Re W Media Holdings Pty Ltd[2021] QSC 208

SUPREME COURT OF QUEENSLAND

1. [1]
   This is an application seeking a finding that each of two written loan agreements is an unreasonable director-related transaction within the meaning in s 588FDA of the Corporations Act 2001 (Cth) (the Act) and for associated declaratory relief under s 588FF(1)(h) of the Act.  There is also a related application to wind up the corporate debtor. 
2. [2]
   The first applicant Mr Watters is a registered liquidator.  The second applicant is Winter One Investments Pty Ltd (WOI).  On 7 August 2020, WOI was placed in liquidation and Mr Watters was appointed its liquidator.

The alleged transactions

3. [3]
   The first alleged transaction involves the second respondent Mark Andrew Williams personally.  Mr Williams is the sole director of WOI. 
4. [4]
   The evidence before the Court establishes that WOI made loans to Mr Williams totalling a little over $2.3 million, probably before June 2016.  The loans were not documented other than in the books of WOI.  They were recorded as current assets of WOI in the company’s accounts, and financial statements, up to and including those for the financial year ending 30 June 2018. 
5. [5]
   On 9 May 2019, WOI by its sole director, Mr Williams, entered into a written loan agreement with Mr Williams. In the company’s financial statements for the year ending 30 June 2019, the first after the loan agreement, the loans were classified as non-current assets of WOI.  As I understand the terms of the written loan agreement, the loans are interest free and “non-recourse”, by which Mr Williams intended WOI may not recover the loans from him or by executing against his property.  On one view repayment is voluntary. 
6. [6]
   The original source of these loan funds was an investment of about $2.5 million by two companies, Cowley Super Pty Ltd and Cowley Custodian Pty Ltd.  These are entities associated with Mr Cowley.  The investment was in WOI. In exchange for it, WOI issued 2.5 million shares to the Cowley companies.  The investment and the share issue occurred in 2014.  On 24 December 2014, the shareholders in WOI entered into a shareholder’s agreement. 
7. [7]
   The second alleged transaction involves the first respondent W Media Holdings Pty Ltd (WMH).  Mr Williams is the sole director of WMH. 
8. [8]
   WOI also made loans to WMH totalling $1.25 million, probably before December 2018.  The loans were undocumented. 
9. [9]
   On 9 May 2019, WOI by its sole director, Mr Williams, entered into a written loan agreement with WMH by its sole director, also Mr Williams.  The loan agreement provided for the loans to be interest-free and to be repayable only in specific circumstances involving a trade sale of all the assets and businesses owned by the W Media Holdings Unit Trust (the Unit Trust) of which WMH is trustee, and WMH receiving what was described as an “actual cash dividend” as a result of such a sale.  Those circumstances seem extremely unlikely to occur, not least because WMH is a trustee of the unit trust and does not hold any units. 
10. [10]
    Indeed, the provisions of the loan agreement about repayment of the loans have been described by Jackson J as ‘nonsensical’, and, respectfully, I agree with his Honour’s characterisation.^[1]  
11. [11]
    The source of these loan funds was a $1.25 million further investment in WOI by Cowley Custodian Pty Ltd and J & R Cowley Super Pty Ltd.  WOI issued 2,353,000 shares to each of those entities in return for the investment. 

Should the loan agreements be declared to have been void?

12. [12]
    The nature of the transactions recorded in the written loan agreements seem, on their face, to be agreements of the kind intended to be encompassed within relief under division 2 of part 5.7B of the Act. 
13. [13]
    Relevantly, an unreasonable director-related transaction is defined in s 588FDA(1) of the Act:

“588FDA Unreasonable director‑related transactions

1. (1)
    A transaction of a company is an unreasonable director‑related transaction of the company if, and only if:

14. [14]
    The respondents raise four grounds on which they say these are not unreasonable director-related transactions, so that relief may not be granted.  I propose to consider each of those in turn. 

Is either loan agreement a transaction?

15. [15]
    The first is a contention that neither loan agreement is a transaction within the meaning of the section.  The respondents accept that conduct or dealing is a transaction for the relevant purposes where it has the consequences of effecting a change in the rights, liabilities or property of a debtor company itself, or a creditor company itself.  For this submission in their written material, reference is made to a passage in the decision in Re Emanuel (No 14) Pty Ltd (in liq).^[2]
16. [16]
    As I understand the respondents’ submission, it is that the loan agreements were intended to simply restate what were always the terms by which WOI advanced those funds to its sole director, Mr Williams and to WMH.
17. [17]
    Before the May 2019 loan agreements were executed, the loans by WOI to Mr Williams and to WMH were undocumented.  They had no expressed terms recorded anywhere.  The likely position was that the loans were repayable on demand.  If not repaid, WOI might have sued to recover them.  In doing so, WOI may have claimed statutory interest on the outstanding sums.  If obtained, a judgment might have been enforced against any property of Mr Williams or WMH. 
18. [18]
    The effect of the written loan agreements was to impose conditions on the obligation to repay the loans.  In this way, the agreements altered WOI’s rights, and. I think it is fair to say, reduced the value of the choses in action represented by the debts owed to it by each of Mr Williams and WMH. 
19. [19]
    As Beazley P identified in Crowe-Maxwell v Frost:^[3]

“to focus on whether there was a contract or antecedent obligation asks the wrong question and potentially casts the onus in the wrong direction. The question at all times is whether there was an unreasonable director-related transaction.”

20. [20]
    As to the first ground of argument put forward by the respondents, I am satisfied that each of the written loan agreements was a transaction within the meaning of the provision because it changed the rights of WOI as the creditor company and the respective liabilities of Mr Williams and WMH as debtors. 

Rectification of the loan agreements

21. [21]
    Secondly, Mr Williams and WMH also seek to avoid a declaration under the Act by making a counter-claim in this proceeding seeking rectification of each of the written loan agreements. 
22. [22]
    The counter-claim is raised as a ground against relief under the Act on the basis that, if it were to be granted by the Court, it would rectify the loan agreements so that, on Mr Williams’ and WMH’s case, neither agreement altered the earlier (oral or implied) terms of each loan. 
23. [23]
    The outcome of the application for rectification is far from certain.  The grant of that remedy is discretionary.  The evidence before the Court for rectification, as I understand it, would come entirely from Mr Williams.  He would propose to say what he intended to agree in his personal capacity, in his capacity as a sole director of WOI, and in his capacity as the sole director of WMH. 
24. [24]
    In the course of argument, I have expressed to counsel a preliminary view, which I now confirm.  I regard it as extremely unlikely, that the Court would rectify an agreement in accordance with such evidence. 
25. [25]
    In the present circumstances, with WOI in liquidation, there is no utility in the respondents’ approach.  If the respondents are genuine in seeking to return to the original terms of the loans, the orders sought by the liquidator declaring the loan agreements void will have the same effect, restoring them to their state before the written loan agreements were executed by Mr Williams. 

Is Mr Williams a close associate of WMH?

26. [26]
    Thirdly, WHM seeks to avoid the relief against it and its loan agreement on the basis that WMH is not a close associate of Mr Williams for the purposes of s 588FDA(1)(b)(ii) of the Act.  This submission is put on the basis that Mr Williams and his close relatives were never liable to repay the loan from WOI. 
27. [27]
    Respectfully, the submission misunderstands the operation of s 588FDA.  The change to the terms of the loan from WOI to WMH was a disposition to WMH by effectively making the loan unrecoverable.   
28. [28]
    The loan to WMH was plainly a loan to it in its capacity as trustee of the Unit Trust, not in some separate personal capacity.  The change to the loan terms was for the benefit of Mr Williams and his wife and his daughter, who are the shareholders in Complete (Qld) Pty Ltd, which holds 50 per cent of the units in the WMH Unit Trust. 
29. [29]
    It benefited Mr Williams, his wife and his daughter in a way that is consistent with the construction of the provision adopted by Nettle JA, as his Honour then was, in Vasudevan v Becon Constructions (Aust) Pty Ltd:^[4] 

“[24] … the natural and ordinary meaning of ‘for the benefit of’ accords to the objective of the section of preventing directors stripping benefits out of companies to their own advantage. Conversely, given the ease with which an errant director might channel benefits from a company under his charge to another company in which he is financially although not legally or equitably interested, there is every reason to suppose that Parliament intended not to confine the meaning of the expression to something in the nature of an equitable interest.

…

[26] … As I see it, the close associate provisions are designed to catch a benefit flowing to a close associate whether or not the benefit has the effect of legally or financially advantaging the director in question.  In contrast, the natural and ordinary meaning of “for the benefit of” in s 588FDA is calculated to catch a benefit which legally or financially advantages the director in question regardless of whether it is paid or directed to a close associate of the director.  Since the two regimes are aimed at different albeit potentially intersecting sets of possibilities, it would run counter to the evident intention of the legislation to read down either to the point of mutual exclusion.

…

[28] … In my view, it is apparent from the terms of s 588FDA, and also from the Explanatory Memorandum, that the very point of the section was and is to catch director-related transactions of kinds not otherwise liable to avoidance as unfair preferences, uncommercial transactions or unfair loans. In effect, that is the converse of a Parliamentary intention to confine the operation of s 588FDA to transactions of the kind which result in the director in question receiving an equitable interest or equity in relation to the disponed property.”^[5]

30. [30]
    I am satisfied the loan agreement with WMH was a disposition made to WMH for the benefit of Mr Williams and his close associates within the meaning in s 588FDA(1)(b)(iii). 

The “real” transaction?

31. [31]
    The final basis upon which the relief sought was opposed was described in this way.  It was said that “the real transaction was a speculative investment by Mr Cowley in a new business venture proposed by Mr Williams”.  This submission must be rejected. 
32. [32]
    It is plain from the evidence of Mr Williams that he intended the loan agreements, which he made, to reflect (using his expression) the agreements that he had been discussing with Mr Cowley.  The loans discussed between Mr Cowley and Mr Williams were never the subject of any final agreement.  Mr Cowley made no such loans.  Instead, he invested in WOI and received shares in that company for his investment.  The loans before the Court today were not made by Mr Cowley or by any of his entities to Mr Williams or to any of his entities. 
33. [33]
    The Cowley entities, if I can call them that, which had invested in shares in WOI, had parted with their funds on that basis.  The loans were made by WOI to Mr Williams and to WMH.  The loan agreements alter the terms of those loans.  They deal with WOI’s funds, not with any funds of Mr Cowley or his associated entities.  Mr Cowley was not a party to any of the loans or the loan agreements.  Whatever may have been agreed between Mr Williams and Mr Cowley cannot bind WOI.  It certainly cannot relieve Mr Williams of his duties as a director of WOI. Nor can it restrict the rights of the liquidator of WOI to obtain relief under s 588FDA against Mr Williams and WMH. 
34. [34]
    There was some discussion in the written submissions about whether the 24 December 2014 shareholders’ agreement, dealing with the rights of the shareholders in WOI, might be of assistance to the Court’s decision.  It authorises WOI to advance monies to Mr Williams or, at his direction, as WOI may in its absolute discretion determine.  That empowering provision authorises WOI to act in certain ways. It is not a provision that alters the rights of WOI to deal with its own funds appropriately, or the obligations of its director to act in its interests.  Over the period in which these loans were made, it seems to be common ground that WOI was not a profitable enterprise.  It was accumulating debt and losses, which were recorded in its equity and capital accounts. 
35. [35]
    In such circumstances, a director of a company owes duties not only to the shareholders of the company, but also to the company’s creditors – it is their interests that ought to be paramount in any such decision-making.  It must have been obvious to Mr Williams, at the time that he was acting as a director of WOI, that he had a duty to the company.  It must have been equally obvious to him that he had an interest in the loans because many of them were to him personally, or to another company, for his benefit and for the benefit of his close associates.  His obligation was to avoid such a conflict of duty and interest.  In any event, that did not occur. 

Conclusion on declaratory relief

36. [36]
    I am satisfied that the terms of the loan agreements changed the rights and the property of WOI.  I am also satisfied that the benefit conferred on WMH was conferred for the benefit of Mr Williams, his wife and his daughter.
37. [37]
    There was no benefit to WOI from either written loan agreement.  Each caused WOI a detriment, but making each of the existing loans practically impossible to enforce against the debtor.  Mr Williams and WMH benefited from their respective loan agreements by freeing them from any practical obligation to repay the loans.  Having regard to these circumstances, I am satisfied a reasonable person in the circumstances of WOI would not have entered into either written loan agreement.
38. [38]
    The purpose, it is said, of s 588FDA is to strip a director or close associate of the unreasonable component of a transaction.  Each of the loan agreements was a departure from normal commercial practice.  The unreasonable component of each of the transactions here is the fixing of terms for the loans such that they bear no interest, that deny the lender recourse to the assets of the borrower to recover the loans and, in effect, to make the loans unrepayable until such point in time as it appears the borrower wishes to do so.  Those benefits ought to be stripped away from each transaction.  In the circumstances, I propose to make an order declaring the whole of each of the loan agreements to have been void at and after the time when it was made. 

Winding up WMH

39. [39]
    The last question before the Court is the winding up of WMH.  There are some grounds shown as to why WMH ought to be wound up as insolvent, on the basis of its financial statements.  So, pursuant to s 459P of the Act, I will give the applicants leave to bring their petition pursuant to s 459A. 
40. [40]
    None of the contending parties here has proffered any expert evidence as to the question of whether the company is solvent.  There is a level of uncertainty about what the effect of setting aside the loan agreement might be on its solvency.  That matter may need to be considered by anyone seeking to express a view about its solvency. 
41. [41]
    The reason I think there are grounds for considering that it might be insolvent is its position with respect to current assets and current liabilities and the net cashflow from its operations.  Those all seem to indicate that it may be the case that the company cannot meet its expenses as and when they fall due.  But it is a significant enterprise. It has employees and there appear to be many others who find work through consulting to it or undertaking some work for it.  It has investments in a large number of subsets of the business in which it has invited other equity contributions, so there is complexity involved in its winding up.  For those reasons, I think the parties ought to have an opportunity to obtain, if they wish, expert evidence about the solvency of WMH, which really means the solvency of the business that it operates as trustee of the Unit Trust. 
42. [42]
    It is unhelpful for matters that presage insolvency to last very long.  So, I would propose to set a fairly short timetable in which any further evidence might be adduced.  I will hear from the parties about that.  For today’s purposes, I do not propose to make an order under s 459A of the Act to wind up WMH.  The costs of that application should be reserved.