On 11 September 2014, the Supreme Court of NSW handed down its decision in Allco Funds Management Limited (Receivers and Managers Appointed) (In Liquidation) v Trust Company (RE Services) Limited (in its capacity as responsible entity and trustee of the Australian Wholesale Property Fund) [2014] NSWSC 1251.

The decision has highlighted the risks associated with the involvement of directors in transactions where they are in a position of conflict.


The background to the proceeding lies in two transactions that occurred around December 2006.  At that time, Allco Funds Management Limited (AFML) owned about half of the units in a wholesale property fund known then as the Allco Wholesale Property Fund (the Fund).

AFML was also the manager of the Fund with another Allco entity, Record Funds Management Limited (RFML), acting as the responsible entity. 

Towards the end of 2006, a stamp duty issue emerged in relation to the Fund.  If left unresolved, the issue exposed the Fund to $1.8m of duty.

A solution to the stamp duty issue was devised in haste. The solution involved a redemption of AFML’s units (worth roughly $109 million) and the simultaneous creation of a loan to that value back to the Fund (the Loan Agreement).  The effect was that AFML’s beneficial equity interest in the Fund was converted into a loan made repayable in 2 years. Under the Loan Agreement, AFML would receive interest payments equivalent to the distributions it would have received on its units.

Shortly after the conversion from equity to debt, problems emerged.  The conversion reduced the profits of the Fund and had implications for the unit price.

The parties entered into a deed which amended the Loan Agreement in a way that would allow the loan to be treated as equity for accounting purposes while preserving its nature as debt for stamp duty purposes (Deed of Amendment). The Deed of Amendment also removed the 2 year term and put the repayment date of the loan at the discretion of the borrower (RFML).

Whilst the Deed of Amendment resolved the problem, it stripped AFML of any enforceable rights it had in respect of its interest in the Fund. 

Importantly, entry into the Loan Agreement and Deed of Amendment was signed off by common directors of both AFML and RFML.

In 2008, Allco collapsed and receivers were appointed to AFML.  A short while later, the unit holders in the Fund replaced RFML with Trust Company (RE Services) Limited (TrustCo) as the responsible entity of the Fund.

In the years that followed, TrustCo reorganised the Fund’s affairs with the effect of denying AFML interest on the loan while maintaining a return to the unit holders of the Fund.


In mid-2012, AFML commenced proceedings to set aside the Deed of Amendment, or alternatively, seeking to set aside both the Loan Agreement and the Deed of Amendment on the basis that:

  • each was approved by directors of AFML in breach of their fiduciary and statutory duties to AFML; and
  • by treating AFML as a bare lender with no unit holder rights, TrustCo was engaged in and continued to engage in unconscionable conduct in contravention of ss 12CA and 12CB of the Australian Securities and Investments Commission Act 2001 (Cth).

In response, TrustCo argued that the transaction was devised to benefit both AFML and the Fund. Both directors who approved the transaction gave evidence that they believed the transaction was in the interests of the Group, including AFML, and that the agreements were not intended to alter the economic outcome for either party.


Ultimately, Justice Hammerschlag found in favour of AFML finding that the directors were clearly in a position of conflict and AFML’s interests, both economic and legal, were not the same as those of RFML.

In coming to his decision, his Honour noted that the rule against conflicts is so strictly adhered to that no question is allowed to be raised as to the fairness or otherwise of any arrangement entered into.

The evidence of the directors, while accepted, ignored the fundamental nature of a director’s obligations to promote the company’s best interests.

Furthermore, his Honour held that no reasonable person in the position of the directors could reasonably and rationally conclude that the Deed of Amendment was in the best interests of AFML.


This decision is a clear reminder of the risks associated with the involvement of directors in transactions in circumstances where they are in a position of conflict.

Under the conflict rule, the court does not inquire into the fairness or unfairness of the transaction entered, or whether it is in the best interests of the principal.  The rule is inflexible.

Unless the articles of association of the company provide otherwise, a contract made in breach of this fiduciary duty, will be voidable at the option of the company unless the director makes a full disclosure of the nature of his interest in the contract to the members of the company who must approve the contract by ordinary resolution.

The practical effect of the orders was to restore AFML as a unit holder of 47% of the units in the Fund.