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A case study

It is a well-known fact that a large portion of new businesses will fail a short time after inception. In fact, it is accepted principle that 60% of all new businesses will fail within the first 3 years of trading.

Unfortunately, this risk can have extreme consequences when you involve family in your new business venture. The writer acted for the successful Defendants in the recent matter of Wheatley v Salmon [2022] NSWSC 395 where this risk came to a head in the most unexpected of ways.

In the course of the proceedings, the NSW Supreme Court was asked by our client’s sister whether an alleged representation made by our Client that he would “buy you a house” was enough to ground an interest in the property as a resolution to a failed business venture.

The plaintiff (sister) and defendant (brother) were siblings and both directors in Marketing Masters Qld Pty Ltd (the company). The company received a $550,000 loan and both parties personally guaranteed the loan. The sister also granted the bank a mortgage over her home.

After the sister placed the company into administration and liquidation, she ultimately sold her home in order to pay the debt owed to the bank.

The Sister then alleged that to compensate her for the loss suffered, her brother promised to buy her another house. The sister gave evidence that her brother said to her words to the effect of “I will buy you a house”. The complicating factor however arose that the brother purchased what both parties agreed was an investment property and that the brother allowed his sister to live in rent-free. The sister only paid for utilities and various other expenses, while the brother paid the rates, strata levies and mortgage payments.

The problem was when the brother sought to terminate the sisters’ occupancy of the property so he could sell the property. The sister sought a declaration that her brother held the property on constructive trust for her and sought an order that he convey the property to her without any encumbrance. The sister also relied on the doctrine of proprietary estoppel by encouragement, claiming she acted in reliance on her brother’s promise to buy her a house after the failure of the business and winding up of the company

Ultimately, the Court did not accept the sister’s evidence that her brother said to her words “I will buy you a house”, given the sister also gave evidence that she understood her brother was looking to build a property investment portfolio and her occupation of the property had nothing to do with repaying her for the failure of the business. As such, the Court held the sister was not entitled to remain at the property without the brother’s consent and found in favour of our clients.

The result in this matter is an important case study to make sure when you get into business with family, that everyone is aware of the risks and there are sufficient documentation and agreements in place to minimise the risk of tearing apart your important family relationships.

You can read the full decision by His Honour Justice Kunc at the following link: