A recent Federal Court decision has provided some useful insights on how related party loans will be considered in an insolvency context, particularly in relation to unreasonable director-related claims against directors and their relatives. For insolvency practitioners it also provides insight into how the assignment of claims might effectively be used to mitigate litigation risks.
Introduction
It is common for businesses to operate loan accounts with related entities, directors and their family members. Sometimes money transferred is booked to loan accounts with related entities but the funds are actually received directly by a director, spouse or family member, including, at times, via another person or company. The recent Federal Court decision in Yang v Wong, in the matter of Axis North Pty Ltd (R&M Appt.) (in Liq) (No 2) [2025] FCA 693, illustrates the insolvency challenges that can arise when the ultimate recipient of the insolvent company's money is different to the recipient in the accounts of the company. This case highlights the importance of careful consideration and strategic positioning when dealing with related party loans involving directors.
The facts
Axis North and its related companies were engaged in property development, using a network of loans within the group. These loans were often undocumented, interest-free and unsecured. Axis North raised funds from mezzanine and non-bank lenders, including Ms Wong, the mother of an Axis North director.
Typically, funds were channelled through a special purpose company, Ultimate, before being lent to other group members. One group member company, Wharf Road, purchased a property at Surfers Paradise for development, financed from money advanced by Ms Wong on a 20% return basis. Ms Wong was owed about $4m in March 2018.
Another investor, Ms Yang, sought to improve her chances of obtaining an Australian residency visa by investing in an Australian business. In March 2018, she loaned $3.5 million to Axis North under terms described by Justice Derrington as heavily legalistic but offering her little protection.
Axis North then used Ms Yang's funds to make an undocumented, interest-free loan to Wharf Road. Wharf Road subsequently paid $2.8 million to Ms Wong to repay her loan relating to the Surfers Paradise property. While there was some dispute over whether Ms Wong received all amounts directly or through Ultimate, it was agreed she was the final recipient of the $2.8 million.
After Axis North entered insolvency, the company's liquidators assigned their rights to sue Ms Wong for an unreasonable director-related transaction to Ms Yang. Ms Yang then launched a claim to recover the $2.8 million Ms Wong had received, arguing it was an unreasonable director-related transaction under section 588FDA of the Corporations Act.
The claim
An unreasonable director-related transaction claim is a type of voidable transaction claim that liquidators or their assignees can use to recover funds from directors, their close associates or, sometimes, others. Notably, the company's insolvency is not a requirement for the claim, but it does set the timeframe within which the claim can be made. Liquidators may pursue unreasonable director-related transaction claims for payments made up to four years before the company's winding up began.
To bring such a claim, the transaction must involve one of the following:
- a payment made by the company
- a conveyance, transfer or other disposition by the company of property of the company
- the issue of securities by the company
- the incurring by the company of an obligation to make such a payment, disposition or issue.
Additionally, the transaction must have been made to a director, a relative of a director or their spouse, or someone acting on their behalf. In this case, it was undisputed that Ms Wong was a relative of a director.
Once these initial conditions are met, the transaction will be voidable if a reasonable person in the company's position would not have entered into the transaction, considering the benefits and detriments to the company and other parties involved.
The key legal question in the case was whether the $2.8 million received by Ms Wong constituted 'payments' by Axis North. Ms Wong defended the claim by arguing that the transaction was reasonable in the company's circumstances.
The decision
Ms Yang's case hinged on the argument that the money Ms Wong received amounted to 'payments' under section 588FDA of the Corporations Act. Ms Wong defended the claim, contending that the funds she received did not qualify as payments in the technical sense of the term used in the legislation. She argued that, although she ultimately received the money, Axis North itself did not pay her directly. Instead, Axis North had loaned the money to Wharf Road, which then paid Ms Wong or the special purpose company, Ultimate, who subsequently passed the funds to her.
Justice Derrington delivered a clear and instructive judgment on this issue. His Honour explained that, for a transaction to be considered a 'payment' under the unreasonable director-related transaction provisions, it 'necessarily requires a transfer of value which has some consequential impact upon the legal rights between parties to it.'1
His Honour gave examples of transactions that are payments:2
- Where A directs C, who owes A, to pay to B, to whom A owes money: there has been a payment by A to B with a consequential diminution of A's indebtedness to B.
- Where B does not owe A, but the transfer of value via C is intended to create a debt from B to A: there is a payment by A to B.
His Honour then provided the following example of a transaction that was not a payment:
- Where a transfer of money or value from A to C merely puts C into a position where C is able to pay its own debt to B, and does so by a further transfer of value without any reference to A: there has been no payment by A to B.
His Honour then summed up the position on the facts explaining why Ms Wong had not received any payment from Axis North:
... Wharf Road made a payment to Ms Wong of $2.8m (being the payments directly to her and to Ultimate) which had the effect of reducing its indebtedness to Ms Wong by that amount. However, these dealings did not have any effect upon any legal relationship between Axis North and Ms Wong, either in relation to any antecedent legal rights or the creation of new legal rights. Put bluntly, between Axis North and Ms Wong, their legal rights inter se remained unaltered by reason of the dealings that transpired in late March 2018. 3
Accordingly, Ms Yang's case failed because she was unable to satisfy the 'payment' element of her claim.
Ms Wong also argued in defence that the payments were reasonable and therefore not an unreasonable director-related transaction. Derrington J rejected this argument and found that, in the case circumstances, which included no discernible benefits being obtained by Axis North from its loan to Wharf Road and the nature of the loan as unsecured, interest free and undocumented, 'it is impossible to accept that a reasonable person in the position of Axis North would have made the payment ...'.4
Comments
The following key takeaways emerge and provide important guidance for company directors and their advisers:
- The flow of money does not determine whether a transaction is a 'payment' for the purposes of an unreasonable director-related transaction claim.
- Keeping accurate and current records of transactions that involve multiple parties, especially where the money is ultimately for the benefit of a director, family member, spouse or their relative, is critical to minimise unintended claims in insolvency.
- Liquidators can assign claims to third parties. Directors may face well-resourced or motivated claims even where the liquidator does not have the funds to pursue such claims.
Directors who believe the case provides a blueprint to avoid claims in insolvency should think again. The case considered only one of a suite of claims that can be brought against a director or their family. The outcome may not have been the same if Ms Yang had broader claims available to her.
For liquidators, the decision serves as an important reminder that assigning claims for voidable transactions to third parties can be an effective strategy to manage litigation risk and costs. The decision also reminds liquidators that it is crucial to consider all angles when investigating potential voidable claims. Care must be taken to avoid assuming transactions meet the technical requirements of the recovery provisions of the Corporations Act.
Cooper Grace Ward's litigation and dispute resolution team has successfully represented clients in voidable transaction proceedings, public examinations and liquidator actions. Our expertise ensures that we can effectively navigate the complexities of insolvency litigation, providing strong representation for our clients.
If you wish to discuss any of the matters contained in this article or would like any further information, please contact a member of our restructuring and insolvency team.
Footnotes
1 At [70].
2 At [70].
3 At [72].
4 At [106].
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.