In a series of cases involving Special Gold Pty Ltd (Special Gold) and, developer, Dyldam Developments Pty Ltd (Dyldam), Australia’s Federal Court (Court) found directors and benefiting third parties liable for breaches of statutory and fiduciary duties. This finding arose from the directors of Special Gold assuming the debts of related entities and dissipating its assets rendering the company insolvent and unable to pay its creditors.
This judgment brings into sharp focus the liability directors and assisting parties can face in insolvency related matters – especially when dissipating assets to defeat creditors. In this finding, the Court also confirmed the circumstances in which third parties who knowingly assisted, or gained a benefit from these breaches, may also be liable to pay compensation.
Key Takeaways
- Entering into transactions that are of no benefit to the company can constitute a breach of directors’ duties and may give rise to personal liability.
- A breach of directors’ duties may attract statutory and equitable compensation: where directors fail to act bona fide in the interests of the company and breach their statutory duties, they may be liable to pay both equitable and statutory compensation, resulting in higher monetary liability.
- Liability for breach of directors’ duties may also extend to third parties. Related entities or individuals who have assisted directors in breaching their duties, or who have obtained benefits through receiving property as a result of the breaches, may also be liable to pay both equitable and statutory compensation. Lawyers, accountants, business advisors and pre-insolvency advisers may also face liability for any unlawful involvement.
- Any debt and general company restructuring should be undertaken carefully, with an eye to future claims.
- Directors and individual third parties should be aware that personal liability, if not satisfied, could lead to personal bankruptcy. Directors should always consider the structuring of their own estate.
Case Background
The cases featured a group of interrelated companies, including the former major developer, Dyldam, and Special Gold, directed by the Fayad and Khatter families. The judgment in Special Gold Pty Ltd (in liq) v Dyldam Developments Pty Limited (subject to a Deed of Company Arrangement) (No 2) [2025] FCA 825 considered the actions of the directors of Special Gold.
From 2016 to 2023, the Fayad family directed Special Gold to take on liabilities, enter agreements, and make payments that provided practically no benefit to the company. There was a scheme involving the dissipation of Special Gold’s assets for the personal benefit of the directors. Special Gold entered into a ‘Deed of Agreement, Guarantee and Indemnity’ (Agreement) with related companies. The effect was that Special Gold became jointly and severally liable for the combined debts of other related companies. Before entering the Agreement, Special Gold’s debt to the ATO was approximately $800,000. Upon entering the Agreement, Special Gold assumed liability for more than $31 million of tax debt.
The Fayad family also directed Special Gold to sell a property it owned for $73.97 million and to use the sale proceeds to secure loans of more than $24 million from the State Bank of India. Special Gold was subsequently directed to make payments to other companies controlled by the Fayad family. However, during this period, Special Gold was not directed to make payments to its creditors, including the ATO, resulting in the company incurring further tax and interest liabilities.
These transactions and the Agreement significantly impacted the financial position of Special Gold. In December 2023, Thyge Trafford-Jones (Liquidator) was appointed as Special Gold’s administrator, followed by his appointment as the company’s liquidator in January 2024. The Liquidator brought an action against the directors for breaches of their fiduciary duty to act bona fide in the interests of the company and for breaches of directors’ duties under sections 180(1), 181(1) and 182(1) of the Corporations Act 2001 (Cth). These breaches resulted from the dissipation of Special Gold’s assets, rendering the company unable to pay its liabilities.
The Federal Court's Reasoning
Transactions of No Benefit to Company
Sections 180–182 provide that directors must manage a company with care and diligence, act in good faith in the best interests of the company, and must not improperly use their position to gain an advantage or cause detriment to the company. Additionally, directors owe a fiduciary duty under general law to exercise their powers in the interests of the company as a whole.
Special Gold derived little or no benefit from the Agreement, the sale of the property, or the payments made to other companies owned by the Fayad family. This is because Special Gold was left unable to pay its debts, leading to penalties and interest liabilities. These transactions were used to dissipate the assets of Special Gold in an attempt to avoid paying the ATO, further evidencing the directors’ failure to act in the company’s best interests.
On the basis of these transactions, the Court found that the directors had breached their fiduciary and statutory duties. In assessing compensation, Jackman J considered both statutory and equitable remedies and their application to the directors and related third parties.
Equitable and Statutory Compensation
Equitable compensation is a remedy for loss caused by a director’s breach of their fiduciary duty to act in the best interests of a company. Additionally, contravention of the directors’ duties set out in the Corporations Act may result in an order for compensation for the damage suffered.
The Court found numerous instances where the directors had breached their fiduciary and statutory duties to the company. These included entering into the Agreement, which increased the company’s liabilities by more than $30 million; exposing the company to risk of contempt of court for breaching freezing orders; and making payments to third parties which negatively affected company finances.
It was necessary for the Court to calculate the loss arising from every breach, resulting in the directors being ordered to pay a sum of more than $44 million.
Third Party Liability
Jackman J considered the case of Barnes v Addy, which establishes that a third party may be liable if they have knowingly assisted a director to breach their duties.
In the present case, third-party liability was highly relevant, as other members of the directing family owned related entities that assisted with the transactions detrimental to the financial health of Special Gold. The Court found that the third parties had knowingly assisted in, and received benefits from, the directors’ breaches. By way of example, another relative, who was a director of related company KH22, knowingly assisted a Special Gold director in breaching their duties. The individual permitted Special Gold to make payments to KH22, increasing Special Gold’s liabilities. Accordingly, they were also ordered to pay equitable and statutory compensation to Special Gold.
This case serves as a reminder of the need to consider debt and company restructuring carefully, with competent advisers and with a lens to potential post-external administration claims.
Further Information
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