Up, Up And Away! - Liquidators Of Solvent Company Seek Relief For Unreasonable Director-Related Transaction

In the recent case of Aviation 3030 Pty Ltd (in liq) v Lao, in the matter of Aviation 3030 Pty Ltd (in liq) [2022] FCA 458, the Federal Court of Australia considered the unusual question of whether a solvent company can seek relief in respect of an unreasonable director-related transaction under section 588FDA of the Corporations Act 2001 (Cth) (Act).

Aviation 3030 Pty Ltd (in liq) (Aviation) was placed into liquidation on 20 March 2019 pursuant to an application by the Australian Securities and Investments Commission (ASIC) on grounds that the winding up was necessary for the public interest, to ensure investor protection and to enforce compliance with the law.  The liquidators of Aviation subsequently identified the issue of 152 million shares in Aviation to its founding shareholders as a potential unreasonable director-related transaction and commenced proceedings to challenge that transaction.

The principal legal question in the case was whether the remedies for an unreasonable director-related transaction are available to a solvent company.


Aviation was incorporated on 4 May 2011 by Mr Hakly Lao and Mr Khay Suong Taing (Founding Shareholders) to act as an investment vehicle for the acquisition and development of 240 acres of land located in Point Cook, Victoria (the Property).  The intention was that Aviation would raise capital from investors for the project, and the investors would receive shares in Aviation or units in certain unit trusts of which Aviation was the trustee.

The board of Aviation at the relevant times was made up of Mr Lao, Mr Chong Huy Taing (the son of Mr Khay Suong Taing) and an independent director Mr Terence Grundy.

Immediately after its incorporation, Aviation entered into a contract to purchase the Property for $7.8m.  Subsequently, in October 2012, the Property was re-zoned and its value increased almost tenfold to around $75.2m.  The purchase contract settled in December 2015, resulting in Aviation becoming the registered proprietor of the Property.

However, certain critical events took place between 2011 and 2016 in relation to the capital raising activities undertaken by Aviation. 

It was not in issue that Aviation issued various and slightly different information memoranda between 2011 and 2015 (Information Memoranda) to investors who then received either shares in Aviation or units in the relevant unit trusts.  These Information Memoranda noted that Aviation intended to raise somewhere between $19.8m and $21.2m for the project.  In relation to the shares, Aviation ended up issuing around 87m shares to investors at prices ranging between $0.098 and $0.14 per share.  Overall, Aviation raised around $10.6m from 73 shareholders and unitholders.

But the heart of the dispute between the parties revolved around an option agreement that was entered into in September 2012 which effectively gave the Founding Shareholders the right to purchase up to 160m shares in Aviation for $0.001 per share (Option Agreement). 

Aviation’s records show that Mr Grundy resolved that Aviation should enter into the Option Agreement on 18 September 2012 (with Mr Lao and Mr Taing abstaining).  It then appears that option exercise notices were executed by or on behalf of the Founding Shareholders (although the true date of these notices was unclear), and these notices were accepted by the board (comprising only Mr Lao and Mr Huy Taing) on 10 March 2016.  Share nomination forms were then signed by or on behalf of the Founding Shareholders in March 2016 nominating entities related to the Founding Shareholders, and on 17 March 2016 the board of Aviation (again comprising only Mr Lao and Mr Huy Taing) resolved to approve the issue of 152m shares in Aviation to the nominated entities.

To add even more fuel to the fire, in October 2018 Aviation entered into a contract to sell the Property to a third party for $135m, delivering a profit of around $127m.

The issue of the shares to the Founding Shareholders changed the total number of shares on issue from 87m shares to 239m shares and resulted in the Founding Shareholders acquiring an additional 63.6% stake in the company.

After complaints by investors, ASIC successfully applied to have Aviation (and a number of unregistered managed investment schemes operated through Aviation) wound up on the basis that the directors had issued to themselves and their associates large numbers of shares at a gross undervalue, had provided false instructions to the company’s solicitors, had duped and misled investors, had entered into related party loans, and had made unauthorised and exorbitant expenditures.

Following their appointment, the liquidators of Aviation commenced proceedings to set aside the issue of the 152m shares to the entities related to the Founding Shareholders as an unreasonable director-related transaction.

The Relevant Provision of the Act

Section 588FDA of the Act confirms that a transaction will be an unreasonable director-related transaction if:

  • it involves a payment, transfer of assets or property, or issue of securities (or agreement to do any of these things) by the company;
  • the payment, transfer or issue of securities is to a director, a close associate of the director, or a person acting on behalf of the director or a close associate of the director; and
  • a reasonable person in the company’s circumstances would not have entered into the transaction having regard to the benefits and detriments of the transaction to the company and to the other party and to any other relevant matter.

Section 588FE(6A) confirms that unreasonable director-related transactions occurring in the 4 years before the relation-back day are voidable transactions.

Section 588FF(1) sets out the general relief available in respect of voidable transactions, but section 588FF(4) provides that where a transaction is voidable solely because it is an unreasonable director-related transaction, then the Court can only make orders under subsection (1) for the purpose of recovering “for the benefit of the creditors of the company” the difference between:

  • the value of the benefits provided by the company under the transaction; and
  • the value (if any) that a reasonable person in the company’s circumstances would have provided under the transaction having regard to the benefits and detriments of the transaction to the company and to the other party and to any other relevant matter.

The Decision

In his judgment, Anastassiou J set out a detailed analysis of both the complex facts underpinning the case as well as the applicable law.

While it is not possible to traverse all of the matters addressed by Anastassiou J in the judgment, the key matters dealt with were as follows.


Anastassiou J noted that in a general sense, while the focus was on the transaction in question, it was also important to consider prior events and relationships as being relevant to assessing both whether there was an unreasonable director-related transaction as well as the appropriate remedy.

In this case, it was true that a significant number of shares had been issued at a very low price to the Founding Shareholders.  However, it was also true that the entire enterprise had been generated by the Founding Shareholders, and that if the share issue were set aside completely this would result in the Founding Shareholders receiving effectively nothing for their efforts other than director salaries.  Finally, it was also true that the investors had been passive investors, had suffered no actual loss from the share issue, and would receive an enormous windfall gain if the share issue was entirely set aside.

Unreasonable director-related transaction

As to whether the share issue had been an unreasonable director-related transaction, Anastassiou J was satisfied that the share issue satisfied the first two limbs in section 588FDA in that it involved the issue of securities to a director or a close associate of a director.

Anastassiou J was also satisfied that the third limb was satisfied and that a reasonable person in Aviation’s circumstances would not have proceeded with the share issue transaction because:

  • the share issue to the Founding Shareholders had been at a gross undervalue and had a significant diluting effect on the investors; and
  • Aviation had failed to disclose the Option Agreement or its potential consequences to investors in the Information Memoranda.

Interestingly Anastassiou J did not agree with the liquidators that the transaction was unreasonable because it exposed Aviation to the risk of litigation and deprived Aviation of the chance to sell the same shares for a higher consideration.  Although unclear, this appears to be because the only logical remedy if this were the case would be for the share issue to be set aside in its entirety, and His Honour felt that this would be inequitable, would ignore the factual background to the matter including that the existence and success of the venture was due to the efforts of the Founding Shareholders, and would deliver an unfair windfall to the investors.

Application of the Act

As to the application of the relevant provisions of the Act, Anastassiou J made a number of key findings:

  • first, His Honour was satisfied that section 588FDA does not require that the unreasonable director-related transaction must also be an insolvent transaction, and that this is supported by the explanatory memorandum to the Act as well as the anti-avoidance nature of the provision.  This was an important finding as it meant that that the claim could be brought even though Aviation was clearly solvent at the time of the transaction; and
  • secondly, His Honour was satisfied that even though section 588FF(4) says that if a transaction is voidable solely because it is an unreasonable director-related transaction then orders can only be made for the benefit of “creditors”, the meaning of the word “creditors” used in this section is broad enough to include shareholders being a class of persons to whom Aviation owed various obligations.  This was also a very important finding as it allowed Anastassiou J to make appropriate remedial orders.


Having had regard to the highly detailed submissions of the parties as to the approach to be taken to relief, Anastassiou J ultimately found that it was open to him to craft remedial orders that would, in an equitable way, remedy the unreasonableness or unfairness of the share issue to the investors.

His Honour noted that as a settlement had been reached with one of the Founding Shareholders, the focus was on remedying the fact that the remaining Founding Shareholder had paid only $76,000 for the 76m shares issued to that Founding Shareholder.  His Honour then noted that the median price paid for shares by the investors was $0.12 per share, and ordered that the remaining Founding Shareholder pay 76m x $0.12 less the $76,000 already paid, being $9.044m.

While this would benefit the investors who paid less than $0.12 per share more than those who paid more than $0.12 per share, it substantially addressed the diluting effect of the share issue to the remaining Founding Shareholder while allowing that Founding Shareholder to retain their equity position in the company.

Lavan Comment

This case is a unique and unusual example of how broadly the voidable transaction provisions in the Act can apply.

While it is unlikely that the same specific fact scenario will arise again any time soon, it is nonetheless a useful illustration of how a Court appointed liquidator can seek relief from the Court in relation to unreasonable director-related transactions even if the underlying entity is solvent.  This could prove to be very relevant given the increasing number of regulator driven appointments in relation to unregistered managed investment schemes in the Australian market.

If you have any questions about unreasonable director-related transactions or about the voidable transaction provisions in the Act, the experienced Lavan team is here to help.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.