Setting Aside Transactions | Directors’ Breach of their Duties

We aim to deliver Just, Redemptive Outcomes®

Directors breach of their duties – Case Note:  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.

In this case, the Supreme Court of New South Wales considered whether a director breached their duty to act in the best interests of the company under their care and consequently, whether a conflict of interest occurred.

We consider this case has relevant considerations for both “for-profit” companies and “not-for-profit” companies.

  1. Brief Relevant Facts

Allco Funds Management Limited (“AFML”) held 109,687,077 units (valued at “$1.00 per unit”) in Australian Wholesale Property Fund (“AWPF”), a Registered Management Scheme.

Record Funds Management Limited (“RFML”) was the responsible entity of AWPF from 1 July 2006 to 23 February 2009.

Both RFML and AFML were subsidiaries of the Allco Financial Group Limited (“Allco”). Further, both AFML and RFML had common directors who sat on both boards.

On 15 December 2006, AFML entered in a Loan Agreement with RMFL, on agreed terms that AFML loaned RMFL the sum of $109,687,077 (“the Loan Agreement”). The Loan Agreement had a fixed repayment date of 31 January 2009 (“the fixed repayment rate”). This transaction was entered into by AFML in order to manage stamp duty obligations.

RFML used the loan advance to redeem AFML’s units. Consequently, AFML was no longer a unit holder of AWPF, as its beneficial equity interest was converted into a loan.

Following entry into the Loan Agreement, “its terms and effect were perceived to be somewhat problematic”.

On 1 February 2007, AFML and RFML executed a Deed of Amendment which varied the Loan Agreement. These amendments effectively deferred the repayment of the loan to a “variable repayment date” subject to the satisfaction of various pre-conditions. This new repayment date was described by the Court as “not arrived and, by all accounts, is not imminent.”

On 23 February 2009, RFML ceased to be the responsible entity for the AWPF, and the Defendant, Trust Company (RE Services) Limited (“TCL”), was the new the responsible entity for the AWPF.

Subsequent to the events of the Global Financial Crisis, the creditors of Allco resolved to place almost all of the companies in its structure into liquidation on 26 May 2009[1].

Proceedings were subsequently commenced by the Receivers on behalf of AFML against TCL to set aside the Deed of Amendment.

It should be noted that there was no provision in AFML’s Articles of Association that authorised the common directors’ conduct, nor were there any members’ resolutions which authorised the aforementioned transactions.

  1. The Court’s Decision

Justice Hammerschlag of the Supreme Court of New South Wales ordered that a Receiver was entitled to rescind (i.e. cancel) the Loan Agreement, Deed of Amendment and the redemption of the $109,687,077 funding units.

In arriving at this Decision, we refer to the following comments by Justice Hammerschlag:

  • In reference to the Director’s fiduciary duty to act in the best interests of the company under their care:

“The rule is so strictly adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract entered into”; and

  • “Unless the articles of association of the company otherwise provide, 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 of the members of the company, in general meeting, who must approve the contract by ordinary resolution. A provision in the articles may validate a contract which would otherwise be voidable under the general law.”

The practical effect of this Decision meant that the AFML’s loan (the conditions for repayment of which were not likely to be satisfied) was set aside, and AFML’s significant beneficial equity interest in the fund was restored.

  1. Our Comments

While there are plenty of lessons to take from this Decision, we comment as follows:

  • Arguably, the Directors’ actions were made in consideration of the interests of the entire Allco Group. However, their individual duties to the separate legal entities of AFML and RFML were “in conflict”. This decision again emphasises the high standard of a director’s duty to a company under their care
  • While the issue of the directors’ personal liability was not specifically addressed in the Decision, we note that in certain circumstances, a director can be personally liable for breaches of their Fiduciary and Statutory Duties under the Corporations Act 2001 (Cth) (“the Act”) (or, in the case of Not-For-Profits, under the Australian Charities and Not-for-Profits Commission Act 2012 (Cth));
  • Under the Act it is possible for members of a Company to consent to Related Party Transactions (though such steps were not taken in this case); and
  • Justice’s Hammerschlag’s comment in relation to the provisions of a company’s Articles of Association being able to “validate” transactions which would otherwise be voidable under general law is a reminder for companies to review their Articles of Association or Constitution and make any amendments if necessary (emphasis added).

As directors of a company, it is commercially prudent that you seek legal advice on company structures, constitutions, governance, personal liability and other related matters pertaining to a company (whether “for-profits” or “not-for-profits”).

For more information regarding Directors breach of their duties

Please contact our Business Development Team or call us on (07) 3252 0011 to book an appointment with one of our specialist Commercial Lawyers today.

[1] The Australian’s write-up on Allco’s high profile liquidation is available here: http://www.theaustralian.com.au/archive/business-old/allco-to-go-into-liquidation/story-e6frg96f-1225713283596