Unreasonable Director-Related Transactions: What They Are and How to Defend Them
Most voidable transaction claims require a company to have been insolvent at the relevant time. Unreasonable director-related transactions under section 588FDA of the Corporations Act are different. A liquidator can pursue these transactions even where the company was entirely solvent when they occurred, making this one of the most significant, and most underappreciated, risks in related-party dealings between a company and its directors.
Related-party transactions between a company and its directors attract heightened scrutiny in insolvency.
Book a confidential strategy call
What Section 588FDA Actually Captures
A transaction is an unreasonable director-related transaction if it involves a payment, disposition of property, issue of securities, or the incurring of an obligation to do any of those things, and if it is made to, or for the benefit of, a director of the company, a close associate of a director, or a person on behalf of or for the benefit of either, and a reasonable person in the company’s position would not have entered into the transaction having regard to all the circumstances.
Three elements matter for practitioners and directors facing these claims.
- The transaction type: the section is deliberately broad, covering not only direct cash payments but asset transfers, security grants, debt forgiveness, and the incurring of obligations such as guarantees and mortgages.
- The recipient: it captures not only direct payments to a director but indirect benefits, including payments to a director’s relatives, associated entities, or any arrangement that delivers a benefit to the director even if the direct recipient is a third party.
- The reasonableness test: a court asks whether a reasonable person in the company’s specific commercial circumstances would have entered into the transaction. This requires looking at what the company received in return for the payment or obligation, whether there was a genuine commercial rationale, and the overall context of the company’s operations.
Two Key Cases Drawing the Boundaries of the Section
Direct payments: CEG Direct Securities v Cooper
In CEG Direct Securities Pty Ltd v Cooper (as liquidator) [2025] FCAFC 47, the Full Federal Court confirmed that indirect benefits to a director, such as a reduction in their contingent personal liability under a guarantee, satisfy the section’s ‘for the benefit of a director’ requirement. The court held that ‘benefit’ is not limited to direct, immediate, or primary advantages — it extends to indirect, contingent, and secondary benefits. The High Court refused special leave to appeal, cementing this as the authoritative position.
Indirect payments through intermediaries: Yang v Wong
In Yang v Wong [2026] FCAFC 39, the Full Federal Court drew a limit on the section’s reach. Where a company made a payment to a related entity, which then paid the proceeds to a director’s relative, the court held this did not constitute a ‘payment’ under section 588FDA because the transaction did not directly alter the legal rights and obligations between the company and the ultimate recipient. The section requires a direct transaction between the company and the prescribed party. Indirect payment flows through an interposed entity do not qualify, though they may still be caught under section 588FB as uncommercial transactions, which requires insolvency.
Together, these two decisions map the current boundaries with considerable clarity: direct dealings and transactions conferring indirect benefits are captured; indirect payment chains through interposed entities are not, leaving liquidators to rely on the uncommercial transaction provisions instead.
The Crucial Difference: No Insolvency Required
Unlike unfair preferences and uncommercial transactions, which require the company to have been insolvent at the time of the transaction or to have become insolvent because of it, section 588FDA carries no insolvency requirement. A payment made to a director two years before the company collapsed, at a time when the company was profitable and solvent, can still be challenged. This is the feature of the provision that catches directors and their advisers most by surprise.
Defences and Available Responses
The commercial explanation defence
The primary defence is establishing that the transaction had a genuine commercial rationale from the company’s perspective. Where a reasonable person in the company’s circumstances would have entered into the transaction, even accounting for the benefit to the director, there is no unreasonable director-related transaction. This typically requires evidence of the specific commercial context: what the company received in exchange, why the transaction was commercially necessary or advantageous for the company, and how it fit within the company’s overall operations. Group financing arrangements, where companies in a corporate group provide cross-security, have been accepted as commercially explicable in appropriate circumstances.
The good faith defence is largely unavailable
Unlike unfair preferences, where a recipient can defend on the basis of good faith and no reasonable grounds to suspect insolvency, section 588FDA does not carry a meaningful good faith defence for the director recipient. Because the transaction involves a person closely connected to the company, the law presumes that director should have known whether the transaction was in the company’s best interests. The absence of a genuine commercial explanation for the transaction, rather than the director’s state of mind, is the critical question.
The commercial rationale at the time of the transaction is what matters — not what the director intended.
Book a confidential strategy call
Request a strategy call
Frequently Asked Questions
Q: Can a liquidator pursue a section 588FDA claim even if the company was solvent when the payment was made?
A: Yes. This is the fundamental distinction between section 588FDA and most other voidable transaction provisions. There is no requirement that the company was insolvent at the time of the transaction. A liquidator can pursue these claims regardless of the company’s financial position when the relevant payment or disposition occurred.
Q: What constitutes a ‘close associate’ of a director?
A: The term is defined in the Corporations Act to include relatives such as spouses, parents, children, and siblings, as well as entities controlled by the director or their relatives, and other persons with specified relationships to the director. The definition is deliberately broad and extends well beyond immediate family members.
Q: Does the section apply to salary and bonuses paid to directors?
A: Yes, in principle. Where a director’s salary or bonus is grossly disproportionate to the services provided, or where it is paid at a time when the company receives no genuine commercial benefit from the arrangement, it may constitute an unreasonable director-related transaction. Market-rate remuneration for genuine services, properly documented, is much harder to challenge.
Q: What happened in Yang v Wong and why does it matter?
A: In Yang v Wong [2026] FCAFC 39, the Full Federal Court held that a payment by the company to a related entity, which then on-paid to a director’s relative, did not constitute a ‘payment’ under section 588FDA because the transaction did not directly alter the legal relationship between the company and the ultimate recipient. Liquidators seeking to challenge indirect payment chains must use section 588FB (uncommercial transactions) instead, which does require insolvency.
Q: What is the difference between a section 588FDA claim and a section 588FB uncommercial transaction claim?
A: Section 588FDA captures payments to directors and their associates without requiring insolvency; section 588FB captures a broader range of uncommercial transactions but requires the company to have been insolvent at the relevant time. Yang v Wong confirms that indirect payment flows through interposed entities fall under section 588FB, not section 588FDA.
Q: What is the look-back period for a section 588FDA claim?
A: Unlike unfair preferences (6 months) or uncommercial transactions (2 years, or 4 years for related parties), section 588FDA does not prescribe a specific look-back period. The relevant limitation period is the standard statutory limitation period applicable to the liquidator’s recovery action, which is generally 6 years. This means the look-back can potentially extend further than most other voidable transaction claims.
