Ben’s unfair loans test

Ben is a graduate insolvency accountant working on his first major voidable transaction research task for his firm.

He has been tasked with determining whether a loan (with a 150% pa interest rate) to a company now in liquidation, could be clawed-back as an unfair loan (per s 588FD Corporations Act).

Of course 150% is unfair, he thought. But during Ben’s research he realises this is not necessarily the case.

He looked at 6 Supreme Court decisions in QLD, NSW and VIC, 1 Court of Appeal decision in NSW and 1 Kings Bench decision in the UK.

This is what he found:

1. in none of these decision did the Court rule that the loan was unfair;

2. the per annum interest rate was not determinative. In the 8 cases reviewed, the interest rates ranged from 19.5% pa to c174% pa;

3. evidence of undue influence, unconscionability or extortion (like unlawful threats or bullying) are paramount;

4. evidence of attempts to source alternative funding or the veracity of any due diligence by lenders can assist; and

5. in Accom Finance, Windeyer J referred to fully secured loans as more susceptible to being unfair where the interest rate is above market rates.

Ben’s lesson: as s588FD has been very narrowly defined to date, you should never judge a loan by its interest.


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