Related-Party Transactions: Approval and Evidence

What Makes a Transaction Related-Party

A related-party transaction under AASB 124 transfers resources, services or obligations between a reporting entity and a related party, even when no price is charged. Relationships include control, joint control, significant influence and key management personnel, with specified family and entity connections. Apply the actual relationship categories in AASB 124 paragraph 9.

Chapter 2E uses its own related-party test in section 228. It includes directors, certain relatives and controlled entities, subject to the statutory conditions. Section 229 interprets financial benefits broadly, including indirect and non-cash benefits. Adequate consideration does not remove a benefit at this identification stage. These are separate questions under the Corporations Act.

A Fictional Supplier Payment

Assume Harbour Manufacturing Ltd is a public company. It pays $48,000 to Dockside Repairs Pty Ltd, a supplier controlled by one of Harbour’s directors. The invoice describes a machinery overhaul. These names and figures are fictional.

The director’s control establishes the connection to investigate. The invoice states the contractual purpose. The bank statement records the cash leaving Harbour. None of those records alone establishes whether the overhaul occurred or whether the price was reasonable.

Incorrect inference: The director controls the supplier, so the whole $48,000 is a wrongful payment.

Correct assessment: Establish the relationship, identify the applicable approval and disclosure rules, then compare the payment with the contract and delivered work.

Approval, Exceptions and Disclosure

Member approval and financial-report disclosure answer different questions, and a board resolution does not substitute for member approval where Chapter 2E requires it.

Section 208 covers a public company, or an entity it controls, giving a financial benefit to a related party of that public company. It requires the prescribed member approval and delivery within 15 months, unless an exception applies. This is not a blanket approval rule for every proprietary company.

Section 210 exempts terms reasonable in an arm’s length dealing, or less favourable to the related party. Other exceptions have their own conditions. Record the relied-on exception and its supporting facts. Payment of an invoice alone does not establish that exception.

A lawyer reviewing approval can use the following record sequence, alongside ASIC’s related-party guidance.

1. Establish the payer’s company type and control structure when the benefit was arranged.
2. Read the contract and variations to identify the benefit and its recipient. Include guarantees or obligations that produced no immediate bank entry.
3. Compare minutes with interest declarations. Identify who participated in the decision and what authority the resolution actually granted.
4. If member approval was required, obtain the notice, explanatory statement, voting record and resolution. Compare their scope with the completed transaction.
5. If an exception was relied on, retain the contemporaneous comparison material and reasons. Comparable quotes help explain the commercial assessment.

A director’s material personal interest engages a separate declaration question. Public-company board participation and voting restrictions also need separate attention. ASIC’s conflicts guidance distinguishes those protections from member approval.

For accounting disclosure, first establish the entity’s reporting framework. AASB 124 paragraph 18 requires relevant relationship, transaction and outstanding-balance information, including commitments. Entities applying AASB 1060 use its simplified disclosure requirements instead of AASB 124. Disclosure of arm’s length terms must be substantiated under paragraph 23.

Compare the financial-report note with the supplier ledger and relationship records. A disclosed total can still omit a particular arrangement. Conversely, an approval exception does not itself settle the accounting disclosure question.

Build the Relationship and Benefit Schedule

Build a schedule that connects each movement of money to the parties, the asserted benefit and its source records. Keep the relationship evidence separate from the transaction description so a label such as “director loan” does not become an unsupported fact.

Evidence Fields for Each Arrangement

In the fictional overhaul, reconcile the $48,000 payment to the agreed work and evidence of completion. If the supplier later refunds $8,000, retain both movements and the reason for the refund. Net cash outflow becomes $40,000. That arithmetic does not quantify a recoverable loss or establish the value of the work.

Preserve ordinary commercial explanations beside the entry. An advance payment might fund ordered parts. A repeated debit might be a staged instalment. Record the document supporting each explanation and distinguish an explanation offered by a witness from an independently established fact.

Where statements span many accounts, FinTrace saves legal teams and forensic accountants hours of manual statement review. The service supplies a searchable ledger and findings report, with each finding citing its source PDF filename and page. Those references put the payment evidence directly beside the professional’s wider corporate-record analysis.

Choose the Correct Dispute Test

Choose the claim from its legal elements and the established facts. A missing approval, an omitted disclosure and an unexplained payment each call for a different analysis.

Member approval does not displace directors’ general duties, as ASIC explains in RG 76. An alleged disclosure breach also requires its own applicable reporting duty. Neither conclusion automatically determines compensation.

The separate unreasonable director-related transaction test concerns a recovery pathway with its own requirements. Insolvency-based claims require their relevant financial-condition evidence. Equitable claims and damages require attention to the pleaded duty, recipient’s position and remedy sought.

Before alleging a breach, turn the schedule’s unresolved entries into targeted evidence requests. If control is uncertain, obtain the ownership or voting agreement. If consideration is disputed, obtain proof of delivery and the contemporaneous pricing material. If the bank narration conceals the recipient, seek the payment detail through the available procedural route.

For Harbour, the next decision depends on the missing record. Absent voting material directs the lawyer to the approval process. Missing overhaul records direct the enquiry to performance and value. Give the instructed lawyer both the cash reconciliation and the unresolved evidence questions before calculating the benefit or pleading the claim.