Filling the Void – Duties of the Fiduciary

The Federal Court has made some helpful comments about the application of the voidable transaction rules under the Corporations Act in the recent decision of Pearce v Gulmohar Pty Ltd [2017] FCA 660.

Key elements for voidable transactions are whether certain transactions are insolvent transactions under section 588FC of the Act, unfair preferences under section 588FA, uncommercial transactions under section 588FB, unreasonable director-related transactions under section 588FDA. The question of whether there was a benefit received in good faith is also relevant to trigger the defence provisions. This case examines these questions and applies the now well settled legal principles to the facts of the case.

What makes the case interesting is that the court has reinforced the scope of the statutory and fiduciary directors’ duties, in the context of voidable transactions.

Directors have a duty to whom exactly?

A director owes duties to the company of which he/she is a director. Normally, a director does not owe a duty to creditors. When the company is insolvent or at least facing insolvency, this position becomes a bit more complicated. It is now well established that in an insolvency context, a director’s duty to the company includes an obligation to take into account the interests of the company creditors.

In this case the Court reaffirmed that something less than actual solvency could be sufficient to trigger an obligation on directors to take into account the interests of creditors. A business decision to proceed with a transaction that has adverse consequences for creditors might also be adverse to the interests of the company. Adversity might propel the company towards insolvency and that would not be in the interests of the company. This is where the interests of creditors become an important consideration for directors even though their primary duty is not to creditors.

A director’s duty to the company requires a director to take into account the interests of creditors where the company is insolvent, or where the circumstances suggest there is a real risk that the interests of the creditors might be prejudiced by the transaction in question.

If a transaction is voidable was there a breach of duty?

In this case the Court found that a number of transactions were voidable transactions under the Corporations Act, and then considered whether the company’s directors, by causing the company to enter into those transactions, were in breach of their duties under sections 181, 182 and 183 of the Act. On the evidence, the Court found that the directors had breached their duties:

1. Section 181 – Certain payments were not made in good faith in the best interests of the company and were not made for a proper purpose. The court found the real purpose for the payments was to benefit the directors themselves and related entities. The directors were therefore not acting in the best interests of the company or its other creditors.
2. Section 182 – By making improper use of their position to gain an advantage for themselves and their related entities the directors had breached their duty. They also used their position to cause detriment to the company in that it was deprived of funds that would otherwise have been available to the company, and to other creditors upon its winding up.
3. Section 183 – The directors had used their knowledge of the company’s financial situation to cause those payments to be made to gain an advantage for related entities and caused a corresponding detriment to the company and were therefore in breach of their duty.
4. Breaches of section 181, 182 and 183 meant the directors were also in breach of their fiduciary duties to the company.

The court ordered the two directors to make good the company’s losses from the various transactions, by paying the total amount of the losses back to the company.

The case is a good reminder for directors that once a liquidator is appointed to the company, the interests of creditors will become the priority. Directors can be personally liable if they breach their duty and the company suffers losses. Company directors in Queensland should seeking the appropriate legal advice from our experienced Townsville lawyers.