iscoverLiquidators have significant powers to pursue claims against ‘unreasonable director-related transactions’. While the legal onus of proof rests with them, accountants are often on the front line, writes Trevor Withane.
Unreasonable director-related transactions: What accountants need to know
12 September 2025
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11 minute read
Why this matters for accountants
When a company enters liquidation, a liquidator is appointed to maximise the pool of assets available to repay creditors. To do this, they often review transactions made before liquidation and may seek to have some of them ‘set aside’ under the Corporations Act 2001 (Cth).
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One of the most disputed categories is the ‘unreasonable director-related transaction’. This covers transactions where the company provides a benefit to its directors (or their close associates) that cannot be commercially explained. Once a transaction is found to fall into this category, the liquidator has a legal power to pursue recovery avenues. This may result in personal liability for the directors of the insolvent company, or a court-order that requires the counterparty to repay funds or surrender security.
This raises important risks for accountants: clients may face repayments or liabilities if such transactions are uncovered, and accountants are often the first to spot ‘problematic’ transactions in company records or to have advised on them. This underscores the importance of understanding how these transactions are identified and challenged, so accountants can detect risks early and guide clients in the right direction. Such guidance is beyond financial advice; it can help clients avoid serious legal consequences.
What counts as an unreasonable director-related transaction?
The test for an ‘unreasonable director-related transaction’ is set out in section 588FDA of the Corporations Act and requires three elements to be met:
- Transaction Type – this includes payments, transfers, conveyances, issues of securities, or the incurring of obligations to do so.
- Parties To the Transaction – the transaction must benefit a director, a close associate (often a family member or business partner), or someone on their behalf.
- Reasonable Person Objective Test – an objective assessment of whether a reasonable person, in the company’s circumstances, would not have entered into the transaction, taking into account the benefits and detriments to the company, the other parties of the transaction, and any other relevant matter.
In practice, most disputes turn on the second and third elements. The Full Federal Court recently clarified their meaning in CEG Direct Securities Pty Ltd v Cooper (as liquidator) [2025] FCAFC 47 (CEG Case). An attempt to challenge this in the High Court was refused, leaving the Full Court’s approach as the prevailing authority.
Full Federal Court’s findings
Background
In the CEG Case, Runtong was incorporated in 2012 to purchase land in Adelaide (Adelaide Land). The acquisition was financed by the National Australia Bank (NAB) and secured by a mortgage granted in October 2012. Runtong had two related companies, Datong and Futong, which shared common directors, Jin Liang and Ping Huang (Runtong Directors).
Between September and December 2014, Datong and Futong entered into three loan agreements (Loans) with CEG as lender. To secure the Loans, the Runtong Directors provided several securities, including a second mortgage over the Adelaide Land (CEG Mortgage) and personal guarantees, thereby reducing their contingent liability under those guarantees.
After default under the CEG Mortgage, CEG took possession of the Land in February 2018. Administrators were appointed to Runtong the following month, and in June 2018, creditors resolved to wind up the company, appointing Nicholas Cooper as liquidator (Liquidator). CEG later exercised its power of sale over the Land as a secured creditor.
The Liquidator subsequently challenged the CEG Mortgage as an ‘unreasonable director-related transaction’. This gave rise to the Full Federal Court’s findings, which clarified the application of the second and third elements of section 588FDA.
How courts assess ‘benefit’
The concept of “benefit” under section 588FDA(1)(b) of the Corporations Act is not confined to obvious or direct advantages. It extends to indirect, contingent, and secondary benefits.
For example, if a company grants security over its property to reduce a director’s personal exposure under a guarantee, that reduction of liability constitutes a “benefit”, even though no cash or asset flows directly to the director. In the CEG Case, the CEG Mortgage reduced the contingent liabilities of the Runtong Directors and was therefore found to be a benefit to them.
Accountants should note that the scope of “benefit” is deliberately broad and does not require balancing benefits against detriments to assess a director’s net position.
Reasonable person test: Focus on commercial rationale
The third element asks whether a reasonable person in the company’s position would not have entered into the transaction. This requires weighing the benefits and detriments broadly in the commercial context.
Where a transaction can be commercially explained, it will not be characterised as unreasonable, even if directors derive a benefit. This is particularly relevant in group financing or pooled funding structures, where companies often support each other’s borrowing.
In the CEG Case, Runtong’s grant of the CEG Mortgage was found to be commercially explicable when assessed in the context of its financial relationship with Datong and Futong as the three companies operated as a property development group that pooled funding and supported each other’s projects. For accountants, the key is to ensure that related-party transactions are supported by a clear and documented commercial rationale. If that rationale is missing, the transaction is at higher risk of being set aside.
What accountants need to watch out for
Liquidators have significant powers to pursue claims against ‘unreasonable director-related transactions’. While the legal onus of proof rests with them, accountants are often on the front line, spotting issues in company records before they escalate.
By advising directors to clearly document the commercial purpose of related-party dealings, accountants can help reduce the risk of those transactions being set-aside and protect their clients from costly claims against them.
Key messages
- Broad definition of “benefit” – extends beyond direct payments to include indirect, contingent, and secondary advantages.
- Reasonable person test – if a transaction has a sound commercial explanation, it is less likely to be set aside.
- Accountants’ role – early detection, clear record-keeping, and proactive guidance are critical to protecting clients from future liabilities.
Trevor Withane is a disputes and insolvency lawyer at Ironbridge Legal.
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