How to Respond to a Liquidator’s Demand for Repayment of an Unreasonable Director-Related Transaction

You received a letter. It is from a liquidator. It says a company you were a director of, one that is now in liquidation, paid you money, or paid money to an entity connected to you. And the liquidator wants it back.

This is one of the most confronting letters a former director can receive. The amount involved is often significant. The letter may cite section 588FDA of the Corporations Act 2001 (Cth) and refer to something called an “unreasonable director-related transaction.” It will typically set a short deadline for response and may threaten court proceedings if you do not comply.

Before you respond, pay, or ignore it, read this guide. The legal landscape is more nuanced than the letter suggests, and the decisions you make in the first weeks after receiving it will shape the outcome.

What Is an Unreasonable Director-Related Transaction?

Section 588FDA of the Corporations Act 2001 (Cth) allows a liquidator to claw back transactions where three conditions are met:

1. The company was a party to the transaction.
2. The transaction was made for the benefit of a director, or a close associate of a director, as defined in section 9 of the Act.
3. A reasonable person in the company’s circumstances would not have entered the transaction, having regard to all the circumstances, including the benefit to the company, the detriment to the company, the respective benefits to others involved, and any other relevant matters.

The key feature that makes section 588FDA different from every other voidable transaction claim is this: there is no insolvency requirement. A liquidator can pursue these transactions even where the company was completely solvent at the time the payment was made. This is what makes section 588FDA one of the most far-reaching clawback powers in the insolvency regime.

Close associates under section 9 include: entities controlled by the director; relatives of the director; relatives of the director’s spouse; and entities controlled by relatives. If your company paid your salary in an unusual amount, paid a management fee to a related entity, made a loan to a related party, paid for personal expenses on company accounts, or transferred an asset to a related party, all of these can be within the section 588FDA net.

The 4-Year Look-Back: Transactions You Thought Were Done

Section 588FE(6) provides that a section 588FDA transaction is voidable only if it was entered into during the four years ending on the relation-back day. The relation-back day is typically the day on which the winding-up application was filed, not the day of the liquidation order.

In practice, this means that if a company goes into liquidation in 2026 and a winding-up application was filed in May 2026, the liquidator can look back to May 2022 for section 588FDA transactions. Payments you made or received in 2022 or 2023, which you may have long since spent or relied upon in your financial planning, are potentially subject to a clawback claim.

This is fundamentally different from unfair preference claims (section 588FA), which are subject to a 6-month look-back for arm’s length creditors, or 4 years only for related-party creditors. Section 588FDA always carries a 4-year window, regardless of the relationship.

Who Can Be the Target of a Section 588FDA Claim?

The liquidator brings the claim against whoever received the benefit, and under section 588FE, the liquidator may seek to void the transaction and/or recover the money or property from the recipient.

Recipients can include:

• The director personally, where the company paid the director a salary, dividend, or bonus that the liquidator characterises as unreasonable.
• A related entity controlled by the director, where the company paid a management fee, licence fee, or other payment to an entity owned by the director.
• A family member, where the company made payments to or for the benefit of a relative.
• A trust, where the director is a trustee or beneficiary of a trust that received company funds.

This is relevant to understanding your exposure. If you received a salary that the liquidator characterises as excessive, the claim is against you personally. If your family trust received management fees from the company, the liquidator may join both you and the trustee as defendants.

The Reasonableness Defence: What It Actually Requires

The central question in any section 588FDA claim is objective: would a reasonable person in the company’s position have entered this transaction? This is not what you believed at the time. It is what the court decides a reasonable commercial person would have done, assessed with hindsight and with access to information the court finds was available at the time.

In assessing reasonableness, courts consider:

• The benefit to the company, did the company receive genuine value for the payment?
• The detriment to the company, what resources did the company lose?
• The benefit to the director or related party, how significant was the payment to the recipient?
• Any other relevant circumstances, industry norms, comparable payments, the company’s financial position, and any documentation supporting the rationale for the transaction.

The Full Federal Court’s decision in Yang v Wong [2026] FCAFC 39 confirmed that the interposition of a corporate entity between the director and the benefit does not defeat a section 588FDA claim, the court will look through the structure to identify whether the director, or a close associate, was the ultimate beneficiary. This matters for directors who arranged payments through related entities rather than directly to themselves.

The practical implication of the reasonableness test is that it rewards documentation. If your company board resolved that a management fee was commercially appropriate, commissioned a market comparator analysis, or documented the services actually rendered by the related entity, that evidence is your primary defence material. If the payments were made without documentation, the liquidator’s task becomes easier.

What Defences Are Available?

What Happens If the Liquidator Succeeds?

If the liquidator establishes a section 588FDA claim, the court can:

• Void the transaction, meaning the property or money is legally returned to the company.
• Order repayment, a money judgment against the recipient for the value of the benefit received.
• Make orders against third parties, where property has been on-passed to someone who was not acting in good faith.

The judgment is a debt. The liquidator can enforce it as any other judgment creditor, by garnishee, writ of execution against property, or, in the case of an individual, as a basis for a bankruptcy petition. The personal exposure is real and immediately actionable once judgment is obtained.

A 6-Step Action Guide for Directors Who Have Received a Section 588FDA Demand

1. Do not pay, and do not ignore it. Paying in response to a demand that has not been tested through negotiation or litigation surrenders defences you may not know you have. Ignoring it allows the liquidator to proceed to court without the benefit of your side of the story.
2. Engage a commercial disputes lawyer before responding. Anything you put in writing in response to the demand can be used in proceedings. Legal professional privilege attaches to communications with your lawyer from the moment of engagement.
3. Preserve all documentation about the transactions. Board minutes, resolutions, service agreements, invoices, bank statements, payroll records, and any market comparator analysis are potential defence evidence. The less documentation exists, the more work needs to be done on the forensics of the transactions.
4. Check the dates. Your lawyer should verify the relation-back day and confirm whether the transactions fall within the 4-year look-back period. If any transactions are outside the window, that is immediately available grounds to contest that part of the claim.
5. Assess the strength of the reasonableness defence. A lawyer with corporate insolvency expertise can assess whether the payments would withstand the objective reasonableness test, considering industry norms, your company’s financial position at the time, and the services or consideration provided. This assessment should happen before any substantive response is sent to the liquidator.
6. Consider negotiation. Section 588FDA claims are frequently resolved by negotiation, particularly where the director has documentation supporting reasonableness, or where the liquidator’s cost-benefit analysis for litigation does not support full enforcement. A negotiated settlement can be significantly less than the demand amount and can include terms that protect your interests.

Common Mistakes When Responding to a Section 588FDA Demand

• Assuming the demand is correct, liquidators’ calculations of the “detriment to the company” are often contested and involve judgment calls about market rates and commercial norms.
• Responding in writing without legal advice, unsupported admissions in a letter to the liquidator can narrow your defences in subsequent proceedings.
• Failing to check the look-back period, if any of the transactions fall outside the 4-year window, that portion of the claim cannot proceed.
• Not investigating the reason-back day precisely, the relation-back day can sometimes be later than directors assume, particularly in provisional liquidations or administrations that preceded the winding-up order.
• Underestimating the cost of ignoring it, default judgment can be obtained quickly if no defence is filed. Once a judgment is registered, enforcement options for the liquidator expand significantly.

Frequently Asked Questions