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