The Perils of Backdating Legal Documents

Wade Pearson

Don’t backdate documents. If you read nothing more than the first sentence of this article, that’s the lesson for today. You can sometimes agree how to treat or record something that has already happened, but just slapping an old date onto a document often leads to grief, or at least confusion around what was intended. This was one issue in an interesting case involving a backdated loan agreement.

This case involved a software company (ACTL), and a group of investors (D4). In mid-2005, D4 paid some $290,000 to ACTL, to fund development of some potentially lucrative data compression software. These funds ran out in mid-2006, so ACTL and D4 entered into a loan agreement.

The loan agreement was actually signed in 2006, but was dated August 2005 (a year earlier). Effectively, the parties were recording that the money paid in 2005 was a loan, while also allowing for future advances – although no more money was advanced. After signing, ACTL and D4 treated the money as a loan for the next 6 years or so. Along the way, things took a turn for the worse.

As sometimes happens with technology companies, the promised software (and revenue) never materialised. After various disputes, ACTL and D4 ended up in the High Court. ACTL tried different arguments to avoid repaying D4. All arguments failed, and D4 won in the High Court – but it wasn’t over, as ACTL appealed.

In the Court of Appeal, the main issue was whether the loan agreement had been backdated so that the earlier $290,000 formed part of the loan. The Court of Appeal dismissed ACTL’s claim, and confirmed that the money was a loan. The result? ACTL was ordered to pay D4 over $3,000,000, including the interest accrued since repayment was due in 2007.

Without going into too much detail, there were a few key reasons for the decision. The Court reviewed the evidence and found that everyone involved had treated the money as a loan and recorded it on their balance sheets. The date inserted was deliberately one day before the first payment. ACTL argued that there was no “consideration” (value) as the money had already been advanced – but this was a somewhat technical legal argument and unsurprisingly was not persuasive.

So what can we learn from the judgment? It’s always dangerous to judge a document in hindsight, and without the full context. But I think there are two lessons here – one for you, and one for your lawyer.

For you – don’t backdate documents. It generally causes more issues than it solves, and can often be a sign of something more sinister. If you want to agree how something should be recorded, that’s fine – just be clear that the agreement applies to the past, even though it’s only being signed and formalised today. There really is no substitute for good documentation.

For your lawyer – be clear. Hopefully most lawyers are already aiming to write clearly, but this is even more vital where there is some complexity, as in this case. In an ideal world, it would have helped to specifically state that the $290,000 formed part of the loan, and to distinguish between the signing date (2006) and the date the loan was first advanced (2005).

While the parties may well have ended up fighting in Court anyway, clearer drafting in the loan agreement might have reduced the likelihood of a dispute. Even avoiding the appeal would have likely saved D4 tens of thousands of dollars.

This article first appeared in the Otago Daily Times on 1 July 2019