Family operated businesses form a significant proportion of Australian businesses. Indeed, the Australian Bureau of Statistics reported that family operated businesses comprised 87 per cent of businesses in Australia in 2013.
Family operated businesses often involve multiple family members and complex legal and financial structures. Many such businesses are conducted by a company, often as trustee of a discretionary or unit trust. Additionally, family members often provide personal assets and guarantees to secure the obligations of the corporate vehicle.
When a family operated business begins to struggle, the directors of the corporate entity may turn to other businesses within the family, or other family members, for financial assistance or relief. Sometimes, these arrangements may be informal or merely oral. Additional complications may also arise where a family member is a director of more than one company.
However, when a family operated company is wound up, the liquidator may bring claims for breaches of directors’ duties (under Chapter 2D of the Corporations Act 2001 (Cth) (Corporations Act) and at common law), as well as claims in relation to uncommercial transactions and insolvent transactions as between family operated entities.
Gordon v Leon Plant Hire Pty Ltd (in liq) & Ors
These issues were considered by Black J of the New South Wales Supreme Court in Gordon v Leon Plant Hire Pty Ltd (in liq) & Ors, a case concerning the liquidation of two family operated companies, Lyon Form Pty Ltd (Lyon Form) and Leon Plant Hire Pty Ltd (Leon Plant Hire).
Marco Leon and Manuela Leon were the directors of Leon Plant Hire and their children, Marcos Leon and Carol Dicsiascio, were the directors of Lyon Form (Leon Family Members). Together, the two companies, the Leon Family Members and two additional family members (the Borrowers) entered into a loan agreement with MKM Capital Pty Ltd (MKM Capital), pursuant to which MKM Capital provided the Borrowers with a loan of $991,250 (Loan Agreement). The Borrowers’ obligations under the Loan Agreement were secured by a registered mortgage over a property owned by Leon Plant Hire (Merrylands Property).
On 7 February 2011, the Australian Taxation Office commenced winding up proceedings against Leon Plant Hire. On 18 March 2011, a workers compensation insurer commenced winding up proceedings against Lyon Form. On 27 March 2011, Ms Carol Dicsciascio became the sole director of Lyon Form. On 11 April 2011, Leon Plant Hire was placed into administration and, one month later, Lyon Form was placed into liquidation.
During 2011 and 2012, Lyon Form made payments totalling $87,762 to MKM Capital pursuant to the Borrowers’ obligations under the Loan Agreement (Mortgage Payments).
On 15 May 2012, Lyon Form was placed in a creditors’ voluntary liquidation and a liquidator was appointed. In relation to the Mortgage Payments, the liquidator brought proceedings:
The Defendants claimed that the Mortgage Payments had been made from Lyon Form’s account with money that was owed to Leon Plant Hire for use of its plant and equipment.
Black J found that there was no fixed or written agreement or set of rates between Lyon Form and Leon Plant Hire in respect of a lease of the plant and equipment.
His Honour noted that invoices in relation to the lease of plant and equipment had only been issued well after the winding up began; in December 2013. However, although His Honour concluded that there was no formal or informal arrangement between Lyon Form and Leon Plant Hire in respect of the Mortgage Payments and lease of plant and equipment, the dealings constituted a ‘transaction’ within the definition of section 9 of the Corporations Act. The parties to that transaction were the Borrowers.
In assessing whether the Mortgage Payments were uncommercial pursuant to section 588FB of the Corporations Act, Black J found that a reasonable person in Lyon Form’s position would have at least made inquiries with Leon Plant Hire as to the cost of leasing the plant and equipment from Leon Plant Hire. Therefore, the failure to even make inquiries caused His Honour to find that the Mortgage Payments were uncommercial.
In considering whether the Mortgage Payments were insolvent transactions, Black J made the following observations about section 286 of the Corporations Act:
The obligation of a company is to maintain financial records in accordance with s 286 of the Corporations Act on an ongoing basis, and that obligations is not satisfied by claiming that such records could be prepared if an additional payment were made by a liquidator to a third party, whether small or large … [Section 286 of the Corporations Act] contemplates that a company must maintain the underlying financial records on an ongoing basis, even if [an] accountant is retained to prepare financial statements based on those underlying records.
Having found that Lyon Form had failed to comply with section 286 of the Corporations Act, His Honour applied the presumption of insolvency under section 588 E(4) where a company fails to keep financial records. Black J also found that Lyon Form was insolvent in fact and, as the Mortgage Payments had occurred during the relation-back period, made orders that Leon Plant Hire and the Leon Family Members (excluding Ms Dicsciascio) pay Lyon Form the amount of the Mortgage Payments (plus interest).
In finding that Ms Dicsiascio had breached various director’s duties, Black J said:
I accept that it may well have been consistent with Carol’s duties to authorize payments at least on an arm’s length basis, by Lyon Form to Leon Plant Hire in respect of equipment made available and any other services properly provided by Leon Plant Hire to Lyon Form. However, I can see no basis on which it could be in Lyon Form’s interests to authorize the payment of the Mortgage Payments, without any inquiry as to whether the amount of those payments was proportionate to the benefit which Lyon Form obtained from the use of the relevant equipment. I also do not accept that course is justified by any suggestion that Lyon Form’s corporate interests required that it assist Leon Plant Hire to meet its obligations – or, more precisely, do so for it – where there is no evidence that Lyon Form could not have continued its business using equipment obtained or rented from third parties, had it needed to do so. There seems to me also to be a plain conflict of duty and interest in the relevant transactions, where they conferred the benefit on Leon Plant Hire, Marcos, Marco, Manuela of reducing their liability under [the Loan Agreement], at the expense of Lyon Form and, ultimately, its creditors.
His Honour also considered Lyon Form’s claim for a right of subrogation over the Merrylands Property in respect of the Mortgage Payments. Having examined the relevant authorities, Black J observed that subrogation would not be ordered unless there was no remedy at law or in equity which was sufficient to avoid an unconscionable result. In this instance, His Honour found that an equitable charge, in favour of Lyon Form, could be ordered over the Merrylands Property. His Honour also noted that an order of subrogation could have potentially affected the rights of MKM Capital as lender and the remainder of the Borrowers.
Lavan Legal comment
This case illustrates that a single action of a director can give rise to a variety of claims in a winding up, and serves as a reminder to insolvency practitioners to carefully examine the conduct of directors when assessing the company’s records and transactions.
In the context of a family operated business, this case reiterates the importance of clear and comprehensive documentation of transactions and arrangements between family members and various businesses operated by a family. Failure to do so may have consequences in a winding up and result in claims under Part 5.7B of the Corporations Act.
It is also essential that banks and financiers providers regularly inform themselves as to their borrowers’ solvency in order to avoid the potential consequences of a successful claim of subrogation.
 For example, the fiduciary duties (1) to act in good faith and in the best interest of the company; (2) to exercise the powers of a director only for a proper purpose; (3) not to act in a manner which would place the director in a position of conflict; and (4) to avoid taking advantage of any such conflict should one arise.
  NSWSC 397.
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