The borrower was formed as a trustee of a trust for two couples to make investments. One of the couples was aware of a development in Tumut which was offering a third of the profit for its investors. The trust therefore borrowed to invest in the third party development.
Following extensive delays in obtaining consent to the DA, and the lender rolling over the loan on several occasions, the couples had a falling out ultimately resulting in a change of directorship. The lender then wound up the corporate trustee.
The question arose as to whether the directors had incurred the debt to the lender whilst insolvent. The Court found that the investment in the development was made by one of the directors’ companies as the lender did not have funds available at settlement. A few days later, the lender paid out that company. The Court held, therefore, that the substance of the transaction was that, despite the terms of the loan agreement, then lender had actually loaned directly to the developer. The parties had not turned their minds as to how properly to document it to ensure the arrangement was otherwise.
The Court then turned to whether the trust was insolvent, or became insolvent, by incurring the debt. The Court found that it was not, as the lender would have extended the date for repayment until such time as the development was sold (and in fact did so on several occasions).
Accordingly, the lender was unsuccessful and required to pay the directors of the borrower’s costs.
Click here to read the full judgment