was not enough: the alleged payment needed to alter legal rights or obligations between the payer and payee.

An alternative case that Axis North’s payment was for the mother’s benefit had not been properly pleaded. The decision did not narrow benefit; it shows that a broad benefit cannot cure a failure to identify and plead the correct transaction. The transaction, its legal effect and the person to whom or for whose benefit it was made must each be articulated.

How can PGC Legal assist?

PGC Legal can assist to identify the transaction, analyse any direct or indirect benefit, assess objective unreasonableness and quantify potential recovery. This may include reviewing company records, loan and security documents, guarantees and the transaction’s commercial rationale.

Where a demand has been made or proceedings are contemplated, we can test the statutory elements and evidence, advise on time limits and alternative claims, and assist with resolution or litigation.

Please contact Brenton Priestley, Partner, Jonathan Khoury, Special Counsel, or Jake Richter, Associate.