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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Rooms for the memory** - she said v he said evidence in court proceedings

Last week's post explored the case of Callus v KB Investments - [2020] VCC 135.

The decision also provides a useful summary of the approach a court must take when considering the evidence from opposing litigants.

In summary it was stated:

1. Human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the process of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience (see: Watson v Foxman (1995) 49 NSWLR 315 at 319).
2. The best approach for a judge to adopt in the trial of a commercial case is to place little if any reliance on witnesses’ recollection of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts (see: Blue v Ashley (No 2) [2017] EWHC 1928).
3. Where there is conflicting evidence, the court will place ‘primary emphasis on the objective factual surrounding material and the inherent commercial probabilities’ together with documentation tendered in evidence' (see: Bullhead Pty Ltd v Brickmakers Place & Ors [2017] VSC 206).

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 Michael Hutchence/Ollie Olsen song 'Rooms for the Memory’.

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Do beneficiaries need to believe in love** when concerned about trustee distributions?

Many previous posts have considered the overriding duty of trustees of trusts - and the fact that a trustee must exercise its discretion in good faith, upon real and genuine consideration and for a proper purpose.

Again with 30 June rapidly approaching, the decision in Callus v KB Investments - [2020] VCC 135 provides a useful example of the approach the courts will take in this area.

Relevantly the factual matrix involved:

1. A family trust set up by the parents of the family (on apparently standard terms);
2. Over time, all adult children benefited in various ways from the assets of the trust;
3. Some years after the trust was established, a new trustee company was appointed, with one of the adult sons the sole director of the company;
4. Around 3 years later the trust distributed one of the properties of the trust to the sole director in his personal name;
5. On discovering the transfer some years later, a sister brought proceedings to unwind the transaction and have the trustee replaced.

In letting the transfer stand, however also removing the trustee, the court confirmed:

1. While the trustee did not give any reasons for its decision to transfer the asset, it was not required to under the trust deed.
2. In any event, no record was provided of the decision – and even if there had been a document disclosing the reasons produced, the trust deed provided that the trustee was not bound to disclose any document setting out any reasons for any particular exercise of the trustee’s power.
3. The trustee was entitled to transfer the property to the son under the terms of the trust deed, which provided that the trustee may in its absolute discretion transfer any property ‘to any beneficiary for his own use and benefit in such manner as it shall think fit’ - with specific provision also confirming the trustee did not have any obligation ‘to consider competing claims of beneficiaries’.
4. The trustee also had no obligation to tell other potential beneficiaries of the trust of the transfer.
5. In contrast, due to the clear hostility between the son and one of his sisters (their relationship had deteriorated significantly following the transfer) the court was of the view that the trustee should be replaced, applying the rules explored in many previous posts centred on the test that 'the only guide is the welfare of the beneficiaries, and a trustee may be removed if the court is satisfied that its continuance in office would be detrimental to their interests'.

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 Human League song 'Love Action (I believe in love)'.

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The Mirror (man)** test - trustee powers of investment

Previous posts have considered various aspects of a trustee's powers.

Given another 30 June is on the horizon, it is timely to remember that the scope of a trustee's powers is often limited when relying on the provisions of the state based legislation in the area - reinforcing the preference to have comprehensive powers set out under the trust deed wherever possible.

The decision in G v G (No. 2) - [2020] NSWSC 818 is a useful point of reference in this regard.

The case involved the powers of a trustee of a protected estate (where the underlying sole beneficiary had lost capacity to manage their own affairs). As there was no trust deed regulating the trust, the relevant trusts act applied.

The key question in contention was whether the trustee had the power to invest assets of the trust in a retail superannuation fund (as opposed to a self managed superannuation fund).

The reason for the proceedings being the view that a payment by a trustee (which it was argued that by analogy, included a protected estate manager) into a superannuation fund is not an 'investment' of trust property by the trustee.

This was said to be because, by the payment into the fund, the trustee divests itself of trust property, loses control of that property and puts the property beyond the protective control of the court, albeit that, as a member of the fund, but without a property interest in the fund, the beneficiary (not the trustee) obtains a right to future benefits.

Furthermore, the trustee had arranged a binding death benefit nomination in favour of the legal personal representative of the estate of the beneficiary.

The court confirmed:

1. The trustee had the power under the relevant legislation to invest, or to authorise a private manager to invest, a protected estate into membership of a Regulated Superannuation Fund (although perhaps not a self managed superannuation fund, without deciding that issue).
2. This was at least in part because a protected estate manager stands in the shoes of the protected person and is the substitute decision maker. A protected estate manager does not hold property for the benefit of the protected person. Rather the protected estate manager controls the property which always remains in the name of the protected person.
3. There was however no power under the legislation for the making of a binding, or indeed any other form of nomination, for the payment of a death benefit payable by the trustee of a superannuation fund.
4. This was despite the fact that the court acknowledged that the prevailing view in Australia is that a binding death benefit nomination is not a testamentary act either because it is merely the exercise of a contractual right or the rules of the fund pursuant to which the nomination is given to the trustee confer a discretion on the trustee as to the identity of the person, or persons, to whom the benefit is to be paid.
5. Rather it was held that the management of an estate terminates on the death of the protected person and therefore the manager's power to make a decision about what happens to the protected person's funds after their death cannot be valid.
6. Thus, here, the proper course of action in relation to the nomination was there to be a separate court application authorising the effective making of a gift out of the estate of a protected person, and (perhaps) also an application for a statutory will (another topic considered regularly in View posts).

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 Human League song 'Mirror Man'.

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