Tuesday, July 5, 2022

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.
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** 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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