Smith v Starke (No 2)

The case of Smith v Starke (No 2) involved a dispute between the liquidators of Action Paintball Games Pty Ltd and the directors of the company regarding certain payments made by the company to the defendants' creditors. The liquidators alleged that these payments constituted unreasonable director-related transactions under the Corporations Act 2001 (Cth). The legal issues before the court were whether the payments were unreasonable and whether a reasonable person in the company's circumstances would not have made them. The court was also required to consider the detriment to the company of making the payments and the obligation to consider the interests of the members.

The court found that the defendants had acted reasonably in making the disputed payments. The company had no legal obligation to make the payments, and they did not provide any benefit to the company. However, the payments were made to secure an alternative site for the company's business, which was of significant importance given the unsatisfactory relationship with the landlord of the existing site. The court held that a reasonable person in the company's circumstances would have considered the interests of the members as a whole before deciding to cease making the payments. The directors wished to maintain the availability of the alternative site for the long-term benefit of the company, having spent a considerable amount towards developing it. The court found that the payments would benefit all shareholders and that there was a significant risk of serious detriment to the shareholders if the payments ceased. Therefore, the court held that the payments were not unreasonable.

The court also considered the ratio of previous cases in which certain transactions had been found to be unreasonable director-related transactions. These included the purchase of a boat using company funds for a close associate, an agreement to assume joint liability for obligations owed by a director to a third party, a contract to dispose of real property of a company for no consideration, a payment made into a home loan account of a company's directors, the incurring of costs and liabilities by a company to construct a house on property owned by a close associate, and rental payments made by the company for premises owned by the director's daughter. The court found that the transactions in the present case did not fall within the same category as those in the previous cases.

In conclusion, the court found that the disputed payments were not unreasonable director-related transactions and that a reasonable person in the company's circumstances would not have made them. The court ordered the parties to file and serve a joint proposed minute of order giving effect to these reasons and listed the matter for directions. The parties were also given liberty to apply.