In the decision of Re Sans Pareil Estate Pty Ltd (In Liq) [2024] NSWSC 255 (‘Re Sans Pareil’), the New South Wales Supreme Court approved an application by a liquidator pursuant to section 588FDA of the Corporations Act 2001 (Cth) for the recovery of unreasonable director-related transactions.
The Group was previously part of the operations of Sans Pareil Estate, a popular winery in New South Wales that established a multi-million dollar wine export business. The case usefully summarises prior section 588FDA cases, and in particular, the evidentiary onus arising from a director’s receipt of money that originated from company bank accounts.
The evidentiary onus is on the defendant to raise a commercial explanation for the transaction, where, on its face, the transaction appears to provide a lack of benefit to the company. When determining an application under section 588FDA, the Court will focus on what a reasonable person in the company’s circumstances would be expected not to do.
Gavin Moss (the Liquidator) was appointed as the liquidator over 10 companies within the Sans Pareil Estate group of companies (the Group).
The Liquidator conducted investigations of the Group’s accounting records. These records included bank statements for accounts held by both the Group and American Express accounts held in the name of Mr Salvestrin (the Director).
From the Liquidator’s investigations, it was evident that money was being transferred from the Group’s bank accounts to the Director’s American Express credit cards, for the payment of personal expenses such as a universal home theatre, food, alcohol, travel and accommodation.
The money being transferred originated from a refund provided to the Group by the Australian Taxation Office (ATO). The ATO refund was a result of the Director fraudulently creating tax invoices to obtain larger GST refunds (the ATO refund).
The Liquidator sought to recover $8,457,203.09 (the Total) from the Director in respect of the transactions.
The Court clarified that the company does not have to be insolvent at the time of the impugned transaction, because insolvency is not an element of a claim under section 588FDA.
Section 588FDA of the Act provides that a transaction is an unreasonable director-related transaction if:
In ascertaining the ‘company’s circumstances’, the Court will consider all relevant matters and have regard to each case’s unique circumstances, facts and context.
The liquidator does not need to provide evidence to prove the precise uncommercial nature of the transaction, given that there is often limited evidence regarding the purpose and circumstances of the impugned transaction. Instead, the liquidator needs to provide enough evidence so that the Court may infer the following:
The onus is then on the director to provide a commercial explanation for the transaction.
The Court held that the Director received a substantial benefit from the transactions, as his personal expenses were paid for by the Group.
The Group gained no benefit from these transactions and instead suffered considerable detriment. The funds transferred by the Director resulted from the ATO Refund. In these circumstances, the ability of the Group to pay back the fraudulent ATO Refund was significantly diminished, especially because the actual operations of the Group were not sufficient enough to repay the ATO Refund.
The Director failed to provide any evidence to indicate that the transactions were a proper business expense or were for the benefit of the Group.
Because of the inability of the Director to bring any such evidence, the Court found in favour of the Liquidator. The Director was ordered to repay the Total to the Group.
Section 588FDA allows a liquidator to recover historical payments that occurred prior to the company entering liquidation. The liquidator does not have to prove that the company was insolvent at the time of the impugned transaction. Additionally, the Court does not require the liquidator to provide detailed evidence of the purpose and nature of the transaction, nor that the director breached any duties. Section 588FDA may provide a lower evidential burden where a liquidator is seeking to recover payments made by a company, to a director, or related party of the company.
Re Sans Pareil provides a useful summary for both Liquidators and defendants, of the principles and evidential burden applicable in a section 588FDA proceeding. The case also serves as a reminder to companies and liquidators to ensure they scrutinise transactions carefully.
If you have any questions regarding this decision or the matters summarised in this paper, the experienced Lavan team is here to help.
