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[2025] NSWCA 186
appellant. Appeal allowed. The primary judgment was varied to reduce the amounts stated in paragraphs 1 and 4 of that judgment. Dracoma was ordered to pay restitution of $280,764.38 to the First and Second...
The Court of Appeal overturned the finding that the Company acted unreasonably by repaying two $250,000 loans to people associated with its controllers. The loans were repayable on demand, the Company was solvent, had no trade creditors or binding commitments for its next season, and the repayments discharged liabilities rather than transferring company value for nothing. Possible future trading needs did not change the result on the facts known at the time. The judgment does not establish that repayment of every director-related loan is reasonable: it stresses that the outcome depends on the company's circumstances when payment is made.
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2,125 words · generated 06/10/2026
Changela v Dracoma Pty Ltd [2025] NSWCA 186 concerned two payments made by Changela Exports Pty Ltd (the Company) on 20 September 2017. Each payment was $250,000. One went to Prashant and Sweta Changela, and the other to Vijay Pandya Pty Ltd. The primary judge found that the payments were repayments of funds previously advanced to the Company, and that those loans were repayable whenever the relevant controllers decided they should be repaid ([11]-[12], [43]).
4 cited instruments linked from this judgment.
The Company exported chickpeas from Australia to India. Its trading activity was seasonal and its first full season had concluded by the time of the payments. A contemporaneous email from Prashant Changela said that the Company had received payments from its buyers, that he had transferred $250,000 “back” to the lenders, and that he would provide accounts so they could establish the season's final profit ([13]). Bell CJ considered that email important because it gave a commercial explanation for the repayments and placed them in the context of settling up after the previous season ([14], [40]).
Dracoma was a trade creditor of the Company and brought proceedings as assignee of claims from the Company's liquidator ([3]). It alleged that the repayments were unreasonable director-related transactions under s 588FDA of the Corporations Act 2001 (Cth). The primary judge accepted that argument, reasoning in substance that the Company intended to buy the 2017 crop and needed to retain cash for that purpose ([32]).
The Court of Appeal allowed the appeal. It varied the primary judgment's monetary orders, ordered Dracoma to make restitution of $280,764.38 to each of two groups of Appellants, with interest from 11 April 2025, and ordered Dracoma to pay the appeal costs ([57]-[58]).
The statutory question was whether it might be expected that a reasonable person in the Company's circumstances would not have made the payments. Section 588FDA(1)(c) requires the decision-maker to consider benefits to the company, detriment to it, benefits to other parties, and any other relevant matter ([20], [49]). The Court stressed that the evaluation must be objective and made at the time of the transaction ([23], [55]).
Several features of the Company's position mattered. It was not insolvent when the payments were made, and the payments did not make it insolvent. It had no trade creditors at that time, no binding commitment concerning the 2017 crop and no ongoing office or employee expenses requiring it to retain cash ([15], [36]). Bell CJ therefore rejected the idea that the money was already “required” for an imminent purchase: the Company had not yet contracted with Dracoma, and the crop discussions began later ([36], [39], [53]).
The payments also discharged debts. They were not gifts, personal expenses, or transfers for no consideration. The loans were repayable on demand, and the same lenders had previously received repayments and then advanced further funds. Bell CJ reasoned that repayment of a debt does not ordinarily strip value from a company's balance sheet because the cash paid out is matched by a liability discharged ([47]-[51]). He also observed that maintaining goodwill with lenders could benefit the Company when it needed finance in a future season ([50]).
The evidence of the Company's past funding practice was relevant. It had been funded through informal loans from the same people, and it received a further $600,000 in November 2017, before any agreement with Dracoma for the new crop ([36], [38]). McHugh JA described the commercial rationale as the lenders expecting repayment after the prior season, with future seasonal funding expected from those same lenders ([69]).
The Company's contemplated future trading did not, by itself, make the repayments unreasonable. The possible need to buy chickpeas was not yet a contractual obligation. The market was uncertain, including because of possible Indian tariffs, and the timing and terms of any later purchase and on-sale were unknown ([16], [38], [53]-[55]). McHugh JA emphasised the difference between a liability already incurred in a known amount and a speculative possibility of a future liability ([68]). The decision was therefore grounded in the facts as they stood on 20 September, not in what subsequently happened to the 2017 crop.
The judgment applied the existing statutory test in s 588FDA rather than announcing a new statutory provision or a categorical rule for director loans. Before this decision, the court had authorities describing the test as objective and directing attention to the company's circumstances, its controllers and business, and the surrounding transaction. Bell CJ quoted the formulation in Weaver v Harburn: the listed benefits and detriments are mandatory considerations, while the “any other relevant matter” limb depends on the circumstances of the case ([23]).
Earlier cases had found unreasonable director-related transactions in circumstances such as use of company funds to acquire a boat for a close associate, assumption of a director's personal liabilities, asset transfers for little or no consideration, payment of personal expenses, and payments made while other creditors were left unpaid ([30]-[31]). The Court treated the repayments here as materially different. They were repayment of loans on their terms, not an unexplained diversion or gratuitous transfer ([46]-[48], [52]).
The judgment also addressed the phrase “it may be expected that” in s 588FDA(1)(c). Leeming JA explained that, despite the phrase's ordinary-language suggestion of a range of possible expectations, courts treat it as emphasising the objective character of the inquiry. It does not dilute the condition that must be established ([60]-[62]). He noted that s 588FB uses identical language and referred to Lewis v Doran and Tosich Construction Pty Ltd v Tosich in explaining why the phrase is not read literally ([61]).
The practical clarification is cautious and fact-sensitive: solvent companies may repay loans repayable on demand, but the result depends on circumstances at the time. McHugh JA expressly rejected hard-and-fast rules and discussed circumstances that might alter the analysis, including existing debts, intended trading liabilities, other available resources, and the commercial rationale for repayment ([66]-[69]). The judgment does not say that every repayment of a director loan is reasonable, nor that solvency alone determines the issue.
At [50], Bell CJ said a reasonable person may be expected to pay debts when due, including loans repayable on demand, at least where payment does not prefer the lenders over other creditors. In plain English, a director-related creditor does not automatically lose the ordinary expectation of repayment merely because of the relationship. The absence of competing creditors mattered here.
At [51], Bell CJ found “no net commercial detriment” because the payments extinguished a corresponding liability. This does not mean a reduction in cash can never be detrimental. McHugh JA recognised that reducing cash can be a detriment in a trading company, but the statutory evaluation must consider the whole situation, including the liability discharged and the certainty of future obligations ([67]-[68]).
At [55], Bell CJ said the reasonable-person evaluation is made objectively and at the time of the transaction. This is central to why the later loss-making outcome of the 2017 crop trade did not determine whether the September repayments were unreasonable. The Court considered the company's position and the information available then, not simply the later result.
At [61], Leeming JA said the introductory words do not “qualify or relax” the condition in paragraph (c). In plain English, the test is not met just because someone might expect that a reasonable company would avoid the transaction. The court must reach an objective conclusion on the statutory criterion.
At [66], McHugh JA warned that “It is not possible to lay down hard and fast rules to cover every situation.” That is an important limit on the case's reach. Repayment of a demand loan may be reasonable in one company's circumstances and unreasonable in another's.
At [68], McHugh JA distinguished an existing known liability from a speculative possibility of future trading debts. The passage directs attention to how concrete the future commitment was at the payment date. Between a definite obligation and a remote possibility there may be many intermediate cases, to be evaluated on their evidence.
The decision is most directly relevant where a company repays a loan from a director, controller, close associate, or a related entity, and the payment is challenged under s 588FDA. Its fact pattern involved informal loans repayable on demand, a solvent company, no other trade creditors, no binding commitment to make the anticipated seasonal purchase, and a history of the same lenders both advancing and receiving funds ([36], [43], [50], [69]).
It may be particularly relevant where the challenge relies on the fact that the repayment reduced available cash for a possible future business transaction. The judgment indicates that the future need must be assessed in its state of certainty at the date of repayment. A future liability that has not been incurred and may never be incurred is not automatically equivalent to an existing debt ([53]-[55], [68]).
The reasoning may be less directly applicable where a company has other creditors whose debts are due or imminent, where repayment prefers an insider over them, where the company is insolvent or becomes insolvent, or where the loan is not actually due or repayable on demand. Bell CJ expressly distinguished repayment of a loan “neither due nor repayable on demand” and repayment that occurs when other creditors are unpaid ([47]). Those distinctions identify issues a later court would need to assess rather than establish a separate automatic rule.
The case should also be read against the examples discussed at [30]-[31], which involved personal use of company assets, gratuitous transfers, questionable expenses, or creditor prejudice. The Court's distinction depended on the genuine debt, the repayment terms and surrounding commercial practice, not merely on the fact that recipients were connected to the company.
The judgment is dated 14 August 2025. The supplied judgment does not describe any later court's treatment of Changela v Dracoma, so no claim about subsequent application, approval, distinction or rejection can be made from this source.
The authorities discussed within Changela show the doctrinal context the Court itself considered. Weaver v Harburn supplied a formulation of the objective test ([23]). Vasudevan v Becon Constructions was distinguished in substance: the Court explained that repayment of a due loan without preference to other creditors did not resemble the “stripping” of company benefits in the circumstances before it ([25], [47]). Smith v Starke and numerous first-instance decisions were discussed as examples of transactions found unreasonable, and Bell CJ concluded that the impugned repayments were “of a vastly different character” ([30]-[31], [46]).
The judgment also cited Aviation 3030 Pty Ltd v Lao on evaluating a transaction at the time it occurs while taking account of relevant antecedent circumstances and foreseeable consequences ([24]). It referred to CEG Direct Securities Pty Ltd v Cooper on commercial assessment and appellate review ([28], [44]). These authorities are part of the reasoning in Changela, not evidence of how later courts have treated Changela itself.
The decision leaves the application of s 588FDA to different kinds of director-loan repayments fact-dependent. McHugh JA said the result depends on all the circumstances at the time, and identified a range between known liabilities and speculative future trading needs ([66]-[68]). The judgment does not set a threshold for when an anticipated liability becomes sufficiently concrete to make retaining cash commercially necessary.
Nor does it decide how a court should weigh a director loan repayment where the company has some creditors, but not necessarily debts that are due or imminent. Bell CJ's reasoning was expressly framed around the absence of other creditors and absence of preference ([47], [50], [52]). A different creditor position could materially change the balance.
Another open issue is the importance of reliable evidence of the loan terms and repayment rationale. Here the primary judge found that the advances were loans repayable as the relevant people determined, and Bell CJ relied on contemporaneous emails and a consistent history of repayments and readvances ([11]-[14], [40], [48]). The decision does not establish how a court would approach undocumented advances where the existence, amount or repayment terms are disputed.
Finally, the Court did not decide the broader legal effect of all informal director funding arrangements or say that a company may disregard future operational needs whenever it is solvent. McHugh JA expressly cautioned against universal rules ([66]). The analysis remains tied to statutory factors, evidence of actual commitments, other creditor interests, the terms of the loan and the commercial rationale at the time of payment.
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Source: NSW Caselaw (www.caselaw.nsw.gov.au). Converted to plain text by ZoeLaw. Not the official version.
Medium Neutral Citation: Changela v Dracoma Pty Ltd [2025] NSWCA 186
Hearing dates: 04 August 2025
Date of orders: 14 August 2025
Decision date: 14 August 2025
Before: Bell CJ at [1];
Leeming JA at [59];
McHugh JA at [64].
Decision: (1) Appeal allowed.
(2) Vary the judgment of the primary judge made on 14 March 2025:
(a) in paragraph 1, by substituting “$119,738.15, including interest of $13,120.15” for “$400,502.53, including interest of $43,884.53”; and
(b) in paragraph 4, by substituting “$870,369.59, including interest of $95,369.59" for "$1,151,133.97, including interest of $126,133.97”.
(3) Pursuant to rule 51.19 of the Uniform Civil Procedure Rules 2005 (NSW), the Respondent pay restitution:
(a) of $280,764.38 to the First and Second Appellants plus interest from 11 April 2025; and
(b) of $280,764.38 to the Third Appellant plus interest from 11 April 2025.
(4) The Respondent pay the Appellants' costs of the appeal.
Catchwords: CORPORATIONS –– whether repayment of informal loans repayable on demand constituted unreasonable director-related payments contrary to s 588FDA of the Corporations Act – where company solvent – where company had no other trade creditors and no ongoing rent or employee expenses – where company had no existing contractual obligations – where company contemplating entering into future contracts for export of chickpeas to India
Legislation Cited: Conveyancing Act 1919 (NSW) s 37A
Corporations Act 2001 (Cth) ss 254T, 477(2)(c), 588F(1)(c), 588FA, 588FB, 588FDA, 588FE, 588FF
Family Law Act 1975 (Cth)
Cases Cited: Aviation 3030 Pty Ltd (In Liq) v Lao [2022] FCA 458
Buzzle Operations Pty Ltd (In liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109
CEG Direct Securities Pty Ltd v Cooper as liquidator of Runton Investment and Development Pty Ltd (in liq) [2025] FCAFC 47
Crowe-Maxwell v Frost (2016) 91 NSWLR 414; [2016] NSWCA 46
Cussen v Sultan [2009] NSWSC 1114
Featherstone v Ashala Model Agency Pty Ltd (in liq) [2018] 3 Qd R 147; [2017] QCA 260
Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd (in liq) [2021] NSWSC 1692
In the matter of Allscope Concrete & Pumping Pty Ltd (in liq) [2024] NSWSC 1476
In the matter of Bryve Resources Pty Ltd [2022] NSWSC 647
In the matter of Gondon Five Pty Ltd (in liq) [2020] NSWSC 1769
In the matter of IW4U Pty Ltd (in liq) [2021] NSWSC 40
In the matter of Pulse Interactive Pty Ltd (in liq) [2019] NSWSC 22
In the matter of RMATA Cutelli Pty Ltd (in liq) [2018] NSWSC 382
In the matter of Rococo Group Pty Ltd (in liq) [2022] VSC 167
In the matter of Sans Pareil Estate Pty Ltd (in liq) [2024] NSWSC 255
In the matter of ZH International Pty Ltd (in liquidation) [2022] NSWSC 2
Lewis v Doran [2005] NSWCA 243; 219 ALR 555
Pleash (Liquidator), in the matter of SFG Relocations Pty Ltd v Fourie (No 3) [2024] FCA 583
Queensland Phosphate Pty Ltd v Paradise Phosphate Ltd [2019] VSCA 215
Re W Media Holdings Pty Ltd [2021] QSC 208
Shot One Pty Ltd (in liq) v Day [2017] VSC 741
Smith v Starke, In The Matter of Action Paintball Games Pty Ltd (In Liq) (No 2) [2015] FCA 1119; (2015) 109 ACSR 145
Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363
Vasudevan v Becon Constructions (Aust) Pty Ltd (2014) 41 VR 445; [2014] VSCA 14
Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9
Weaver v Harburn [2014] WASCA 227; 103 ACSR 416
Woodgate v Fawcett [2008] NSWSC 868
Category: Principal judgment
Parties: Sweta Prashant Changela (First Appellant)
Prashant Girishbai Changela (Second Appellant)
Vijay Pandya Pty Ltd (Third Appellant)
Dracoma Pty Ltd (Respondent)
Representation: Counsel:
A Greinke with O Bellhouse-Smith (Appellants)
G Laughton SC with J Hynes (Respondent)
Solicitors:
Lodhia Lawyers (Appellants)
William James Lawyers (Respondent)
File Number(s): 2025/00129860
Publication restriction: Nil
[This headnote is not to be read as part of the judgment]
This appeal concerned two payments each of $250,000 (the impugned payments) made by Changela Exports Pty Ltd (the Company) on 20 September 2017 to Sweta and Prashant Changela, and Vijay Pandya Pty Ltd (together, the Appellants). The sole issue on appeal was whether the impugned payments constituted unreasonable director-related transactions for the purposes of s 588FDA of the Corporations Act 2001 (Cth) (the Act). Such transactions are voidable for the purposes of s 588FE of the Act.
The Company operated a business of exporting chickpeas from Australia to India. Both Prashant Changela and Dr Pandya admitted at trial to being shadow directors of the Company and were intimately involved with the operation of its business.
Dr Pandya was also the general medical practitioner of Mr Alex Wheeler, the sole director and shareholder of Dracoma Pty Ltd (the Respondent). Mr Wheeler has for the last 50 years grown “desi” and “kabuli” chickpeas on several farms in the Central and Orana region of New South Wales, areas in which chickpeas are annually harvested around November. In September 2016, after Dr Pandya had facilitated an introduction between Prashant Changela and Mr Wheeler, the Company successfully purchased the Respondent’s 2016 crop of chickpeas.
In a finding not challenged on appeal, the primary judge held the impugned payments were repayments of loans earlier advanced to the Company. Consistent with that finding, on 19 July 2017, $250,000 was advanced to the Company by Prashant and Sweta Changela, and $250,000 by Dr Pandya (through his company, Vijay Pandya Pty Ltd). The primary judge concluded these loans were “repayable whenever Prashant, Rajan [Changela] and Dr Pandya so determined”.
In October 2017, Prashant Changela had discussions with Mr Wheeler in relation to the sale of his 2017 crop of chickpeas (the 2017 Crop), and an agreement was reached for that sale in “late 2017”. The Company on sold most of those chickpeas to an Indian Gujarat company, Vijay Pulses Pty Ltd, in the course of which the Company incurred significant expenses exacerbated by the imposition of a 30% and then a 40% tariff on all imported chickpeas by the Indian government.
The proceedings were brought by the Respondent as an assignee under a Deed of Assignment entered into on 1 September 2022 with the then liquidator of the Company in respect of the rights, title and interest in any choses in action that the Company or the liquidator had against, relevantly, any present or past director of the Company.
The primary judge held that the repayment of the loans in September 2017 constituted unreasonable director-related transactions contrary to s 588FDA(1), emphasising that the Company intended to purchase the 2017 Crop prior to the making of the impugned payments, and that those payments diminished the liquid funds available to purchase the 2017 Crop without consideration of the effect on the Company or its future creditors.
The Court (Bell CJ, Leeming JA and McHugh JA agreeing) held, allowing the appeal:
Weaver v Harburn [2014] WASCA 227; 103 ACSR 416, cited.
Vasudevan v Becon Constructions (Aust) Pty Ltd (2014) 41 VR 445; [2014] VSCA 14, distinguished.
Smith v Starke, In The Matter of Action Paintball Games Pty Ltd (In Liq) (No 2) [2015] FCA 1119; (2015) 109 ACSR 145, applied.
In the matter of Gondon Five Pty Ltd (in liq) [2020] NSWSC 176; In the matter of Sans Pareil Estate Pty Ltd (in liq*)* [2024] NSWSC 255*; In the matter of ZH International Pty Ltd (in liquidation)* [2022] NSWSC 2; In the matter of IW4U Pty Ltd (in liq) [2021] NSWSC 40; In the matter of Rococo Group Pty Ltd (in liq) [2022] VSC 167; In the matter of RMATA Cutelli Pty Ltd (in liq) [2018] NSWSC 382; Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd (in liq) [2021] NSWSC 1692; In the matter of Bryve Resources Pty Ltd [2022] NSWSC 647; In the matter of Pulse Interactive Pty Ltd (in liq) [2019] NSWSC 22; In the matter of Allscope Concrete & Pumping Pty Ltd (in liq) [2024] NSWSC 1476, distinguished.
Aviation 3030 Pty Ltd (In Liq*) v Lao* [2022] FCA 458, cited.
Per Leeming JA:
Lewis v Doran [2005] NSWCA 243; 219 ALR 555; Tosich Construction Pty Ltd (in liq*) v* Tosich (1997) 78 FCR 363, cited.
BELL CJ: This is an appeal from one aspect of a decision of Stevenson J (the primary judge) in the Commercial List of the Equity Division in Dracoma Pty Ltd v Changela [2025] NSWSC 83 (the primary judgment) concerning two payments of $250,000 (the impugned payments) made by Changela Exports Pty Limited (the Company) on 20 September 2017.
These payments were found to constitute unreasonable director-related transactions for the purposes of s 588FDA of the Corporations Act 2001 (Cth) (the Act). Such payments are voidable transactions for the purposes of s 588FE of the Act and do not depend upon the company in question being insolvent at the time the payments were made.
The proceedings were brought by Dracoma Pty Ltd (the Respondent) which, on 1 September 2022, entered into a Deed of Assignment with the then liquidator of the Company pursuant to s 477(2)(c) of the Act in respect of the rights, title and interest in any choses of action that the Company or the Liquidator had against, relevantly, any present or past director of the Company. The Respondent was a trade creditor of the Company.
The proceedings extended to a series of payments made by the Company comprising some $1,702,000 and his Honour found that a number of these constituted unfair preferences for the purposes of s 588FA of the Act and/or unreasonable director-related transactions. As already noted, the two impugned payments with which this appeal is concerned were found to be unreasonable director-related transactions for the purposes of s 588FDA of the Act. Unlike the other payments the subject of the judgment, the impugned payments were not made at a time when the Company was insolvent and they did not result in the Company becoming insolvent.
Before turning to the primary judge’s reasoning with respect to these two payments, it is necessary to provide a little detail in relation to the business of the Company.
The Company operated a business of exporting chickpeas from Australia to India. It was incorporated on 12 December 2012: PJ [15]. It had a relatively short-lived trading life, commencing trading by way of a transaction with the Respondent around September 2016, and ceasing trading in early 2018: PJ [16], [179]. The Company was placed into liquidation on 23 December 2020 and deregistered on 17 September 2021: PJ [19]. It was restored to the Register for the purposes of the Deed of Assignment and these proceedings.
Mr Alex Wheeler is the sole director and shareholder of the Respondent. He has for the last 50 years grown ‘desi’ and ‘kabuli’ chickpeas on several farms in the Central West and Orana region of New South Wales: PJ [1]-[3]. In that region, chickpeas are harvested annually around November: PJ [4]. The Respondent typically either sells its crop to grain traders or stores part of it for sale later: PJ [5].
Mr Wheeler’s first contact with Prashant Changela was in September 2016 and was facilitated by Dr Vijay Pandya, Mr Wheeler’s long term general medical practitioner but also, evidently, a business associate of Prashant Changela in relation to crop trading and exporting through the Company. Soon after their first meeting, the Company agreed to purchase the Respondent’s 2016 crop of chickpeas: PJ [139] (the 2016 Crop).
The 2016 Crop was delivered between November 2016 and February 2017 and paid for in full by the Company on 12 April 2017 by way of three bank deposits totalling $1,523, 209.87: PJ [140].
The Company had no facility from any bank or other lender, no formal governance or financial systems, no evidence of formal shareholders or directors’ meetings, and maintained its accounting records on an MYOB program “maintained on an ad hoc basis by Rajan [Changela] as and when he had time to do so”: PJ [31]-[33]. The directors and shareholders of the Company were Sweta and Radhika until 2019, when they were replaced by Grishkumar and Jayana, but none of those four individuals played any role in administering the Company’s affairs: PJ [17]-[18]. Prashant Changela admitted that he was a shadow director of the Company and Dr Pandya ultimately admitted, after over a day of cross examination, that he was as well. In this context, the primary judge held (at PJ [45]) that:
“… Dr Pandya had an intimate involvement in the business of the Company. Dr Pandya's email exchanges with Prashant and Rajan showed that they, Prashant in particular, deferred to him and sought to involve him in all significant business decisions of the Company. In those emails Prashant frequently sought Dr Pandya's approval, thoughts and feedback on suggestions for the business of the Company, and its strategic direction: all of which Dr Pandya readily gave.”
Notwithstanding the paucity of formal records, the primary judge was able to conclude that “the impugned payments constituted repayment of funds earlier advanced to the Company”: PJ [26]. Thus, in relation to the two payments the subject of this appeal, his Honour noted that on 19 July 2017, $250,000 had been advanced to the Company by Prashant and Sweta Changela and $250, 000 had been advanced by Dr Pandya/Vijay Pandya Pty Limited (Dr Pandya’s company).
The primary judge noted a dispute between the parties as to whether the funds advanced from time to time by members of the Changela family and Dr Pandya were loans or injections of equity in the form of cash. His Honour concluded that the advances were “loans repayable whenever Prashant, Rajan and Dr Pandya so determined”: PJ [116]. Some insight as to the Company’s modus operandi may be gleaned by an email sent from Prashant Changela to his brother Rajan and Dr Pandya on 5 June 2017:
“Hello Vijaybhai,
As per our talk and as agreed I have transferred back $300,000 to you and $200,000 to Rajan & $100,000 to Prashant account this means all our initial investment is drawn back and will put money back into Changela Exports account when need again. I have attached receipt for every ones reference.”
“Hello vijaybhai,
I have transferred back $250,000 to you and me, pls see attached receipt. It should reflect in your account tomorrow if not pls let me know.
By end of this week I will pay everyone including if any GST etc, we have received all the payments now from our buyers nothing outstanding. Once this is done I will send you all the statements for AU$ & US$ and everything in details for your reference. So by end of this week we will have clear picture on final $$$ (profit) for the last season as we are completely done with it.
We will make slightly less than previously manually calculated due to extremely high US$ which was not something we could not control. Overall given its our first year no experience I believe we will make reasonable profit for our efforts to keep us engaged.
Next season is looking good for us already (touch wood) lets try to make a killing, we may not want to break records but lets make biggest margins etc...”
“neither Prashant, nor Dr Pandya, gave evidence of the circumstances in which these payments were made. These loans were repayable whenever Prashant, Rajan, and Dr Pandya so determined. By what process Prashant and Dr Pandya so determined on this occasion was not revealed in the evidence, apart from Prashant’s glib assertion that the money ‘was not required’”.
His Honour made no reference, however, to the email of 20 September 2017 set out above which puts the two impugned payments squarely in the context of a “settling up” in respect of the Company’s trading activities for the 2016 Season. His Honour also did not make any reference to the email of 5 June 2017, reproduced at [12] above.
It was not in issue that the two impugned payments of $250,000, one to Prashant Changela and his wife Sweta, and one to Vijay Pandya Pty Ltd, did not leave the Company insolvent and it was accepted that the Company had no other trade creditors at the time the payments were made. It was also accepted that, at the time of the payments, the Company had not entered into any commitments in respect of the 2017 chickpea season, the harvest of which was still several months away. Indeed, it was not until October 2017 that Prashant Changela had discussions with Mr Wheeler in relation to his 2017 crop of chickpeas (the 2017 Crop).
In an email of 21 July 2017, Prashant Changela had inquired of Ian Mallon of Mallon Commodity Broking as to current trading in the “Desi Chickpea New Crop”, noting that he “didn’t have interest just yet”. In an email to Dr Pandya on the same day, Prashant Changela wrote “Market gone real down real fast, can't believe, I still don't understand why? NSW is getting dryer and dryer...” to which Dr Pandya replied the following day:
“We can buy at 830 --250 tonnes
Something strange is happening in India
Alec [Wheeler] says he has good moisture in 10000 acres and will be ok for 6 weeks without rain
Dct will pick up and at worst I feel we will break even.”
Ultimately, the Company agreed to purchase the entire 2017 Crop. There was a debate at trial as to whether this was a conventional contract for the sale of goods or whether the Company simply took the 2017 Crop on consignment. The primary judge held that the former characterisation was consistent with such documentary evidence as there was and there is no appeal from that finding. Relevantly for present purposes, however, his Honour found that the agreement was entered into in “late 2017” (PJ [141]) and noted (at PJ [169]) that “the Company’s General Ledger contains an entry dated 20 December 2017 in the amount of $1,809,362.55 described as being ‘Purchase; Alex Wheeler’.”
The primary judge noted that:
“[174] The Company on sold most of the chickpeas purchased from Dracoma to an Indian Gujarat company, Vijay Pulses Pvt Limited (“Vijay Pulses”).
[175] The sale was recorded in the Company’s general ledger on 1 and 2 January 2018 at a value of $2,002,948.90: again, an entry evidently made contemporaneously by Rajan.
[176] The precise contractual arrangements between the Company and Vijay Pulses are not clear, but it appears that the sale occurred a short time earlier as 2,426 tonnes of the total 2,522.25 tonnes of chickpeas purchased by the Company from Dracoma from the 2017 Crop were shipped to India by late December 2017. The balance was retained at a packing facility.
[177] By 3 January 2018 the Company had incurred expenses totalling some $370,000 for the packing and shipping of the chickpeas. This had the effect that the total cost of the chickpeas was some $2,179,000: some $176,000 more than the sale price to Vijay Pulses. The 2017 Agreement was thus, subject to whatever the Company could achieve from the sale of the remaining balance of chickpeas, and there is no evidence of any such sale, a loss making venture for the Company.
[178] Following the sale to Vijay Pulses, the Company ceased to trade.
[179] Prashant agreed that this took place in the first few days of January 2018.”
“(1) A transaction of a company is an unreasonable director-related transaction of the company if, and only if:
(a) the transaction is:
(i) a payment made by the company; or
…
(b) the payment, disposition or issue is, or is to be, made to:
(i) a director of the company
(ii) a close associate of a director of the company; or
(iii) a person on behalf of, or for the benefit of, a person of a kind referred to in subparagraph (i) or (ii); and
(c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
(i) the benefits (if any) to the company of entering into the transaction; and
(ii) the detriment to the company of entering into the transaction; and
(iii) the respective benefits to other parties to the transaction of entering into it; and
(iv) any other relevant matter.”
Unreasonable director-related transactions may be voidable depending on their proximity to the “relation-back day”: s 588FE (1) and (6A). There was no issue that the impugned payments were made before the “relation-back day”, which was 23 December 2020: PJ [221].
Provided the court is satisfied that a company’s transaction is voidable, it may make a number of orders under s 588FF of the Act. Section 588FF relevantly provided:
“588FF Courts may make orders about voidable transactions
(1) Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction.”
“The test of unreasonableness in s 588FDA of the Act is objective; it is what a reasonable person in the company’s circumstances may be expected not to do. The “company’s circumstances“ encompass all relevant matters, starting with its status as a company and what flows from that; its controllers, shareholders, business and other activities; and the facts and circumstances of, and surrounding, the transaction.
The matters in par (c)(i), (ii) and (iii) of s 588FDA(1) are mandatory relevant matters in the evaluative assessment of what is objectively unreasonable. The “any other relevant matter“ requirement in par (c)(iv) recognises that relevance depends on the facts and circumstances of the particular case.”
“The question inherent in s 588FDA of the Act is: what was wrong about the conduct as manifest by the transaction or transactions concerned? That question is to be answered at the time the transaction occurs, because s 588FDA uses the transaction as the trigger for potential remedial action. However, that does not mean that the antecedence to the transaction is irrelevant, indeed s 588FDA(1)(c)(iv) expressly states that the Court may take “any other relevant matter” into account when assessing the reasonableness of the impugned transaction. The question, therefore, as to whether the transaction was unreasonable in the sense defined in s 588FDA cannot, in my view, be answered as if at the time the transaction occurred nothing had come before. Nor does the section require foreseeable future consequences at the time of the transaction to be ignored. Indeed, quite the opposite considering that s 588FDA is an anti-avoidance provision.”
His Honour also at [412] referred to “the fundamental purpose of the provision being ‘self-evidently an anti-avoidance provision aimed at preventing errant directors from stripping benefits out of companies to their own advantage’”, citing Vasudevan v Becon Constructions (Aust) Pty Ltd (2014) 41 VR 445; [2014] VSCA 14 at [19] (Vasudevan).
The now favoured view (after some inconsistency of approach following the introduction of s 588FDA) is that a broad interpretation should be given to the expression “for the benefit of” in s 588FDA(1)(b) and that the benefit in question may be a direct or indirect benefit: Vasudevan at [19], [26]-[31]; see also Pleash (Liquidator), in the matter of SFG Relocations Pty Ltd v Fourie (No 3) [2024] FCA 583 at [64]-[65]; In the matter of Gondon Five Pty Ltd (in liq*)* [2020] NSWSC 1769 at [16]-[18] (Gondon); CEG Direct Securities Pty Ltd v Cooper as liquidator of Runton Investment and Development Pty Ltd (in liq) [2025] FCAFC 47 at [109] (CEG).
The detriment to the company within the meaning of s 588FDA(1)(c)(ii) of entering into the transaction refers to commercial detriment but is not confined to detriment that can necessarily be measured in money terms: Shot One Pty Ltd (in liq*) v Day* [2017] VSC 741 at [211]; Aviation 3030 at [310]; In the matter of Sans Pareil Estate Pty Ltd (in liq*)* [2024] NSWSC 255 at [62] (San****s Pareil); see also Buzzle Operations Pty Ltd (In liq*) v Apple Computer Australia Pty Ltd* (2011) 81 NSWLR 47; [2011] NSWCA 109 at [117] (Buzzle Operations); Queensland Phosphate Pty Ltd v Paradise Phosphate Ltd [2019] VSCA 215 at [164(g)].
It has also been held that the “assessment of “benefits” and “detriment” and any other relevant matter as part of the mandatory considerations required to reach a conclusion as to the negative stipulation in s 588FDA(1)(c) demands a sensible commercial assessment of the reality of the company’s circumstances and ought not be confined to analysing only the enforceable legal relationships as documented”: CEG at [161].
In Crowe-Maxwell v Frost (2016) 91 NSWLR 414; [2016] NSWCA 46, this Court drew on authorities concerning “uncommercial transactions” under s 588FB of the Act to assist in identifying circumstances that may constitute unreasonable director-related transactions and Beazley P held at [89] that:
“A common thread in the uncommercial transaction cases is that, where there is limited evidence of the nature or purpose of a transaction, but the surrounding circumstances show it to be a departure from normal commercial practice and to raise inferences as to a lack of benefit to the company, detriment caused to the company, or benefit accruing to other parties, absent some commercial explanation, courts may infer the transaction was uncommercial, without requiring the liquidator to prove its precise uncommercial nature. The same may be said with respect to the identification of unreasonable director-related transactions.”
“• The purchase of a boat using company funds for a close associate: Weaver. McLure P (at [98]), Buss and Murphy JJA agreeing, concluded that, prima facie, a reasonable person in the company’s circumstances would not have made the payments, regardless of the financial health of the company. They would not have done so because it involved the director using corporate property as if it was his own (at [103]). That conclusion was fortified by the conclusion that at the time of the payments the company was in uncertain financial and commercial circumstances.
• An agreement by a company to assume joint liability for obligations owed by a director to a third party and to grant a mortgage to secure performance of the assumed liability: Vasudevan at [31];
• A contract to dispose of real property of a company for no consideration, which was found to amount “to giving away a valuable asset of the company to the son of one of the directors, because it was anticipated that in due course the company would realise its assets and have a sufficient surplus (in excess of the value of the property) available for distribution to the unitholders of the trust of which it was the trustee, and that those unit holders would somehow be able to procure a distribution in kind of the property to [the son]“: Slaven v Menegazzo [2009] ACTSC 94 at [45] (Mansfield J);
• A payment made into a home loan account of a company’s directors. The court found that the payment was probably used to finance a home loan with which a property was purchased. The court was “unable to find any reasonable basis for a hypothesis that there was any benefit to [the company] as distinct from the defendants personally, from that payment, or any basis for thinking that it discharged any liability of [the company] to them“: Re Lesvos Pty Ltd [2012] NSWSC 1288 at [30].
• The incurring of costs and liabilities by a company to construct a house on property owned by a close associate, in the absence of any commensurate benefit accruing to the company at the outset when the close associate thought that the house was to be built for “free“: Kazar at [152–[153];
• 22 rental payments made by the company for premises owned by the director’s daughter, and occupied by the director and her domestic partner: Fielding as liquidator of Lyngray Developments Pty Ltd v Dushas [2013] QCA 55 at [5], [18], [63].”
To these may be added the following examples:
the transfer of an apartment with a stamp value of $550,000 for $1: Gondon at [12];
payment of personal expenses on items such as supermarket products, food, alcohol, entertainment, motor vehicles, accommodation, travel, gifts, social media, health care and credit cards: Sans Pareil at [63];
the transfer of four properties, the company’s net equity in which was some $2.16 million, to a husband and wife as directors of the company as a part of their property settlement under the Family Law Act 1975 (Cth). That transaction was held to be unreasonable notwithstanding both that (i) the husband and wife had contributed (a small amount) to the purchase of the properties, and (ii) the transaction discharged the companies’ liabilities in the form of mortgages secured against the properties and obligations to pay interest on them: In the matter of ZH International Pty Ltd (in liquidation) [2022] NSWSC 2 at [182]-[190];
the transfer of a business for nil consideration, denying the company the opportunity to “market and sell its business” (though relief under s 588F(1)(c) was refused in the absence of compelling evidence as to the benefits received from the transaction): In the matter of IW4U Pty Ltd (in liq*)* [2021] NSWSC 40 at [89]-[92];
withdrawals spent by a director for asserted “business expenses” which were found to be non-commercial in nature, including: the purchase of a printer and laptop which were then “treated as personal assets”, and payments to a travel agent for travel and accommodation at “conferences” which were not at arm’s length given a close association between the director and the travel agency: In the matter of Rococo Group Pty Ltd (in liq*)* [2022] VSC 167;
the purchase of a property, the extinguishing of a loan account without corresponding receipt of payment, and significant cash withdrawals, all made in favour of two directors and equal shareholders of a company, “without regard to its [the company’s] potential or actual tax liability or the claims of other creditors”: In the matter of RMATA Cutelli Pty Ltd (in liq*)* [2018] NSWSC 382 at [23]-[32];
the granting of two interest free loans both of which were repayable, if at all, only in extremely unlikely circumstances and thus were “practically impossible to enforce” against the company: one totalling $1.25 million to another company which shared the same sole director, and the other of a little over $2.3 million to the director himself: Re W Media Holdings Pty Ltd [2021] QSC 208 at [36]-[38];
“[230] These payments were made almost a month before Dr Pandya first approached Mr Wheeler in relation to the 2017 Crop.
[231] However, the defendants admit on the pleadings that by no later than 22 July 2017, the Company had the intention of purchasing chickpeas from Dracoma and that the purchase of chickpeas was then within the contemplation of Prashant and Dr Pandya.
[232] From July 2017, Prashant was communicating with growers, including Mr Wheeler, about the possibility of purchasing chickpea stock. On 18 September 2017, two days before the impugned payments, Prashant and Dr Pandya exchanged emails concerning the relevant trade index and the price at which the Company could sell chickpeas into India.
[233] According to the Company's balance sheet, as at FY17, it had total assets of $1,363,983, with total liabilities of $1,364,067: a slight deficiency.
[234] The Company's assets included cash at bank in the sum of a little over $1 million.
[235] The effect of the impugned transactions was that the Company had $500,000 less in liquid funds to devote to the purchase of the 2017 Crop.
[236] There is no evidence that Prashant or Dr Pandya gave any consideration as to whether the payments would have a negative impact on creditors of the Company, nor that they considered the financial ramifications to the Company in making these payments. The effect of the payments was that the only means that would be available for the Company to pay for the likely cost of purchase of the 2017 Crop would be the proceeds of its on sale.
[237] In that regard, Prashant gave this evidence:
"Q. Did you make the payments in consultation with your brother and Dr Pandya?
A. Not with my brother, but yes, I would have consulted Dr Pandya.
Q. The payments should have been - the fact of the matter was that in September 2017, you were approaching the harvest season, were you not?
A. Yes, we were.
Q. For chickpeas. You knew that the chickpeas were to be harvested in late 2017, correct?
A. That is correct.
Q. You knew that there was going to be a cost to purchase more chickpeas in late 2017, correct?
A. That is correct, but there was no plan for the purchase. As mentioned earlier, there was a likelihood of an import tariff getting, getting put on by Indian government, so there was no--
Q. But you were still in the business of buying and selling chickpeas, irrespective of whether it was into India or not, weren't you?
A. Yes, we were but we--
Q. And you were in a position where the company needed to buy stock in late 2017 for the purposes of carrying out its business, correct?
A. We never intended to sell it to any other country apart from India or we never, never have."
[238] Although Prashant said in this passage that there was "no plan for the purchase" of the 2017 Crop, the defendants have made the admission to which I have referred. Further, Prashant's evidence reveals that he knew of the possibility of the Indian government imposing an import tariff and thus must have known of the potential for difficulty in selling chickpeas to India.
[239] In those circumstances, I am persuaded that it might be expected that a reasonable person in the Company's circumstances, and in the circumstances in which Prashant and Dr Pandya found themselves, would not have caused these payments to be made but would, rather, have left those funds in the Company in preparation for its purchase of the 2017 Crop. Contrary to Prashant's evidence, the funds were "required" by the Company for that purpose.
[240] I find that these payments were unreasonable director-related transactions.”
The focus of the appeal was on whether a reasonable person in the Company’s circumstances would not have made the impugned payments having regard to the considerations referred to in s 588FDA(1)(c) of the Act.
The Appellants attacked a number of aspects of the primary judge’s reasoning and were critical of his Honour’s failure to take into account the Company’s traditional modus operandi as to its financing requirements.
The following matters are relevant to a consideration of the Appellants’ sole ground of appeal:
(i) the Company was not insolvent when the payments were made nor was it put into a state of insolvency as a result of them having been made. (The Respondent’s submission that “the effect of the payments was that the Company was effectively substantially ‘underwater’” was not supported by the evidence and was inconsistent with its position at first instance). (ii) The Company had no trade creditors at the time the impugned payments were made and had made no commitments in relation to the 2017 chickpea season or the 2017 Crop at that time. It also had no ongoing operating expenses such as the costs of an office or any employees that might require retention of funds. (iii) There being no contractual commitments made, still less owing, at the time of the making of the impugned payments, the funds were not “required” by the Company: cf PJ [239]. (iv) The admission that his Honour referred to at PJ [231] was made by reference to a period no later than 22 July 2017 which was approximately two months prior to the making of the impugned payments. (v) In any event, the admission was narrow and non-specific: it was not an admission of an intention “to purchase, at least 1,000 acres of chickpeas from Dracoma in connection with the upcoming season’s chickpea harvest” nor was it an admission of an intention to purchase the 2017 Crop (cf PJ [238]): discussions as to that possibility did not commence until October 2017 and did not result in an agreement until “late 2017”: PJ [141]. (vi) The impugned payments were satisfactorily explained by the contemporaneous email of 20 September 2017 reproduced at [13] above, which coincided with the wrapping up or settling up of accounts following the first full year of the Company’s trading activity. (vii) The primary judge’s statement at PJ [236] that “[t]he effect of the payments was that the only means that would be available for the Company to pay for the likely cost of purchase of the 2017 Crop would be the proceeds of its on sale” (emphasis added) was in the face of evidence that was not relevantly referred to by the primary judge, namely that the Company had both before and after the impugned transactions been “cashflowed” or financed by loans from the Changela brothers and Dr Pandya. Indeed, the Company’s whole first year of operation had been funded by such loans and the Company’s paid up capital was nominal. (viii) There was no reason to doubt that moneys would be lent in the future (as they had been in the past) as reflected in the email of 5 June 2017 extracted at [12] above and as they in fact were. Thus, $600,000 was deposited into the Company’s bank account on 7 November 2017, prior to entry into any agreement with the Respondent for the 2017 Crop season. (ix) The fact that there was, as stated at PJ [236], “no evidence that Prashant or Dr Pandya gave any consideration as to whether the payments would have a negative impact on creditors of the Company” was irrelevant as the inquiry under s 588FDA(1)(c) is objective and, in any event, any consideration as to whether the impugned payments would have a negative impact on creditors of the Company would have been answered in the negative because it was common ground that, at the time of the payments, the Company had no creditors or contingent creditors and no contractual commitments to prospective creditors. (x) The loans were repayable on demand.
“The funds comprising the $250K Payments were plainly "required" for the purpose of the pending transaction with Dracoma. As recognised in decisions such as Buzzle Operations at [116], when considering the question of whether a transaction caused detriment within the meaning of s 588FDA(l)(c)(ii), it is the whole picture that is to be assessed. In this regard, while it might be said that the $250K Payments reduced the Company's indebtedness to its lenders, there was no legal or commercial requirement for this to occur, and there was a looming transaction (in the contemplation of Prashant and Dr Pandya) which required the Company to be in funds. As recognised by Young JA in Buzzle Operations at [117], "detriment" in the s 588FDA(l)(c)(ii) is not limited to a detriment that can necessarily be measured in money terms, but also refers to commercial detriment.”
The Respondent pointed to emails of 18 and 19 September 2017 between Prashant Changela and Dr Pandya about prospective sales of chickpeas into India and price volatility. The volume being contemplated for sale in these emails was 500 tonnes at a price around $975 to $980 per tonne. As noted in [36(viii)] above, the Company in fact had an injection of funds on 7 November 2017 apparently sufficient to meet this planned export, even without allowing for income from the on-sale. No negotiations had even opened up with Dracoma as at 20 September 2017 for the purchase of the 2017 Crop, let alone had terms been reached. The Respondent did not identify what the relevant “detriment” to the Company was of repaying funds and thus discharging a liability as opposed to retaining funds for the purposes of discharging a potential further liability to a third party, especially in circumstances where the lenders, having been repaid prior loans in early June 2017, had readvanced moneys to the Company on 19 July 2017 (see [11] above).
The fourth matter noted at [36] above was self-evident on the face of the pleadings from which the admission was taken. The fifth matter was correct.
The sixth matter is supported by the terms of the 20 September 2017 email, a reliable contemporaneous communication which explained the basis for the impugned payments, and which was consistent with the repayments which had taken place in early June 2017. Contrary to the Respondent’s submission, this email was strong evidence providing a commercial explanation for the impugned payments. Moreover, the payments were not gifts or distributions to the directors but were repayments of loans, repayable on demand. Given their character, the explanation for their repayment was obvious. Further, I would not, with respect, agree with the primary judge’s characterisation as “glib” of Prashant Changela’s explanation that the money repaid was “not required” by the Company at the time of the repayments. It was entirely accurate in commercial terms: the Company had no relevant debts and no binding future commitments. It was a small proprietary company, financed by loans from its directors and associates repayable on demand.
The seventh and eighth matters can be taken together, and largely speak for themselves. In addition, apart from the likelihood of further advances by the directors from their own funds, the primary judge’s statement (at PJ [236]) that, “the only means that would be available for the Company to pay for the likely cost of purchase of the 2017 Crop would be the proceeds of its on-sale” (emphasis added) would not necessarily or self-evidently have been an adverse matter for the Company. This would depend on a number of matters that were not known at the time of repayment of the loans, namely the terms of any contract to be entered into with the Respondent including the timing of any payment obligation under it, and the terms of any on-sale contract with the ultimate purchaser of the goods in India.
(i) the benefits (if any) to the Company of entering into the transaction; and
(ii) the detriment to the Company of entering into the transaction; and
(iii) the respective benefits to other parties to the transaction of entering into it; and
(iv) any other relevant matter
the following additional points may be made.
First, a reasonable person in the position of the Company may be expected to pay their debts when due. This expectation would extend to the repayment of loans repayable on demand, at least in circumstances where such a payment did not prefer the lenders over any other creditors. Repayment may also reasonably be expected to maintain goodwill with lenders which would be beneficial for the Company in respect of any future lending needs.
Second, as to the question of detriment, there was no net commercial detriment to the Company. The repayments extinguished a corresponding liability. Indeed, detriment to the Company’s commercial reputation would be expected to accrue if the Company did not repay debts, including loan obligations, when due.
Third, in relation to the respective benefits to other parties of entering into the transaction, the other parties were relevantly Prashant Changela and his wife Sweta, and Vijay Pandya Pty Ltd. The benefit they received was the repayment of moneys lent informally to the Company but nevertheless in accordance with the terms upon which the primary judge held that the funds had been advanced, and consistent with the Company’s past practice. There was no benefit in any way resembling the types of benefits received in the cases noted in [30]-[31] above. The Appellants did not receive early repayment, or repayment in preference to other existing or contingent creditors of the Company.
As to whether there was any other relevant matter that would give rise to an expectation that a reasonable person in the Company's circumstances would not have entered into the transaction, the matter fixed upon by the primary judge was the intention on the part of the Company at the time of repayment to enter into transactions in relation to the 2017 Crop. Plainly enough, no such transactions had been entered into at the time of the repayments and, as the evidence demonstrated, there was some uncertainty at the time surrounding the export market to India because of the possibility of an imposition of tariffs although Prashant Changela’s email of 20 September 2017 speaking of the next season “looking good for us already” (see [13] above) was consistent with a strong desire to continue the business.
Whether or not the Respondent would require security for the sale of the 2017 Crop would be a matter for commercial negotiation between it and the Company. It was under no obligation to enter into commercial relations with the Company and it was open to it to satisfy itself, at the time of contracting, as to the Company’s financial position including its solvency. It is important not to make the s 588FDA assessment with the benefit of hindsight.
The evaluation of the expectation of a reasonable person in the position of the Company must be made not only objectively but at the time at which the transaction was entered. Such a person would know that the Company had experienced a successful first year of operation notwithstanding the relative informality insofar as its financing arrangements was concerned, and the lack of other than nominal paid up capital.
For the above reasons, the appeal should be allowed with costs.
The orders of the Court should be as follows:
Appeal allowed.
Vary the judgment of the primary judge made on 14 March 2025:
(a) in paragraph 1, by substituting "$119,738.15, including interest of $13,120.15" for "$400,502.53, including interest of $43,884.53"; and (b) in paragraph 4, by substituting "$870,369.59, including interest of $95,369.59" for "$1,151,133.97, including interest of $126,133.97".
(a) of $280,764.38 to the First and Second Appellants plus interest from 11 April 2025; and (b) of $280,764.38 to the Third Appellant plus interest from 11 April 2025.
The Respondent pay the Appellants' costs of the appeal.
LEEMING JA: I agree with the reasons of the Chief Justice, and with the additional reasons of McHugh JA.
The following is added by way of emphasis rather than qualification. It is clear as a matter of authority that when an appellate court is asked to review the finding that a transaction falls foul of s 588FDA, it will ask whether, based on a review of the whole case, the necessary condition in s 588FDA(1)(c) for the transaction to be an unreasonable director-related transaction is made out. To someone reading the paragraph afresh, that might seem remarkable. That is because the paragraph is framed in terms not of whether a reasonable person would not enter into the transaction, but instead in terms of whether “it may be expected that” a reasonable person would not enter into the transaction. Both the word “may” and the idea of what might be “expected” are suggestive of a range of conclusions being available, rather than a single correct conclusion.
However, those introductory words, and the identical language in s 588FB, do not bear their literal meaning. They have long been deprecated as “curious” (Lewis v Doran [2005] NSWCA 243; 219 ALR 555 at [156]) and “difficult to see what meaning is added” (Tosich Construction Pty Ltd (in liq*) v* Tosich (1997) 78 FCR 363 at 366-367). Courts have consistently proceeded on the basis that they serve only to emphasise the objective nature of the inquiry. They do not qualify or relax the condition in paragraph (c).
A further reason why that must be so is that paragraphs (a), (b) and (c) are necessary and sufficient conditions for a transaction to be an unreasonable director-related transaction (that being the force of “if, and only if”). If paragraph (c) bore something close to its literal meaning, whereby one person might expect a reasonable person in the company’s circumstances not to enter into the impugned transaction, but a second person might have a different expectation, the section could not work: the expectation of the first person could lead to the section being satisfied, while that of the second would prevent the section being satisfied. That contradiction reinforces the conclusion already reached that the words “it may be expected that” are read merely as emphasising the objectiveness of the test.
The reasons of Bell CJ and McHugh JA amply explain why the condition in s 588FDA(1)(c) is not satisfied. The orders proposed by the Chief Justice should be made.
McHUGH JA**:** I have had the considerable advantage of reading in draft the reasons of the Chief Justice, and of Leeming JA, with which I agree. I also agree with the orders the Chief Justice proposes. I would add the following.
**********
Changela
Dracoma Pty Ltd [2025] NSWCA 186
(2011) 81 NSWLR 47
(2016) 91 NSWLR 414
(1997) 78 FCR 363
(2014) 41 VR 445
(1979) 142 CLR 531
Appeal allowed. The primary judgment was varied to reduce the amounts stated in paragraphs 1 and 4 of that judgment. Dracoma was ordered to pay restitution of $280,764.38 to the First and Second Appellants and $280,764.38 to the Third Appellant, with interest from 11 April 2025, and to pay the Appellants' appeal costs ([58]).
the declaration and payment of dividends in circumstances where the payment constituted a contravention of s 254T of the Act and an alienation of property intending to defraud creditors for the purposes of s 37A of the Conveyancing Act 1919 (NSW): Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd (in liq*)* [2021] NSWSC 1692 at [1145]-[1153];
payments of $421,501.00 to one creditor which in effect left another significant creditor “hanging out to dry” as the company was “without funds to pay towards reducing its liabilities to other creditors”: In the matter of Bryve Resources Pty Ltd [2022] NSWSC 647 at [96]-[101];
direct payments of $2.1 million to the sole director and shareholder of three companies in circumstances where the companies “had significant debts, limited assets and limited cash” and that director already owed the companies $2 million in director’s loans at the time of the payments: In the matter of Pulse Interactive Pty Ltd (in liq*)* [2019] NSWSC 22 at [27]-[31]; see also In the matter of Allscope Concrete & Pumping Pty Ltd (in liq*)* [2024] NSWSC 1476, where a direct payment to a director’s personal account was plainly unreasonable in circumstances where it brought no corporate benefit to the company.
As to the ninth matter, namely the absence of any evidence that Prashant or Dr Pandya gave any consideration as to whether the payments would have a negative impact on creditors of the Company, as noted in [36], this was either irrelevant because it was a subjective consideration but, perhaps more significantly, had such consideration been given, it would have favoured the Appellants as the answer to any such consideration would have been “no” because there were no trade creditors at the time of the payments, and no ongoing operating expenses.
As to the final matter, consistent with the primary judge’s findings as to the nature of the loans, this had the consequence that a liability of the Company was discharged by the impugned payments. This was not a case of discretionary payments or distributions of questionable merit being made to directors. The Respondent submitted that the primary judge did not in fact hold that the loans were repayable on demand but “[r]ather, his Honour found at [116] that the advances were loans repayable whenever Prashant, Rajan and Dr Pandya so determined”. The Respondent’s distinction is a semantic one. Its apparent subtlety eludes me.
In CEG at [144], it was held that the standard of appellate review for challenges to a primary judge’s evaluation of the reasonableness of a director-related transaction under s 588FDA(1)(c) was the correctness standard whereby the appellate court determines for itself the correct outcome (while making due allowance for the advantages available to the trial judge): citing Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9.
In my view, applying that standard, the appeal should succeed. In this context, the criticisms made by the Appellants of what was but one of many otherwise unchallenged aspects of his Honour’s decision were persuasive, and have informed my reconsideration of that part of his decision which is subject to challenge.
The repayments were of a vastly different character to any of the examples set out in [30]-[31] above.
Repayment of a loan neither due nor repayable on demand may amount to “stripping benefits out of companies to [the directors’] own advantage”: Vasudevan at [19]. So also, repayment of a loan in full when a company has other creditors whose payment is due or imminent may be problematic but that was not this case. In the circumstances of the present case, it is difficult to characterise the repayment of a loan repayable on demand with the pejorative label “stripping” employed by Nettle JA in Vasudevan when the effect of that repayment did not affect the Company’s balance sheet because the repayment did no more than discharge an obligation owing by the Company.
The impugned payments were not made in preference to any other creditors of the Company and did not obviously expose the Company to the risk of litigation. The payments were for no more than the sums owing, and were not gratuitous or without precedent. Other loans had been repaid in early June, followed by new loans advanced by the same individuals in July 2017.
Analysing the matter objectively in terms of s 588FDA(1)(c) of the Act, namely whether it may be expected that a reasonable person in the Company's circumstances would not have entered into the transaction, having regard to:
Taking all these considerations into account, the criterion in s 588FDA(1)(c) of the Act was not satisfied, and the primary judge erred in holding that the impugned payments were unreasonable director-related transactions for the purposes of s 588FDA of the Act.
The respondent’s argument in this Court had two main elements. First, that “the clear intention was to incur significantly more debts as at 20 September 2017”: Tcpt 4/8/2024 at 13.40. In light of the matters the Chief Justice canvasses, the clarity of that intention as at 20 September 2017 is to be doubted. Secondly, that the loan repayments “had the effect of reducing about a million in cash that the company was holding by about $500,000”: at 14.22.
It may be expected that many small businesses in corporate form will be funded by informal loans, repayable on demand, from the persons who control the company. Whether it might be expected for the purposes of s 588FDA(1)(c) that a reasonable person in the company’s circumstances would not repay such a loan depends on all the circumstances at the time of repayment. It is not possible to lay down hard and fast rules to cover every situation. However, where a director advances working capital to a company on the basis that it is repayable on demand, and the company is solvent, and the repayment will not make the company insolvent, there are reasons to be cautious before concluding that it would be unreasonable for the company to use cash to repay the loan if demand is made, merely because the cash would otherwise be available for use in the company’s future operations (in particular, to discharge liabilities of unknown quantum that have not yet been incurred and that might never be incurred).
Where a company intends to incur liabilities in the course of trading, a “transaction” within the meaning of s 588FDA(1)(a) that reduces the company’s cash position may well involve a “detriment” to it for the purposes of s 588FDA(1)(c)(ii). If the transaction is repayment of a director loan, the s 588FDA(1)(c) question is whether it might be expected that a reasonable person in the company’s circumstances would not make the repayment. If (a) the fact that the repayment reduced the company’s cash position, coupled with (b) the circumstance that the company intended to incur future trading liabilities in the ordinary course of business, were sufficient, without more, to satisfy s 588FDA(1)(c) in relation to solvent companies, it is not clear when it would be reasonable for a trading company to repay a director loan. If that were so, a rational director who hoped to be repaid might hesitate to fund the operations of solvent companies, noting that the period in s 588FE(6A)(b)(i) extends back 4 years from the relation-back day.
Assume a company is solvent and that the repayment of a director loan that is due will reduce the company’s cash position but not make the company insolvent. To the extent that it is said that a reasonable person would not make the repayment because the company had incurred, or intended to incur, trading liabilities to third parties (which is the position here) — and putting to one side what other resources may be available to the company to discharge such liabilities — there is a significant difference between an existing liability in a known amount and a mere speculative possibility that the company may incur a trading liability in the future. In between those extremes lies a range of states of corporate intention and commitment. And, to the extent that it is said that repaying a director loan was unreasonable because the company was contemplating some other transaction involving particular risk, it is important to avoid hindsight bias.
The nature and strength of any commercial rationale for repaying a director loan are also relevant to the reasonableness of doing so. Here, the Company’s business model was effectively seasonal. So too was the Company’s funding, informal as that was. The evident commercial rationale for repaying the loans at issue in this appeal was that the Company’s expected sources of capital to finance trading in the next season’s crop were the same lenders (its directors) who had financed the previous one. The lenders plainly expected to be repaid once the previous season’s trading operations were complete, and they were entitled to be paid. It was not to be expected that those lenders would advance further funds to the Company for the 2017 crop if it failed to repay the earlier loans when due. Given that the Company was not insolvent as at 20 September 2017, had no trade creditors, and had not made any commitment to trade in the upcoming season’s crop, and given that the loans were repayable upon demand, it is not obvious on what basis the Company could reasonably have refused to repay the loans. In those circumstances the criterion in s 588FDA(1)(c) was not satisfied.