The Supreme Court of New South Wales has clarified the circumstances in which a liquidator may recover deposit funds paid to a third party and the extent to which a counterparty may rely on the good-faith defence under section 588FG of the Corporations Act 2001 (Cth).
In In the matter of Portman Securities (in liq) Pty Ltd [2025] NSWSC 1338, the Court examined the director’s decision to release a $5 million deposit and addressed the relationship between director conduct, uncommercial transactions and insolvent trading risk. The decision provides practical guidance for directors, counterparties and insolvency practitioners when deposits are released in the lead-up to insolvency.
Key Takeaways
- Directors must verify that the company can meet its financial commitments before releasing substantial funds, particularly in the lead-up to insolvency.
- A creditor relying on good faith must demonstrate more than honest intention – the Court will examine what they understood about the commerciality of the transaction.
- A creditor’s actual state of knowledge is assessed against what a reasonable person would infer from the circumstances, including any warning signs they chose to ignore.
- Suspicion of insolvency is assessed under a hybrid test that considers both the creditor’s own position and an objective standard; limited inquiries may still be telling where the circumstances called for investigation.
Case Background
The liquidator of Portman Securities Pty Ltd (in liq) (Company), together with the Company, commenced proceedings against the former director, Mr Pamboris, the property vendor, Westwood Capital Pty Ltd, and Athenee Mortgages Pty Ltd. The dispute arose from a contract dated 26 March 2020 under which the Company agreed to purchase a Punchbowl property from Westwood for $100 million. The plaintiffs alleged that the transaction was uncommercial, as the Company paid a significant deposit despite having no realistic capacity to complete the purchase.
The contract required the deposit to be paid in three stages: $100 on exchange, $5,000,000 by 31 March 2020, and a further $4,999,900 by 30 June 2020 (later extended to 30 September 2020). The Company paid the $5,000,000 instalment, became liable for the remaining balance, and incurred stamp duty of approximately $5.48 million. On 8 October 2020, Westwood terminated the contract, retained the $5,000,000 deposit, and asserted a claim for the unpaid balance.
The liquidator and the Company sought relief against:
- Mr Pamboris, for alleged breaches of directors’ duties, recovery of the $5 million deposit as an uncommercial and insolvent transaction, and compensation;
- Westwood, for orders requiring repayment of the $5 million deposit and extinguishing any entitlement to the unpaid balance; and
- Athenee Mortgages Pty Ltd, for orders setting aside mortgages granted by Mr Pamboris as transactions intended to defeat creditors.
Westwood cross-claimed for the unpaid portion of the deposit, relying on an alleged personal guarantee said to have been given by Mr Pamboris.
The Court’s reasoning
Directors’ duties
The Court found that Mr Pamboris breached his obligations to exercise reasonable care, diligence and proper purpose. When the contract was executed, the Company lacked the funds to meet the full deposit and had no credible plan for raising the balance. There was no firm lending commitment, no realistic funding strategy, and no independent valuation – resulting in the Company agreeing to pay at least twice the property’s true market value.
The Court held that entering into the contract rendered the Company insolvent and amounted to a clear breach of duty. However, the recoverable loss was limited to the $5 million already paid. Although the Company became indebted for the remaining deposit on entry into the Contract, it ultimately would not remain liable in light of the relief the Court was prepared to grant, and Westwood received no additional benefit, so compensation could not exceed that amount.
Uncommercial and insolvent transaction
The plaintiffs sought relief under the voidable transaction regime. A transaction is uncommercial where a reasonable person in the company’s position would not have entered into it, having regard to the benefits, detriments and surrounding circumstances.
Applying that test, the Court concluded that no reasonable person would have committed the Company to a $100 million purchase when it lacked both funding and any realistic pathway to completion. The transaction therefore satisfied the definition of an uncommercial transaction.
The Court also found that the Company became insolvent upon entry into the contract. Applying the cash-flow test, the Company was unable to pay its debts as they fell due: it lacked the funds to meet its deposit obligations and had no viable means of obtaining them. As the transaction was both uncommercial and insolvent, it was voidable. The plaintiffs succeeded in their claim for an order under section 588FF(1)(a) requiring Mr Pamboris to pay $5 million.
Failure of the section 588FG defence
The Court rejected Westwood’s reliance on the statutory good-faith defence. Westwood knew the Company had already paid $5 million, was assuming a similar further liability within a short period, and had incurred substantial stamp duty. Despite this, it made no inquiries about the Company’s capacity to meet these obligations, even as market conditions deteriorated.
In those circumstances, the Court was not satisfied that Westwood had acted in good faith or that it lacked reasonable grounds for suspecting insolvency. The defence therefore failed, and the plaintiffs were entitled to relief.
Claim against Athenee
The Court held that the mortgages granted by Mr Pamboris in favour of Athenee over the Paddington and Marrickville properties were void as transactions intended to defeat creditors. The evidence demonstrated an intention to place assets beyond the reach of the liquidator or, at minimum, to hinder or delay recovery. The mortgages also diminished the pool of assets available to satisfy Mr Pamboris’s liabilities.
Accordingly, the Court granted the declaratory relief sought.
Outcome
The Supreme Court of New South Wales found in favour of the liquidator and the Company. The key orders were:
- Mr Pamboris breached his statutory and general law duties and was ordered to pay compensation under section 1317H for the $5 million loss.
- The transaction was characterised as uncommercial and as an insolvent transaction because the Company became insolvent upon entry, rendering it voidable.
- Mr Pamboris was ordered to repay the $5 million deposit as part of the voidable transaction relief.
- Westwood was unable to establish the section 588FG defence; the Court held the plaintiffs were entitled to relief against Westwood, including repayment of $5 million, with the precise form of orders to be settled by short minutes.
- Westwood’s cross-claim for the unpaid balance of the deposit, based on the alleged personal guarantee, was dismissed.
- The mortgages granted to Athenee were declared void as transactions intended to defeat or hinder creditors.
Further Information
For further information about director liability, recovery of deposit funds, uncommercial and insolvent transactions, and the limits of the section 588FG good faith defence, please contact the author of this article:
Trevor Withane
FOUNDER & MANAGING PARTNER
