The High Court of Australia (being Australia’s highest court) refused special leave to appeal the Full Federal Court’s decision in CEG Direct Securities Pty Ltd v Cooper (as liquidator) [2025] FCAFC 47. The Court held that the Full Court’s decision turned on the application of the relevant provision to the particular facts of that case and did not raise any broader question of principle. In refusing leave, the Court further stated that there was insufficient reason to doubt the correctness of the Full Federal Court’s decision.
Practical Takeaways
- Broad Construction of “Benefit”: The Court confirmed that “benefit” under section 588FDA(1)(b) extends beyond direct or immediate advantages. It includes indirect, contingent, and secondary benefits, and does not require proof of a director’s net benefit. Caution must be taken to avoid narrowing the scope of “benefit”.
- Commercial Explanation as a Defence: Where a transaction can be commercially explained, it will not be characterised as unreasonable, even if directors derive a benefit. This is particularly so in circumstances such as group financing arrangements or pooled funding structures, where companies operate collectively and transactions are part of a broader commercial strategy.
- Onus on the Liquidator: Legal onus of proving that a transaction is an unreasonable director-related transaction remains with the liquidator, even where the evidential burden shifts. Liquidators must be prepared to adduce clear and comprehensive evidence of unreasonableness, as courts will not infer the negative condition in section 588FDA(1)(c) without a sound evidentiary basis.
Case Background
The proceeding concerned Runtong Investment and Development Pty Ltd (in liquidation)’s (Runtong) application for special leave to appeal the Full Federal Court’s decision in CEG Direct Securities Pty Ltd v Cooper (as liquidator) [2025] FCAFC 47 (Full Court Decision) to the High Court of Australia. The Full Court Decision arose from an appeal by CEG Direct Securities Pty Ltd (CEG) against the ruling of O’Sullivan J in 2024 (Primary Decision).
Runtong was incorporated in 2012 for the purpose of purchasing land in Adelaide (Adelaide Land). The acquisition was financed by the National Australia Bank (NAB), secured by a mortgage granted in October 2012. Runtong had two related companies, Datong and Futong, with whom it shared common directors, Jin Liang and Ping Huang (Runtong Directors).
Between September and December 2014, Datong and Futong entered into three loan agreements (Loans) with CEG as lender. The Runtong Directors provided several securities for the Loans, including a second mortgage over the Adelaide Land (CEG Mortgage) and personal guarantees, to reduce their contingent liability under those guarantees.
Following default under the CEG Mortgage, CEG, as mortgagee, took possession of the Land in February 2018. Administrators were appointed to Runtong in March 2018, and by resolution of creditors in June 2018, Runtong was wound up and Nicholas Cooper, one of the administrators, was appointed as liquidator (Liquidator). CEG subsequently exercised its power of sale over the Land as a secured creditor.
The dispute arose when the Liquidator sought to challenge the CEG Mortgage as an unreasonable director-related transaction under section 588FDA of the Corporations Act 2001 (Cth). This application led to a proceeding in 2024 before the Federal Court (Primary Proceeding).
O’Sullivan J (Primary Judge), the judge in the Primary Proceeding, declared that the grant of the CEG Mortgage from Runtong to CEG in 2014 was an ‘unreasonable director-related transaction’, and therefore voidable. The Primary Judge found that the Liquidator had successfully established all of the required cumulative elements in section 588FDA(1) and ruled in favour of the Liquidator. His Honour ordered CEG to pay to Runtong (in liquidation) the sum of $1,983,100.40.
The Primary Decision was appealed by CEG to the Full Federal Court, in which CEG challenged the Primary Judge’s findings on two grounds: one directed to the ‘broad’ interpretation of the word ‘benefit’ (Ground I), and the other to the finding that a reasonable person in Runtong’s circumstances would not have entered into the CEG Mortgage, having regard to the mandatory statutory considerations (Ground II).
The Full Federal Court’s Reasoning
Unreasonable Director-Related Transaction
Relevantly, section 588FDA(1) provides that a transaction is an ‘unreasonable director-related transaction’ if it involves a payment, disposition of property, issue of securities, or the incurring of an obligation to do so, made to a director (or for the benefit of a director), in circumstances where a reasonable person in the company’s position would not have entered into the transaction. To establish that the grant of the CEG Mortgage was an ‘unreasonable director-related transaction’, the Liquidator was required to prove that:
- the CEG Mortgage involved a disposition of Runtong’s property or the incurring of an obligation to do so (section 588FDA(1)(a));
- the CEG Mortgage was entered into for the benefit of the Runtong Directors (section 588FDA(1)(b)); and
- a reasonable person in Runtong’s circumstances would not have granted the CEG Mortgage, having regard to the benefits and detriment to the company (section 588FDA(1)(c)).
The Court found no issue with the first of these cumulative requirements. It was common ground that by granting the CEG Mortgage on 12 December 2014, Runtong effected a disposition of its property and incurred an obligation to make such a disposition. The main dispute centred on whether the elements in sections 588FDA(1)(b)–(c) were satisfied.
“Benefit” Interpreted Broadly by the Court
The interpretation of “benefit” under section 588FDA(1)(b) was central to Ground I of the appeal. The Primary Judge held that the grant of the CEG Mortgage was for the benefit of the Runtong Directors, as it reduced their contingent liabilities under personal guarantees.
On appeal, CEG argued that “benefit” should be confined to a “net benefit” or to benefits that are direct, immediate, and primary. The Full Court rejected this construction, holding that the concept of “benefit”, read in its text, context and purpose, is not so limited. It encompasses indirect, contingent, and secondary benefits, and does not require a balancing of benefits against detriments to assess a director’s net position.
The Court noted that questions as to the nature or value of the benefit are matters to be weighed under section 588FDA(1)(c), not read into the threshold requirement in section 588FDA(1)(b). Accordingly, the finding that the CEG Mortgage was made for the benefit of the Runtong Directors was upheld.
The Full Court upheld the Primary Judge’s conclusion that the CEG Mortgage was made for the benefit of the Runtong Directors, and Ground I of the appeal was dismissed.
Commercial Context and the Reasonable Person Test
Ground II concerned whether, within the meaning of section 588FDA(1)(c), a reasonable person in Runtong’s circumstances would not have granted the CEG Mortgage.
The Full Court held that the Primary Judge erred in concluding that the negative proposition was established. While the liquidator’s evidence was sufficient to shift the evidential burden to CEG, the legal onus of proof remained with the liquidator, who had access to statutory powers to obtain records and information.
The Full Court found that the Primary Judge failed to draw available inferences from the evidence which, taken together, supplied a commercial explanation for the transaction. Objectively assessed, Runtong operated as part of a property development group with Datong and Futong, relying on pooled funding from related entities and financiers, such that entry into the mortgage was commercially explicable.
The Full Court rejected the contention that the evidence demonstrated an absence of commercial rationale, emphasising that questions of benefit and detriment must be weighed broadly in context. On the totality of the evidence, the Court was not satisfied that a reasonable person in Runtong’s position would not have entered into the CEG Mortgage, and therefore the condition in section 588FDA(1)(c) was not made out.
The Full Court upheld Ground II of the appeal, finding that the liquidator had failed to discharge the onus of establishing unreasonableness.
Outcome
The Full Court dismissed CEG’s challenge to the Primary Judge’s finding that the CEG Mortgage was for the benefit of the Runtong Directors under section 588FDA(1)(b), but upheld the challenge to the finding that a reasonable person in Runtong’s circumstances would not have granted the mortgage under section 588FDA(1)(c).
As the requirements in sections 588FDA(1)(a)–(c) are cumulative, the failure to satisfy the reasonable person test in section 588FDA(1)(c) meant that the mortgage was not an ‘unreasonable director-related transaction’, and therefore not voidable.
The Court held that, in the commercial context of Runtong operating as part of a property development group, dependent on pooled group funding, the mortgage had a commercial explanation.
The appeal was allowed, the Primary Judge’s orders (including as to interest and costs) were set aside, and the Liquidator’s originating process was dismissed with costs.
Further Information
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