Related Party Transactions: What Australian Directors Must Know to Stay Compliant

This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.

Related party transactions are one of the most common — and most misunderstood — sources of director liability in Australia. A director who pays above-market rent to a family trust, lends company funds to a connected business, or transfers an asset to an associated entity before financial trouble strikes can face personal liability, regulatory action, and in a liquidation, litigation to claw that value back. These obligations apply whether the company is public or private, and the consequences of getting it wrong are serious.

This article explains the legal framework in plain terms: what the law requires of directors, where private company directors most often go wrong, and what you can do right now to protect yourself.

What Is a Related Party Transaction Under Australian Law?

A related party transaction is any arrangement through which a company gives a financial benefit to a person or entity that has a close connection to the company’s directors or controllers. The concept originates in Chapter 2E of the Corporations Act 2001 (Cth) and covers a wide range of commercial dealings.

Financial benefits caught by the definition include payments of money, loans, the supply of goods or services at non-arm’s-length terms, the transfer of property, the giving of guarantees, and the forgiveness of debt. In short: almost any transaction that moves value from the company toward someone connected to those who control it.

The breadth of the definition reflects the underlying concern. Directors occupy positions of trust and power. The law is designed to prevent them — and those close to them — from extracting private benefits at the expense of other shareholders and creditors.

Who Is a “Related Party” Under Section 228?

Section 228 of the Corporations Act 2001 (Cth) sets out who counts as a “related party” of a company. The definition is considerably broader than most directors anticipate. Related parties include:

• Directors and company secretaries of the company.
• Directors and company secretaries of related bodies corporate — if you sit on the board of a holding company or subsidiary, you are a related party of both.
• Spouses and de facto partners of any director or secretary.
• Parents, children, siblings, and their spouses of any director or secretary.
• Entities that a director controls — including family discretionary trusts, self-managed superannuation funds, and private companies in which the director holds a controlling interest.
• Related bodies corporate — holding companies, subsidiaries, and entities under common control.
• Any entity that a related party controls — catching indirect connections through corporate structures.

The practical reach of this definition is significant. If your family trust owns the premises your company leases, that lease is a related party transaction. If your spouse’s company supplies services to your company, that contract is caught. The connection does not need to be direct or formal — it flows through family relationships and control structures as defined in section 228.

Directors should map their personal and commercial relationships against this definition at least annually. Many discover connected transactions they had not recognised as such.

When Does Chapter 2E Apply?

Chapter 2E of the Corporations Act creates a formal approval regime for related party transactions in public companies. The default rule under section 208 is that a public company must not give a financial benefit to a related party unless:

• The company obtains member approval by ordinary resolution before the benefit is given; or
• The transaction falls within one of the exceptions in sections 210 to 216.

The exceptions are meaningful. A transaction on arm’s-length terms — that is, on terms no more favourable to the related party than would be reasonable in an arm’s-length dealing — is generally excluded. Remuneration of directors and officers is also excluded where it falls within certain limits and has been disclosed.

Proprietary companies are exempt from Chapter 2E under section 111L. However, this exemption is frequently misunderstood. Private company directors are not free to engage in self-dealing. They remain subject to the full force of director duties under sections 180 to 184, common law fiduciary obligations, and the voidable transaction provisions in Part 5.7B. The Chapter 2E exemption removes a procedural approval requirement — it does not authorise conduct that would otherwise breach director duties.

Director Duties in Related Party Dealings

Regardless of whether Chapter 2E applies, directors must comply with their statutory duties under the Corporations Act whenever they deal with related parties.

Section 180 — Care and Diligence

Under section 180(1), a director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise in the same circumstances. Where a director approves a transaction between the company and a related party without obtaining an independent valuation, without scrutinising the terms, or without genuinely considering whether the transaction serves the company’s interests, they will likely fall short of this standard.

Section 181 — Good Faith and Proper Purpose

Section 181 requires directors to act in good faith in the best interests of the company and for a proper purpose. A director who channels a benefit to a connected party in circumstances that advantage themselves or their associates at the company’s expense — without genuine commercial justification — will be difficult to defend.

Section 182 — Improper Use of Position

Section 182 prohibits directors from improperly using their position to gain an advantage for themselves or someone else, or to cause detriment to the company. A director who uses their board position to procure a related party contract on favourable terms engages this provision directly.

Section 191 — Material Personal Interest

Section 191 requires a director to disclose a material personal interest in any matter that relates to the affairs of the company. In public companies, a director with a disclosed conflict generally cannot vote on the matter. In private companies, section 194 may permit a conflicted director to be present and vote if the company’s constitution allows — but only if disclosure has been properly made. Failure to disclose is a criminal offence under section 191(6).

The Insolvency Risk: Voidable Transactions

Even where a related party transaction was approved at the time, it may be challenged in a subsequent insolvency. Liquidators hold powers under Part 5.7B of the Corporations Act to recover value that has been extracted from a company in the lead-up to its insolvency.

Section 588FB — Uncommercial Transactions

A transaction is an uncommercial transaction if a reasonable person in the company’s circumstances would not have entered into it having regard to the benefits and detriments to the company, and the respective benefits to the other party. Transactions with related parties at above-market purchase prices, below-market sale prices, or on terms no third party would accept are obvious candidates. The look-back period is four years for transactions involving related parties (compared to two years for ordinary creditors).

Section 588FDA — Unreasonable Director-Related Transactions

Section 588FDA specifically targets payments, dispositions, or obligations entered into in favour of a director, a close associate of a director, or on their behalf — where a reasonable person in the company’s position would not have entered into the transaction. Critically, this provision does not require the company to have been insolvent at the time. The look-back period under section 588FDA is four years. This makes it one of the more powerful recovery tools available to liquidators in relation to director-adjacent dealings.

A liquidator who successfully challenges a related party transaction under either provision can recover the value of the benefit from the recipient. The recipient cannot claim they acted in good faith if the company’s insolvency was foreseeable.

Where Directors Most Often Go Wrong

The most common related party transaction failures we see in commercial and insolvency disputes fall into predictable patterns:

• No documentation. A loan or payment to a connected party is made informally, with no written agreement, no interest terms, and no repayment schedule. In a liquidation, the lack of documentation suggests — and courts often find — it was a gift, not a commercial dealing.
• No independent valuation. A director approves a transaction at a price that suits the connected party without obtaining an independent assessment of market value. When challenged, there is no objective evidence the terms were arm’s-length.
• No board disclosure. A conflicted director fails to declare their interest, participates in the vote, and the transaction proceeds without the other directors being aware of the conflict. This is both a breach of duty and, in public companies, a criminal offence.
• Asset stripping before insolvency. Directors transfer valuable company assets to related parties — often at undervalue — in the months before the company fails. This is the conduct section 588FDA was designed to address, and liquidators pursue it actively.
• Confusion between public and private company rules. Private company directors assume the Chapter 2E exemption means they face no constraints. They do not understand that director duties and voidable transaction provisions apply in full.

How to Protect Yourself: Practical Steps for Directors

Managing related party transactions correctly is not complicated. The process is straightforward — what creates liability is failing to follow it.

1. Map your related parties annually. Identify every person and entity that falls within the section 228 definition. Include family trusts, SMSFs, associated companies, and your spouse’s business interests. Update the list whenever your circumstances change.
2. Obtain an independent valuation. Before entering any transaction with a related party, obtain a written assessment of market value from an independent qualified person — whether that is a real estate valuation, a business valuation, or a legal opinion on market terms. Keep the document on file.
3. Disclose conflicts at board level. If you have a material personal interest in a matter, disclose it formally at a board meeting and have it recorded in the minutes. In public companies, absent yourself from the vote. In private companies, follow whatever the constitution requires.
4. Document the transaction properly. Every related party dealing should be supported by a written agreement, signed by both parties, with clear terms on price, duration, repayment, and commercial rationale. Informal arrangements do not withstand scrutiny.
5. Apply arm’s-length terms. The price, terms, and conditions of any related party transaction should be those that could be obtained in an open market. If the company is granting a benefit that would not be available to an unconnected third party, the transaction is vulnerable.
6. Keep board minutes. The board’s consideration of the transaction — including the conflict disclosure, the valuation, and the rationale for proceeding — should be recorded in minutes. Minutes are the primary evidence of what was considered and why.
7. Monitor the company’s financial position. If the company is approaching insolvency, heightened caution is required. Transactions with related parties in the vicinity of insolvency will be scrutinised closely by any subsequent liquidator. Obtain legal advice before proceeding.

How Boss Lawyers Can Help

Boss Lawyers regularly acts for directors and companies navigating the obligations that arise from related party dealings — whether that means advising on structuring a transaction to withstand scrutiny, representing a director who faces a challenge from a liquidator, or advising a company on what its disclosure and approval obligations require.

If you are entering into a transaction with a connected party, have received correspondence from a liquidator about a past dealing, or are uncertain about your disclosure obligations, call us on 1300 267 711 or use the contact form below.

Related party transactions that are managed correctly create no liability. The risk is entirely in the failure to manage them properly — and that failure is almost always avoidable with the right advice at the right time.

Frequently Asked Questions

Does Chapter 2E apply to private companies?

No. Section 111L of the Corporations Act exempts proprietary companies from the Chapter 2E member approval regime. However, private company directors remain fully subject to director duties under sections 180 to 184 and the voidable transaction provisions in Part 5.7B. The exemption removes a procedural approval requirement — it does not authorise self-dealing or transactions that breach director duties.

Can a liquidator set aside a related party transaction that was properly approved at the time?

Yes. Member approval under Chapter 2E does not protect a transaction from challenge under the voidable transaction provisions. A liquidator can seek to unwind a transaction under section 588FB (uncommercial transactions) or section 588FDA (unreasonable director-related transactions) regardless of whether it was approved by shareholders at the time. The tests applied under Part 5.7B are independent of the Chapter 2E approval process.

What is the look-back period for related party transactions in a liquidation?

The look-back period for related party and director-connected transactions is generally four years before the relation-back day — the date the company’s winding up is taken to have begun. This is significantly longer than the six-month look-back period for ordinary creditors and the two-year period for some other voidable transaction categories. Transactions as far back as four years can be scrutinised and, if they satisfy the relevant test, set aside.

My family trust charges rent to my company. Is that a related party transaction?

Almost certainly yes. If you are a director of the company and you control the discretionary trust — as trustee, appointor, or otherwise — the trust is likely a related party of the company under section 228. The lease arrangement is a related party transaction. This does not mean it is unlawful — a lease at arm’s-length market rent, properly documented, with disclosed conflicts, is entirely manageable. The risk arises where the rent is above market, the arrangement is undocumented, or the conflict has not been disclosed.

What happens if I forget to disclose a conflict?

Failure to disclose a material personal interest in accordance with section 191 is a criminal offence with a penalty of up to 10 penalty units. Beyond the criminal exposure, the failure to disclose will be relevant to whether the director has satisfied their duty of good faith under section 181 and their duty not to improperly use their position under section 182. A transaction entered into by a conflicted director who did not disclose the conflict is significantly more vulnerable to challenge — by the company, by other shareholders, or by a liquidator.

This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances. Laws may have changed since this article was published. Contact Boss Lawyers on 1300 267 711 for advice specific to your situation.

If you are a director facing scrutiny over related party transactions, or a shareholder concerned that directors are using company resources for improper purposes, Boss Lawyers’ director dispute lawyers Brisbane can advise on your rights and options. We also act in commercial litigation matters where ASIC or shareholders are pursuing claims. Call 1300 267 711.