The decision of Fielding as Liquidator of Lyngray Developments Pty Ltd (In Liquidation) v Dushas & Anor  QCA55, overturned a Judgment at first instance where it was held that various payments made by a company to a close associate of a director of a company were not unreasonable director related transactions pursuant to Section 588 FE(6).
The Court of Appeal held that the payments did constitute unreasonable director related transactions and this decision provides guidance as to:
- What constitutes a “benefit” to a company when assessing unreasonable director related transactions; and
- How the Courts will exercise discretion under Section 588 FE(4) to quantify the amount to be repaid to the company.
Dushas separated from her husband and in a property settlement became the registered owner of a property mortgaged to the ANZ Bank.
Dushas was unable to afford the repayments and entered into an agreement with her mother, the sole director of Lyngray, whereby the company would occupy and pay rent equivalent to the mortgage repayments until such time as Dushas’ mother (Director) and her partner could purchase the property. The Director and her partner immediately began occupying the property.
The agreement was never reduced to writing but the books and records of the company reflected that rent was being paid. Those payments were debited against a director loan account which Dushas alleged constituted an asset of the company.
Oral evidence, uncontested by the liquidator, was provided by the Director that approximately 25% of the property was by Lyngray for its business.
Two questions were specifically considered on appeal:
- Did the raising of a director’s loan account for the payments made by the company to Dushas for rent, constitute an asset of the company and thereby give the company benefit such that the transactions did not constitute unreasonable director related transactions; and
- Where the transactions did constitute unreasonable director related transactions, could the oral evidence provided by Dushas at hearing that the property was used for 25% of business purposes be sufficient evidence to reduce the amount payable by Dushas to the company in liquidation.
Did the raising of a director’s loan account constitute a “benefit” for the company?
Daubney J, with whom McMurdo and White JJ agreed, stated that it was “impossible to accept on the uncontested findings and otherwise on the uncontroversial evidence” Dushas’ argument that the benefit gained by the company for each transaction was the asset constituted by the debt represented by the director’s loan account.
His Honour went on further to say that the fact that these entries were made on the company's books and account does not prove that there was in fact an agreement of value by the director to repay those sums to the company. Further consideration was given to the “extremely suspicious” manner in which the director and her partner had used company funds for personal living expenses.
Without an agreement of value by the director to repay those sums to the company, it was held that the director’s loan accounts could not constitute a benefit to the company.
How to quantify the amount to be repaid?
On appeal, all three Judges considered and accepted that the company may have used a portion of the premises for the purpose of the conduct of its business and while there was some divergence in opinion as to how the benefit should be calculated the majority took a practical view.
The evidence provided as to the extent of the use of the property was limited in that it was merely a statement of the Director within affidavit material and in examination in chief which, while untested, lacked any substantiation. Daubney J did not accept the evidence of the Director and did not reduce the amount payable to the company in liquidation by the amount of benefit received by the company.
Margaret McMurdo P (with whom White JA agreed) stated that in many cases the determination of the amount of benefit that the company receives will be “capable of precise arithmetical calculation. In other cases…the evidence will be imprecise and Judges will be required to assess the value as best they can on the evidence”.
The liquidator had not called evidence to establish the 25% use of the property by the company was unreasonable and as such, it held that the amount claimed by the liquidator should be reduced by 25% to reflect the quantification of the benefit which the company had received from the rental of the property.
What does this mean?
In relation to what constitutes a benefit for the company, it is clear that by simply recording in a directors’ loan account amounts advanced to directors will not change the characterisation of the actual transaction. The Court’s will examine the nature of what occurred to ascertain whether it in fact constituted a loan or was simply recorded to disguise a transaction which may otherwise be deemed unreasonable.
Insolvency practitioners should be prepared to examine director’s loan accounts critically and look beyond the recording of transactions to examine the real benefit, if any, obtained by virtue of the transaction/s.
As to quantifying the benefit which a company may have received, it is clear the Courts will come to a conclusion based upon the evidence presented to them, albeit that the evidence might be imprecise. This serves as a warning to ensure that those seeking to either establish a benefit, or challenge the quantification of a benefit, produce the best evidence possible to put before the Court when challenging or establishing a benefit to remove the risk that the Courts will make rudimentary quantifications.