By Harold Peng, a Solicitor of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
The High Court has refused special leave to appeal in the dispute between CEG Direct Securities Pty Ltd (“CEG”) and the liquidator of Runtong Investment and Development Pty Ltd (in liq) (“Runtong”). The Court said that the result depended on the specific facts of the case and that no wider point of law was involved. It also said there was no good reason to doubt the Full Federal Court’s judgment. This leaves the Full Federal Court decision as the main guide for future cases of this type.
At first instance, the trial judge had set aside a second mortgage that Runtong granted over its Adelaide property pursuant to section 588FDA of the Corporations Act 2001 (Cth). That mortgage secured large loans made to two related companies that shared the same directors as Runtong. The judge also ordered that close to two million dollars be repaid by CEG to Runtong. This outcome worried many insolvency and finance professionals. It appeared to threaten the common practice of using security across related companies in property projects.
The Full Federal Court allowed CEG’s appeal. The starting point in considering s588FDA was not in dispute. Runtong’s grant of the mortgage was a dealing with its property. The focus was on two questions. First, was the mortgage made for the benefit of the two directors? Second, looking at the situation at the time, would a reasonable person in Runtong’s position have refused to enter into the mortgage?
On the first question, the Full Federal Court said that “benefit” is to be understood broadly. A benefit does not have to be direct or immediate. It can be indirect or contingent. For example, if a transaction lowers the risk that directors face under a personal guarantee, that can still be a benefit. Using that approach, the Full Federal Court accepted that the second mortgage could be for the benefit of the directors.
On the second question, the liquidator had to prove that a reasonable person in Runtong’s position would not have granted the mortgage. The Full Federal Court looked at all the evidence. Bank documents and expert opinion showed that Runtong, Australian Datong Investment & Development Pty Ltd and Futong Investment and Development Pty Ltd were operating together. Monies moved within the group to keep each project moving. On that basis, there was a sensible commercial reason for Runtong to give the mortgage, even though the loan funds went to the related companies. The majority (Cheeseman and McCvoy JJ) said that the trial judge had drawn inferences which were not supported by the evidence. Justice Goodman agreed with the final result for a different reason. In his view, the liquidator had not set out Runtong’s circumstances in enough detail to require CEG to respond. Any gaps in proof were the liquidator’s responsibility.
The High Court’s refusal confirms this outcome:
“The outcome of the proceedings turns on the analysis of particular facts to s 588FDA(1) of the Corporations Act 2001 (Cth) and does not raise any broader question of principle. Otherwise, there is insufficient reason to doubt the correctness of the decision of the Full Court to warrant a grant of special leave to appeal. It would therefore be futile to grant the extension of time that is sought.”
The practical lesson is clear. The crucial issue is whether the company decision was unreasonable when viewed in its real world context. A liquidator needs detailed and company focused evidence that shows no reasonable decision maker would have entered the transaction at the time. Financiers and sponsors should keep clear records that explain the commercial logic as they go.
Our insolvency, restructuring and debt recovery team advises liquidators, creditors and directors in all types of insolvency litigations. We represent our clients in court to pursue or defend claims such as unreasonable director related transactions, insolvent trading, unfair preferences, etc.
Read the Full Federal Court judgment of CEG Direct Securities Pty Ltd v Cooper as liquidator of Runtong Investment and Development Pty Ltd (in liq) [2025] FCAFC 47 (9 April 2025) in https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/2025/2025fcafc0047
Read the High Court’s disposition of special leave of Nicholas David Cooper as liquidator of Runtong Investment and Development Pty Ltd (in liq) v CEG Direct Securities Pty Ltd [2025] HCADisp 196 (4 September 2025) in
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