A summary about promissory notes: avoid a cold sweat**

Following on from posts over the last few weeks concerning gift and loan back arrangements, a question has been raised as to how the funding of any gift (and subsequent loan) can occur.

Certainly, the conservative view is that there is the physical transfer of funds by way of electronic transfer or bank cheque. Where this is not possible there are generally two other approaches that can be utilised.

The first is simple endorsement of a cheque. If this approach is taken it is critical that the original cheque (or at least copies of it) is retained indefinitely.

The other approach is the use of promissory notes.

The Bills of Exchange Act 1909 (Cth) defines a ‘promissory note’ as follows:

‘A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer.’

It has been accepted by the courts that promissory notes are considered equivalent to cash at law.

Arguably the leading confirmation of this position is the decision in Fielding & Platt Ltd v Selim Najjar [1969] 1 W.L.R 357, where relevantly it was held –

'We have repeatedly said in this court that a bill of exchange or promissory note is to be treated as cash.

It is to be honoured unless there is some good reason to the contrary.'

Therefore, the endorsement of promissory notes can legally discharge the financial transactions contemplated by a gift and loan back arrangement.

Further assurance about the effectiveness of a validly created promissory note can be found from the Tax Office in relation to superannuation contributions and its ruling TR 2010/1.

This ruling lists a range of methods for the making of valid superannuation contributions, including cash, electronic funds transfer, money order, bank cheque, personal cheque, post dated personal cheques that are presented promptly and promissory notes.

In relation to promissory notes, the Tax Office confirms its view that the two key requirements (in a superannuation context) are that the payment demand is proximate to the issuing of the note and that the note is then honored.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Sugarcubes song 'Cold Sweat’.

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Real (love)** and Money (and sham transactions)

For those interested, following recent posts, the High Court further explored the issues in relation to shams, rejecting the argument that ‘real money’ must change hands before a loan is said to exist in the case of Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55.

In reaching this conclusion the court confirmed that the critical aspect was that there was no evidence to suggest that the parties to arrangements were not intending for any outcome other that what was documented.

This was despite the fact that what was essentially a round robin of transfers was evidenced with documentation only.

The decision also see the High Court provide a succinct definition of a ‘sham’, as ‘steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences’.

As explored in other recent posts therefore, in relation to a gift and loan back arrangement, properly drafted and validly signed promissory notes, loan and mortgage documents should therefore be legally effective.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from John Lennon song the surviving Beatles worked up during the Anthology project.

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When you were mine** - An Edelsten case from days gone by

Geoffrey Edelsten has been involved in a number of litigation cases over the years.

Following on from last week’s post which considered the impact the rules concerning sham transactions have on gift and loan back arrangements, it is useful to revisit the decision in Max Christopher Donnelly As Trustee of the Bankrupt Estate of Geoffrey Walter Edelsten v Geoffrey Walter Edelsten and Ors [1994] FCA 992.

Essentially, the case focussed on whether property allegedly acquired by Edelsten during bankruptcy via a series of company structures should have been made available to Edelsten’s creditors.

During the bankruptcy period, these entities were said to be controlled by Edelsten in breach of the Corporations Act 2001 (Cth), before then being formally transferred to him once he was discharged.

Reiterating the key aspects of what amounts to a sham (as summarised in last week’s post), the court confirmed that in this case –

1. A transaction is not a sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it should not be deemed to be ‘undone’ merely because there was an ulterior purpose in doing it;
2. Here, the companies involved were real corporations in that they were properly incorporated and administered in accordance with the requirements of the law relating to corporations;
3. Therefore, the key question was whether the acquisition or creation of the businesses of the companies was a sham. In other words, was it in fact agreed and intended that the legal and beneficial ownership of those businesses should be and remain with Edelsten, not the companies;
4. In holding that the structure was valid, the court confirmed a key aspect of the case featured last week, namely, that a structure will not be automatically characterised as a sham because it was undertaken for the purpose of ensuring that any property acquired after bankruptcy did not fall into the hands of a trustee in bankruptcy.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Church song 'When you were mine’.

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A further (& deeper)** gift & loan back case

Previous posts have looked at various aspects of gift and loan back arrangements, including arguably the leading case in the area Atia v Nusbaum [2011] QSC044 (Atia).

Further case law support for the position outlined in Atia, is provided by the earlier decision Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530 (Sharrment).

In this case it was held that for a transaction to be considered a sham, the parties must intend that the acts or documents giving rise to the transaction ‘are not to create the legal rights and obligations which they give the appearance of creating’.

Essentially this means the courts examine ‘whether the act or document was never intended to be operative according to its tenor at all but rather was meant to cloak another and different transaction’.

In Sharrment, a series of complex transactions were implemented that were designed to place assets out of the reach of creditors, with the outcome being an at risk individual owed a debt to the trustee of a family trust.

1. The court held that the transactions did not constitute a sham arrangement. This was the case despite the following factual matrix:
2. The transactions were essentially circular and arguably lacked an objective commercial purpose;
3. There was a ‘round robin’ of cheques (as opposed to a physical transfer of funds) and not all parties had sufficient funds to make good on the payments anticipated by the cheques;
4. The loans created were interest free and repayable at call;
5. The at risk individual could essentially control any loan repayment requirements in his discretion, given he had ultimate control (via an appointor role) of the family trust that made the loans;
6. It seemed reasonable to assume there was ‘ulterior purpose’ of the arrangements of protecting the at risk individual’s wealth from creditors, which created an ‘unpleasant aura’;
7. If an ulterior purpose was present however it counterintuitively supported the validity of the arrangement, given the ulterior purpose would only be achieved if the transactions were intended to be valid and not a sham.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Church song from their ‘Further/Deeper’ album and 'Miami’.

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