The company took out a mortgage and paid $520,000 of the proceeds to the sole shareholder’s brother-in-law to settle a debt owed by the shareholder to his brother-in-law. The company’s liquidator sued to recover the money as an uncommercial transaction pursuant to s 588FB of the Corporations Act 2001 (Cth) which reads:
A transaction is an uncommercial transaction of the company if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
the benefits (if any) to the company of entering into the transaction; and
the detriment to the company of entering into the transaction; and
The finance was organised by the brother-in-law and the judge found that although there was a benefit to the company (which needed the rest of the loan), the detriment to the company far outweighed the benefit.
At one point the brother-in-law’s barrister made the analogy of a commission for obtaining finance. However it could not be rationally possible that a commission of $520,000 was appropriate for obtaining a loan only three times that amount. It can only be appraised as what it was, a requirement by the brother-in-law, as a condition of his involvement and of making available the moneys which were made available, that the company should provide $520,000 out of the advance and treat it as if it had been lent to the director.
Moreover the brother-in-law was found to have acted in bad faith as he knew the debt he was owed had nothing to the company. Accordingly he was ordered to repay the $520,000 plus interest to the liquidator.