The decision of the New South Wales Court of Appeal in Changela v Dracoma Pty Ltd [2025] NSWCA 186 affirms that on-demand loan repayments to shadow directors were reasonable, where the company was solvent, and the payments caused no detriment, and as such do not constitute a breach of the unreasonable director related transaction provisions in section 588FDA of the Corporations Act.
Factual Background
Changela Exports Pty Ltd operated a business exporting chickpeas from Australia to India.
Its operations were lean; it had no employees, no premises, no external funding and relied almost entirely on informal, on-demand loans from Prashant and Sweta Changela and Dr Pandya (via Vijay Pandya Pty Ltd). These individuals were shadow directors and were intimately involved in decision-making of the business.
The company successfully purchased and exported Dracoma Pty Ltd’s 2016 chickpea crop, paying all amounts due by April 2017.
Its internal email exchanges revealed a loose practice of repaying internal loans when seasonal income was received and re-advancing funds when new trading opportunities arose.
The Repaid Loans
On 19 July 2017, the directors and Dr Pandya’s company advanced two loans of $250,000 each to the company.
On 20 September 2017, the company repaid those loans (Repaid Loans).At the time the transaction took place the company;
was solvent;
had no trade creditors or ongoing liabilities;
had not yet entered any contract for the 2017 chickpea crop;
next harvest season was still months away.
Internal emails sent that day showed that the repayments were part of a “settling up” after the 2016 season, reflecting the company's normal financing practice.
In November 2017 –after the repayments- $600,000 was again injected into the company by the same lenders to fund the purchase and export of the 2017 crop.
First Decision
The primary judge held the repayments to be unreasonable director-related transactions, on the ground that the company “required” the funds to purchase the 2017 crop and that a reasonable director would have retained the cash.
Judgment was entered requiring the repayment of more than $1.5 million (including other transactions not part of this appeal).
The Appeal Decision
The Court of Appeal (Bell CJ, Leeming JA and McHugh JA) unanimously allowed the appeal.
Its reasoning for overturning the first decision highlights several important principles for understanding claims made under section 588FDA.
1. Solvency and absence of creditors were critical
At the time of the payments, the company;
was not insolvent,
had no existing prospective creditors
had no contractual commitments to purchase the 2017 crop.
Thus, the repayments did not prefer the lenders over other creditors, nor did the repayments prejudice the company’s ability to meet any present obligation.
2. Repayment of on-demand loans is ordinarily reasonable
The Court held that a reasonable person may expect a company to pay its debts when due, including debts repayable on demand. Repaying such loans:
extinguished a corresponding liability;
resulted in no net commercial detriment;
helped maintain goodwill with the lenders, who were the only source of future capital.
This commercial operation of the business distinguished the case from those involving asset-stripping or disguised distributions.
3. Benefit to directors must be assessed in commercial context
The repayments did not deliver any improper benefit resembling:
gifts,
early repayments in preference to other creditors,
acquisition of personal assets,
repayment of personal expenses, or
transfers at undervalue.
Rather, they reflected ordinary loan repayments consistent with business practice.
This was affirmed by Leeming JA who noted that “it may be expected that a reasonable person in the company’s circumstances would not have entered the transaction” does not introduce multiple possible “expectations”. It simply emphasises the objective nature of the inquiry.
The standard remains a single, correct evaluative judgment, not a discretionary spectrum.
Take Aways
The decision is a strong reaffirmation that s 588FDA is a targeted anti-avoidance provision, not a general fairness standard.
It aims at preventing directors from extracting corporate value for personal purposes in circumstances that have no proper commercial foundation.
The case further confirms that Courts look at the commercial reality, the company’s operational model, how it is funded, and what a reasonable person would have done in real time.
Many small and medium enterprises rely on shareholder or director loans that are fluid and informal. This is not improper and does not, without more, create exposure under s 588FDA. Repaying insider loans is typically unobjectionable—if the company is solvent. Repayments that do not harm creditors, or expose the company to commercial detriment, are unlikely to trigger s 588FDA.
The Court cautioned against imputing obligations or intentions that were not crystallised at the time of the transaction. Consistent internal funding patterns—such as advance/repay cycles—properly documented can demonstrate that a transaction was part of normal operations.
The Court delineated between, genuine attempts to strip assets from companies (which s 588FDA targets), and permissible commercial decisions made by solvent entities and provides some illustrations on what constitutes breach under s 588FDA, drawing from past cases, including in cases of:
using company funds for personal assets,
diverting opportunities
repaying insiders in preference to outside creditors
employing company money for family settlements, or
dissipating corporate value without reciprocal benefit.
Against this backdrop, the Court held that the Repaid Loans did not resemble any of these categories.
For more information please contact:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
