The blog post, Is it a bird, is it a plane is it a loan? highlighted the importance of determining the nature of funds advanced to a trust. In that case it was argued that a loan advance was a gift.
Another case along the same lines was ultimately resolved between the parties and it was accepted that the advance was a loan. However, that was not the end of the matter. The trustees who had tried to hold onto the loan advance were left out of pocket – not just as to the amount of the loan but for the significant legal fees incurred. Round two went in the trustees’ favour: the trustees recovering their costs as well as damages on account of emotional distress from the lawyers acting for them on the purchase. The High Court finding that in failing to determine (and document) the nature of the advance the lawyers were guilty of negligence. Matters not adequately addressed by the lawyers acting on the purchase included:
• failing to identify the source if the deposit
• failing to adequately identify how the borrowings were being utilised and by whom – the loan advance and borrowings amounting to more than the purchase price per the settlement statement
• failing to advise the purchasing trustees that absent any documented and agreed limitation of liability the trustees remained personally liable (in this regard see the recent blog post on the dangers of undocumented advances to trustees – Undocumented loans)
• failing advise the clients of the need for independent advice due to the acting solicitor’s clear conflict
Trustees and their advisors should pay attention to this decision. It is too easy to think that the idea that anyone hands over $800,000 with no documentation is so extraordinary that this is a one off. Au contrair gentle reader. Far too often fund flows fail to be documented in related party transactions. That the losers can include the advisors is novel. However, the message is loud and clear. Failure to document or identify the source of funds can be risky for all parties.