The Chickpea Case: Unreasonable Director-Related Transactions in Changela v Dracoma Pty Ltd

Changela v Dracoma Pty Ltd [2025] NSWCA 186 (Changela) involved payments made from the company to two of its shadow directors in satisfaction of loans from those directors. While this case involved a very particular set of facts, Bell CJ’s judgment provides a useful overview of the relevant principles and the factors the court will look to in determining whether a transaction is an ‘unreasonable director-related transaction’. It is particularly useful for liquidators who are considering deploying section 588FDA in proceedings against directors.

Key Takeaways

• The reasonableness of a director-related transaction must be assessed at the time the transaction was made – there is no benefit of hindsight.
• The assessment of whether a transaction is an ‘unreasonable director-related transaction’ will be primarily a fact-specific exercise. Liquidators should place themselves in the specific circumstances that existed at the time of the transaction to assess the reasonableness of the transaction.
• Directors should seek advice before entering into such transactions to ensure they are structured in such a way as to protect against the risk of a clawback.

Legislative Framework

Unreasonable director-related transactions are transactions between the company and a director (including on behalf of the director/for their benefit or a transaction with a relative of the director) that a reasonable person in the company’s circumstances would not have entered into.

If a transaction is an unreasonable director-related transaction, it will be a ‘voidable transaction’ within the meaning of section 588FE. If a transaction is voidable the court may (among other things) order the relevant person is to pay to the company an amount equal to the money that the company has paid under the transaction.

Unreasonable director-related transactions can be useful tools in particular because there is no requirement to establish that the company was insolvent at the time of or as a result of the transaction.

Background and Trial Judgment

Changela concerned two payments made from Changela Exports Pty Ltd (Company) to Sweta and Prashant Changela and Vijay Pandya Pty Ltd (together, the Directors).

The Company exported chickpeas from Australia to India. Each of the Directors were shadow directors. In 2016, the Company purchased Dracoma Pty Ltd’s (Dracoma) 2016 crop of chickpeas. At the time of the payments in question, the Company was in preliminary discussions with Dracoma about purchasing its 2017 crop of chickpeas as well.

The payments in question were held at first instance (and unchallenged on appeal) to be repayments of loans which had previously been advanced to the Company by the Directors. After the Company went into liquidation, the sole director of Dracoma, commenced proceedings after being assigned the right to sue from the liquidator.

At first instance, Stevenson J held that the repayments of the loan were unreasonable director-related transactions on the basis that the payments ‘diminished the liquid funds available’ to purchase the Respondent’s 2017 crop without considering the effect the payments would have on the Company or its future creditors.

Relevantly, the factors to be considered under section 588FDA in assessing what a reasonable person in the Company’s circumstances would have done are:

(i) the benefits (if any) to the company of entering into the transaction; and

(ii) the detriment to the company of entering into the transaction; and

(iii) the respective benefits to other parties to the transaction of entering into it; and

(iv) any other relevant matter.

Appeal Judgment

The judgment was written by Bell CJ, with whom Leeming JA and McHugh JA agreed.

Bell CJ emphasised that the analysis of the factors under section 488FDA requires an objective assessment to determine whether the transaction was unreasonable. Bell CJ explained some of the key principles summarised below:

• a broad interpretation should be given to the expression “for the benefit of” in section 588FDA(1)(b);
• ‘detriment’ to the company in section 488FDA(1)(c)(ii) of the Act refers to commercial detriment but is not necessarily confined to detriment that can be defined in monetary terms; and
• the assessment of any other relevant matter under section 588FDA(1)(c) requires a ‘sensible commercial assessment of the reality of the company’s circumstances’. It should not be confined to only enforceable legal relationships.

The question on appeal was whether a reasonable person would have made the payments having regard to the factors contained in section 588FDA.

Some factors which Bell CJ considered in assessing the reasonableness of the transactions were that:

• the Company was not insolvent when it made the payments, nor did it become insolvent as a result of the payments;
• the Company had no trade creditors at the time the payments were made and there was no commercial detriment to the Company caused by the transactions as they simply extinguished the existing liability of the Company to the Directors;
• the loans from the Directors were repayable on demand;
• the Company had made no firm commitments to purchase the Respondent’s 2017 crop of chickpeas;
• there was no evidence that future funding could not be obtained from the Directors or from elsewhere;
• a reasonable person in the position of the Company may be expected to pay their debts when due;
• a reasonable person may want to maintain goodwill with its lenders in case the Company requires a loan in future; and
• the benefit of hindsight should not be applied in making an assessment of the reasonableness of the transaction.

Having regard to the above factors, among others, Bell CJ held that it was not unreasonable for the Company to make the payments and therefore the criteria in section 588FDA(1)(c) had not been met. The appeal was accordingly allowed.

Conclusion

The decision in Changela is a useful example of the process the court will undertake in assessing whether a transaction is an unreasonable director-related transaction. Liquidators should place themselves in the position of the company at the time of the transaction to determine what is reasonable in all of the commercial and other circumstances.

Each case will turn on its own facts. Liquidators should scrutinise and test those facts against the broader actual circumstances when forming a view about whether a director should be pursued for an unreasonable director-related transaction.

Directors should seek advice before entering into any transactions that benefit themselves or a relative. The consequences of getting it wrong can be costly.

If you have any questions about navigating such transactions, please get in touch with our Commercial Litigation & Dispute Resolution and Insolvency & Restructuring teams.