Unreasonable director-related transactions for the benefit of a director

The decision of the Full Court of the Federal Court of Australia in CEG Direction Securities Pty Ltd v Cooper as liquidator of Runtong Investment and Development Pty Ltd (in liq) [2025] FCAFC 47 on 9 April 2025 is significant for liquidators considering claims for unreasonable director-related transactions under s 588FDA of the Corporations Act 2001 (Cth) (the Act) when such transactions are said to be ’for the benefit of a director’.

In particular, the decision confirms that the relevant ’benefit’ to a director extends to benefits that may be only indirect, contingent, derivative, or secondary in nature – in this case, a reduction in the director’s contingent liability under a separate but related guarantee.  This clarification may give liquidators greater confidence to cast the net more widely; however they may face challenges in demonstrating to the court that a reasonable person in the company’s circumstances would not have entered into the transaction, especially when the benefits are less direct.   

Furthermore, the decision emphasises the liquidator’s responsibility to provide sufficient evidence to satisfy this standard. That legal onus remains with the liquidator throughout the application.  If the liquidator presents enough evidence for the court to infer that a reasonable person in the company’s circumstances would not have entered into the transaction, the evidentiary onus then shifts to the defendant to present evidence to the contrary. Nonetheless, the ongoing dispute in this case regarding the sufficiency of the evidence presented by the liquidator serves as a reminder of the importance of gathering and submitting the most compelling evidence available to demonstrate that, in the objective assessment, the transaction would not have been entered into.

The case at first instance

Jian Liang and Ping Huang were two of the directors of three indirectly related companies: Runtong Investment and Development Pty Ltd (Runtong), Australian Datong Investment & Development Pty Ltd (Duntong), and Futong Investment and Development Limited (Funtong).

In 2014, as part of a suite of securities provided to secure borrowings by Datong and Funtong from CEG Direct Securities Pty Ltd (CEG), Runtong granted to CEG a mortgage over real property it owned in Adelaide. The securities included guarantees given by the directors of the companies.

In 2018, Nicholas Cooper was appointed as liquidator of Runtong. He brought proceedings in the Federal Court against CEG seeking relief under s 588FF of the Act on the basis that the grant of the mortgage to CEG was an unreasonable director-related transaction within the meaning of s 588FDA, and so avoidable transaction under s 588FE of the Act.

Relevantly, under s 588FDA, a transaction of a company is an unreasonable director-related transaction of the company if:

1. The transaction is a conveyance, transfer, or other disposition by the company of property of the company, or the incurring by the company of an obligation to make such a payment, disposition, or issue (s 588FDA(1)(a)).
2. The payment, disposition, or issue is, or is to be, made to a director of the company, or to a person on behalf of, or for the benefit of, a director of the company (s 588FDA(1)(b)).
3. It may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to the benefits (if any) to the company of entering into the transaction, the detriment to the company of entering into the transaction, the respective benefits to other parties to the transaction in entering into it, and any other relevant matter (s 588FDA(1)(c)).

The parties agreed, and the primary judge was satisfied, that the first condition (sub-section (a)) was established because the grant of the mortgage to CEG was a disposition by Runtong of its property or the incurring of an obligation by Runtong to make such a disposition.

Whether the second condition (sub-section (b)) was satisfied was in dispute. The primary judge held that the condition was satisfied because the grant of the mortgage to CEG was for the benefit of the directors. The benefit was the reduction in their contingent liability to CEG under the guarantees they had given by any net sum that CEG received in enforcing the mortgage. 

The third condition (sub-section (c)) was also in dispute. The primary judge found that it could be expected that a reasonable person in Runtong’s circumstances would not have granted the mortgage to CEG.  On the basis that all three condition were satisfied, his Honour concluded that the CEG mortgage was an unreasonable director-related transaction and so a voidable transaction, directing CEG to pay $1.9m to Runtong.

The appeal

The principal grounds of CEG’s appeal were that:

1. First, the primary judge had erred in concluding that the mortgage to CEG was ’for the benefit of a director’ of Runtong within the meaning of s 588FDA(1)(b), and
2. Second, the primary judge had erred in concluding, for the purposes of s 588FDA(1)(c), that the transaction was such that it may be expected that a reasonable person in Runtong’s circumstances would not have granted the CEG mortgage.

The appeal turned on the proper construction of s 588FDA of the Act, which the majority (Cheeseman and McEvoy JJ) said sets out the three conditions necessary and sufficient necessary for there to be an unreasonable director-related transaction, describing the conditions as being cumulative and operating as ’progressive filters’, with each criteria under sub-sections (a) and (b) to be satisfied in turn before the court would move to the evaluative assessment under sub-section (c).

A ’benefit’ to the directors

In deciding at first instance that the mortgage to CEG was for the benefit of the directors, so as to satisfy sub-section (b), the primary judge adopted a broad construction of the term ’benefit’ to include benefits that were indirect and contingent, as well as those that are direct or immediate.

Historically, the courts have been divided on the meaning of ‘benefit’. Some earlier decisions, such as Ziade Investments Pty Ltd (in liq) v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; 57 ACSR 693 and Re Great Wall Resources Pty Ltd (in liq) [2013] NSWSC 354 supported the narrow view, requiring that the relevant benefits to the director be direct benefits. However, other cases such as Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; (2014) 41 VR 445 and Re Gondon Five Pty Ltd (in liq) [2020] NSWSC 1769 have favoured the wider approach.

In Vasudevan, Nettle JA gave a broader meaning to ‘benefit’, suggesting that the ‘benefit’ should include indirect or derivative benefits.

’According to ordinary acceptation, “benefit” includes both direct and indirect benefits and, prima facie, that accords with the apparent objective of the section. If so, why should the notion be confined the direct benefit for the purposes of the section?’

CEG contended on appeal that the term ’benefit’ should be narrowly construed to exclude benefits to directors that are indirect or derivative. CEG submitted that it was not the intention of the legislature that the benefit referred to in sub-section (b) could be so broad that it included contingent and uncertain benefits, such as that alleged in this case. CEG submitted that such a construction would result in absurd outcomes that could not have been intended by the legislature.  

In their judgment on the appeal, rejecting CEG’s contentions, the majority said the following:

• The wider construction of the word ’benefit’ is the proper construction. It includes benefits that are indirect, contingent, and secondary, and is not confined to benefits that are direct, immediate, and primary. 
• The word benefit’ is broadly defined in s 9 of the Act and extends to ’any benefit’— the natural reading of which includes both direct and indirect benefits – and a benefit includes anything that is ’for the good of a person or thing’.
• On that basis, a disposition for the benefit of a director will include a circumstance where the director ’obtains the right to the chance of an advantageous outcome’.
• A transaction will benefit a director for the purposes of s 588FDA(1)(b) if the disposition in issue ’legally or financially advantages’ the director, even where that advantage is indirect or secondary in nature.

In considering whether this broader construction might result in outcomes not objectively intended by the legislature, the majority took the view that it would not do so when read with the cumulative requirement in sub-section (c) requiring the court to determine whether the relevant transaction was objectively unreasonable. The majority considered that the third condition permitting the court to ’winnow out’ those transactions that might be captured by the broader construction of ’benefit’, but that were not unreasonably entered into.

Their Honours similarly rejected a submission by CEG arguing that the phrase ’for the benefit’ should be construed as translating to ’for the net benefit’ to the director, as had the primary judge. CEG supported this argument by reference to the fact that the guarantees pre-dated the mortgage to CEG.  They contended that additional funds were advanced on the strength of the mortgage, which, according to CEG, increased the directors’ contingent liability under the guarantees without providing them any benefit.

Their Honours observed that the director’s net position regarding a contingent liability was not a fact that could necessarily be known at the date the transaction was entered into, which is the relevant date for evaluating the conditions under s 588FDA. This could introduce complexity and uncertainty to the threshold condition in sub-section (b), which does not align with the text, context, and purpose of that section. They stated that whether a benefit is marginal, contingent, direct, indirect, or net, should be considered as part of the court’s evaluative assessment under sub-section (c).

On that basis, the majority rejected CEG’s contention that the primary judge erred in finding that the disposition by way of the mortgage to CEG was made for the benefit of the directors.

Goodman J similarly rejected CEG’s submission that the primary judge had erred in his construction of the phrase ’for the benefit of’. In addition to the matters addressed by the majority, his Honour noted, and refused to accept, a submission for CEG to the effect that the relevant payment, disposition, or issue must have been made for the purpose of benefiting the recipient. It was not sufficient that the payment, disposition, or issue merely had the effect of providing a benefit. 

His Honour also found that CEG’s first ground of appeal was not made out.

Evidence to establish that a reasonable person in the company’s circumstances would not have entered into the transaction

At first instance, the primary judge concluded that a reasonable person in Runtong’s position would not have granted the mortgage, thereby satisfying the final requirement to determine it as an unreasonable director-related transaction.

CEG argued that the primary judge failed to consider all of Runtong’s relevant circumstances and all other relevant matters. They argued that the evidence before the Court, when considered in its entirety, did not allow the primary judge to be satisfied that the sub-section (c) condition was met.  CEG further asserted that the evidence supported the contrary conclusion that it may be expected that a reasonable person in Runtong’s circumstances would have granted the mortgage to CEG.

On appeal, the majority said that, to satisfy sub-section (c), there must be:

’an objective evaluation of the relevant considerations, viewed as a whole, leading to a determination of whether the legal conclusion—that a reasonable person in the company’s circumstances would not have entered into the transaction—should be drawn.’   

The majority determined that, considering the mandatory considerations under sub-section (c) against the whole of the evidence, they could not be satisfied that a reasonable person in Runtong’s position would not have granted the mortgage. In their view, the main error of the primary judge was that he had been satisfied that it may be expected that a reasonable person in Runtong’s position would not have granted the mortgage notwithstanding what his Honour regarded as a lack of evidence about the circumstances in which it was entered into, and by declining to draw inferences available on the evidence that gave a commercial explanation for why entering into the mortgage was not unreasonable.

On an application under s 588FDA, the legal onus of proving the negative proposition that a reasonable person in the company’s circumstances would not have entered into the transaction rests (and remains) with the liquidator.  

The majority referred to the principle in Blatch v Archer [1774] EngR 2; (1774) 1 Cowp 63; 98 ER 969 that all evidence must be weighted according to the proof which it was in the power of the party to have produced, and in the power of the other party to contradict. The majority emphasised the need for the court to be realistic and pragmatic when assessing the ability of the parties to prove the relevant circumstances.

The majority, referring to the decision of Goodman J in the minority, noted that when a party has the legal onus to prove a negative proposition and produces sufficient evidence from which that proposition may be inferred, the evidentiary onus then shifts to the opposing party. The opposing party is expected to adduce evidence that contradicts the initial proposition. In this case, the majority accepted that the evidence adduced by the liquidator was sufficient to allow for the inference of the negative proposition, thereby shifting the evidential burden to CEG. CEG was then required to present evidence showing that a reasonable person in the company’s position would have entered into the transaction in question.

Their Honours noted particularly the principle developed in the uncommercial transaction cases that:

’[W]here there is limited evidence of the nature and purpose of a transaction, but the surrounding circumstances show it to be a departure from normal commercial practice and to raise inference as to a lack of benefit to the company, detriment caused to the company, or benefit accruing to other parties, absent some commercial explanation, courts may infer the transaction was uncommercial, without requiring the liquidator to prove its precise uncommercial nature.’

The same principle, they said, may be applied with respect to unreasonable director-related transactions. 

The issue with the Court’s approach at first instance was that, in finding the liquidator’s evidence incomplete, imprecise, and unsatisfactory, the primary judge had not considered the respective capacities of the liquidator and CEG to prove the circumstances surrounding entry into the mortgage.  The primary judge, in finding that there was insufficient evidence to establish that the three companies were part of a property development group and so no evidence revealing an adequate commercial explanation for the transaction or any benefit to Runtong, had failed to draw available inferences that ought to have been drawn.

The majority concluded that the primary judge erred in rejecting expert opinion evidence to the effect that the three companies operated together as a property development group in various property developments, and that it was common practice for lenders to take cross-securities from related entities in such circumstances. The evidence made available to the primary judge an inference that the three companies acted cooperatively, including in securing finance and, taking into account all of the relevant evidences and circumstances, including the commercial reality of the parties relationship, the entry into the mortgage was not a departure from normal commercial practice. 

Departing from the decision at first instance, the majority found that there was sufficient evidence to infer that the three companies—Datong, Futong, and Runtong—operated as a property development group that cooperated in financing their respective developments.  Within that commercial context, the mortgage granted by Futong to secure funding to the other companies considered to be in line with normal commercial practices.

The liquidator presented sufficient evidence to shift the evidentiary burden of proving the negative condition in sub-section (c) to CEG.  As a result, the majority determined that CEG had discharged its evidential onus, leading to a conclusion that there was a valid commercial rationale for entering into the mortgage.

As a result, the majority upheld CEG’s second ground of appeal, and ordered that the orders of the primary judge be set aside.

Goodman J similarly upheld CEG’s second ground of appeal.

His Honour was not satisfied that the evidence adduced by the liquidator at first instance provided a sufficient basis to reach any conclusion about Runtong’s circumstances when it granted the mortgage, or to conclude that a reasonable person in those circumstances would not have granted it.  His Honour considered the evidence of Runtong’s circumstances was ’slender and inadequate’, with no evidence from anyone associated with the companies, no business records, and no explanation from the liquidator for why such evidence had not been adduced. As a result, the available evidence did not show a departure from normal commercial practice. Therefore, his Honour found that the evidentiary onus did not then shift to CEG, departing from the majority position.

His Honour determined that the surrounding circumstances established by the evidence ’did not show a departure from normal commercial practice or otherwise allow the drawing of an inference favourable to the liquidator sufficient to require explanation by CEG.’  His Honour did not consider there to be any basis to conclude that CEG had greater means to produce that evidence than the liquidator, and in fact, the converse was true with the liquidator having the benefit of various provisions of the Act by which they could have obtained books, records, and information relevant to the Court’s assessment under sub-section (c).

His Honour concluded that the primary judge erred in finding that it may be expected that a reasonable person in Runtong’s circumstances would not have granted the mortgage, the evidence before him being insufficient to reach that conclusion. 

As a result, the Full Court allowed the appeal, setting aside the orders made by the Court at first instance and substituting orders dismissing the liquidator’s claim.