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No way it’s not reasonable

26 Feb 2026

Restructuring & Insolvency

The High Court recently refused special leave to appeal the Full Federal Court decision of CEG Direct Securities Pty Ltd v Cooper as liquidator of Runtong Investment and Development Pty Ltd (In Liquidation) (2025) 309 FCR 66; [2025] FCAFC 47 ¹, noting there was insufficient reason to doubt the Full Federal Court’s decision² that the granting of a second-ranking mortgage by Runtong Investment and Development Pty Ltd (Runtong) to CEG Direct Securities Pty Ltd (CEG) was not an unreasonable director-related transaction under s588FDA of the Corporations Act 2001 (Cth) (Act).

What did the Full Federal Court have to say about unreasonable director-related transaction under s588FDA?

Section 588FDA of the Act

S588FDA(1) provides as follows:

(1) A transaction of a company is an unreasonable-director related transaction of the company if, and only if:

(a) the transaction is:

(i) a payment made by the company; or

(ii) a conveyance, transfer or other disposition by the company of property of the company; or

(iii) the issue of securities by the company; or

(iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and

(b) the payment, disposition or issue is, or is to be made, to:

(i) a director of the company; or

(ii) a close associate of a director of the company; or

(iii) a person on behalf of, or for the benefit of, a person named in subparagraph (b)(i) or (b)(ii); and³

(c) it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(i) the benefits (if any) to the company of entering into the transaction; and

(ii) the detriments to the company of entering into the transaction; and

(iii) the respective benefits to other parties to the transaction of entering into it; and

(iv) any other relevant matter.

The obligation referred to in subparagraph (a)(iv) may be a contingent obligation.

Overview of proceedings

Runtong had granted CEG a guarantee supported by a second-ranking mortgage to secure funding CEG provided to two Runtong-related entities, Australian Datong Investment & Development Pty Ltd (Datong) and Futong Investment and Development Pty Ltd (Futong).

Each of the companies had purchased a commercial development site, with initial funding for each project provided by NAB, secured by first registered mortgages over the properties.

Datong, Futong and Runtong had directors and members in common. Two of the directors of Runtong (Runtong Directors) were also directors of Datong and Futong. The Runtong Directors also provided CEG with personal guarantees in consideration of the funding.

Runtong’s liquidator succeeded in the first instance in arguing that the granting of the Runtong mortgage was an unreasonable director-related transaction because it was a disposition by Runtong of its property, or the incurring by Runtong of an obligation to make that disposition on behalf of or for the benefit of the Runtong Directors, in that it reduced their personal liability under the guarantees they had provided to CEG, and a reasonable person in Runtong’s position would not have entered into the transaction.

The Full Federal Court unanimously allowed CEG’s appeal on the basis that one of the mandatory conditions under s588FDA had not been satisfied, that is the Court was not satisfied that a reasonable person in Runtong’s circumstances would not have entered into the transaction.

What were Runtong’s circumstances?

Initially, CEG provided funding to Datong and Futong secured by second-ranking mortgages over each of Datong and Futong’s properties and supported by director guarantees (including the Runtong Directors’ guarantees). Subsequently, CEG provided an additional loan to the group and sought additional security by way of guarantees from Runtong and the Runtong Directors, plus the second-ranking Runtong mortgage in issue.

Runtong was not named as a borrower for the additional lending from CEG, but did, in fact, obtain the benefit of CEG’s advances. Runtong received regular transfers of funds from Datong and Futong (and overseas) pending income from the sale of its development project.

In 2018 CEG entered into possession of the property, realising approx. $12 million from its sale, and Runtong entered external administration.

Runtong’s liquidator was faced with limited evidence; Runtong’s books and records were incomplete, the Runtong Directors had left the country and CEG’s director had passed away. NAB’s business records were before the court at first instance.

Decision of the Full Federal Court

It was not in issue that Runtong’s granting of the second-ranking mortgage to CEG was a transaction within s588FDA(1)(a) of the Act.

The two main grounds of appeal related to whether the mandatory conditions under s588FDA(1)(b) and (c) had been satisfied.

Ground 1: Meaning of ‘benefit’

CEG argued that Runtong’s granting of the mortgage was not for the benefit of the Runtong Directors within the meaning of s588FDA(1)(b) in that:

there was no net benefit to the Runtong Directors because there was an increased contingent liability of the directors under their guarantees when they agreed to take on liability for both the original funding to Datong and Futong as well as the additional funding from CEG;
if there was a benefit, it was not the purpose of the transaction; and
it was not a direct or primary benefit.

The Full Federal Court unanimously dismissed this ground on the basis that a wider construction of ‘benefit’ was appropriate for anti-avoidance provisions like s588FDA, that is:

the benefit does not need to be the purpose of the transaction, as long as the transaction has the effect of providing a benefit to the recipient in some way; and
‘benefit’ is not confined to direct, immediate and primary benefits to the exclusion of benefits which are indirect, contingent and secondary.

The mortgage was a disposition which had the effect of benefiting the Runtong Directors (by reducing their personal liability under their guarantees) and therefore satisfied s588FDA(1)(b)(iii) of the Act.

Ground 2: Reasonable person test

Section 588FDA(1)(c) requires a Court to evaluate whether a reasonable person in the company’s circumstances would not have entered into that transaction. It is an objective test, and the Court must take into account all of the matters referred to in s588FDA(a)(i)-(iv) in assessing what is objectively reasonable.

The Full Federal Court did not go so far as to find, as CEG urged, that a reasonable person in Runtong’s circumstances would have entered into the mortgage. However, the judges were unanimous that the primary judge should not have found that a reasonable person in Runtong’s circumstances would not have entered into the mortgage.

The Full Federal Court’s approach to limited available evidence

The Full Federal Court’s consideration of the limited evidence available is also of interest.

Each of the judges was willing to consider NAB’s business records. The majority judges considered NAB’s business records were a reliable source of information about Runtong’s circumstances, as they would have been critically assessed and verified as part of NAB’s credit application process.

Treatment of expert evidence

The majority judges were critical of the primary judge’s rejection of expert opinion evidence, to the effect that:

Datong, Futong and Runtong operated as a property development group; and
it was common lending practice to take cross-securities from related entities in circumstances where existing securities may be inadequate (eg second-ranking as was the case here).

The Full Federal Court unanimously considered that it was appropriate to view the companies as a group and it was not necessary for the Court to be satisfied that they were related bodies corporate within the narrow definition of the Act.

Evidentiary onus

The legal onus of establishing a case always remains with the liquidator. As such, the liquidator here had the responsibility of producing the necessary evidence to establish his case. As Runtong’s liquidator, he had the usual powers including to undertake public examinations and to require the production of books and records.

However, the evidentiary onus may shift to the defendant in certain circumstances, including where a liquidator prosecuting a s588FDA claim has produced sufficient evidence that it may be inferred that a reasonable person would not have entered into the transaction. That is, although the legal onus of establishing a case always remains with the liquidator, the evidentiary onus may shift to the defendant to explain why it was not unreasonable for the company to enter into the transaction.

Here, Goodman J, the minority judge, did not consider that there was anything in the evidence suggesting that there had been any departure from normal commercial practice requiring an explanation from CEG.

The majority judges, Cheeseman and McEvoy JJ, considered that an explanation was required from CEG but, having regard to the available evidence and inferences, the liquidator had not established a reasonable person in Runtong’s position would not have granted the mortgage. They accepted the expert’s opinion that it was common lending practice to take cross-securities from related entities in circumstances where existing securities may be inadequate.

The Court of Appeal therefore took into account the limited evidence and inferences available which, taken in combination, supplied the commercial rationale as to why, objectively assessed, Runtong did not act unreasonably in entering into the mortgage.

Lavan Comment

There are only a handful of decisions at the High Court and appellate court level about s588FDA. This Full Federal Court decision is a guide to the Court’s approach where, as is often the case:

limited evidence is available;
there is no direct evidence from the main players; and
there are incomplete company books and records.

The Court demonstrated a ready willingness to draw inferences from the commercial circumstances and rationale of a transaction.

If you have any questions regarding this decision or voidable transactions, the experienced Lavan team is here to assist.

Disclaimer

The information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.

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