CEG Direct Securities v Runtong: Full Federal Court overturns decision in a victory for secured creditors

The Full Federal Court has confirmed the validity of the longstanding practice deployed by credit providers of seeking cross-security from a borrower’s related entities (particularly in the context of the financing of commercial projects by that corporate group). In rejecting the liquidator’s characterisation of such a transaction as constituting an unreasonable director-related transaction, the Full Court has provided timely guidance and commercial certainty for both financiers and liquidators.

Executive summary

• The Full Federal Court of Australia has unanimously overturned a controversial judgment on appeal in relation to the unreasonable director related transaction provisions in section 588FDA of the Corporations Act 2001 (Cth) (the Act).
• The original judgment held that a mortgage granted as cross-security by a related entity with common directors amounted to a voidable transaction, on the basis that it had reduced the contingent liabilities of the common directors under personal guarantees.
• Upon appeal, the Full Court examined the objective ‘reasonableness’ of the cross-security for the purposes of application of section 588FDA(1)(c) of the Act, ultimately determining that the grant of the cross-security was consistent with common commercial practice.
• The Full Court’s decision hinged upon a factual inquiry as to the existence of common commercial practices in the credit industry. Consequently, the judgment is likely to deliver comfort to credit providers who have required the provision of related party cross-security as a condition of provision of finance to a corporate borrower.

Background and security structure

Runtong Investment and Development Pty Ltd (Runtong) was a special purpose vehicle that was the registered proprietor of a parcel of land in Adelaide valued at $2.2 million (Property). Runtong shared two common directors with companies named Datong Investment and Development Pty Ltd (Datong) and Futong Investment and Development Pty Ltd (Futong). Together, these companies intended to develop the Property.

Runtong financed the Property’s purchase by way of a loan of $1.54 million from the National Australia Bank (NAB), which held first ranking mortgage as security. Datong and Futong had pre-existing loan agreements with a credit provider, CEG Direct Securities (CEG). This liability was secured by, amongst other things, personal guarantees from all directors.

In December 2014, Runtong granted a second ranked mortgage to CEG (the Runtong Mortgage) to secure funds of approximately $15 million borrowed by Datong and Futong, both of whom shared common directors with Runtong and who had provided personal guarantees to CEG.

CEG eventually enforced its security over the Property following defaults under the Datong and Futong loan agreements. Runtong was ultimately placed into liquidation and the Property was sold by CEG in July 2018.

Unreasonable director related transaction (section 588FDA)

The liquidator contended that the Runtong Mortgage constituted an unreasonable director related transaction under section 588FDA of the Act, on the basis that its grant conferred a benefit upon the two common directors, as their contingent liability under the personal guarantees was reduced by the provision of the Runtong Mortgage.

The trial judge accepted this argument and granted orders for $1.9 million to be paid by CEG into the liquidation of Runtong[1]. The Full Court’s recent judgment[2] unanimously overturned this decision.

In this regard, although the Full Court confirmed that a transaction’s “benefits” for the purposes of section 588FDA can include indirect benefits (such as the reduction of a director’s contingent liability under a personal guarantee), the transaction will only be voidable if it is objectively unreasonable as determined by section 588FDA(1)(c). That subsection requires the Court to consider whether a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to numerous indications of whether the transaction has a commercial rationale, including:

• the benefits (if any) to the company of entering into the transaction;
• the detriment to the company of entering into the transaction; and
• the respective benefits to other parties to the transaction of entering into it.

Inquiry into ‘reasonableness’

Relevantly, the Full Court majority’s inquiry into the concept of ‘reasonableness’ pursuant to section 588FDA(1)(c) broadly turned on their interpretation of two pieces of evidence, namely:

1. expert evidence that suggested it was ‘common practice’ for lenders to taking cross-securities from related entities (particularly in circumstances where the borrower could not itself offer sufficient security for the loan), and that CEG’s procurement of the Runtong Mortgage aligned with reasonably accepted lending practice; and
2. documentary evidence in the form of NAB’s and CEG’s ongoing credit assessments of Runtong, which treated the three companies as an aggregated group for credit assessment purposes.

The Full Court disagreed with the primary judge’s finding that Runtong, Futong and Datong were ‘standalone property development companies’, as opposed to ‘a co-ordinated property development group’ which was acting cooperatively in financing the respective property developments of each entity. Runtong was entirely dependent on Datong and Futong and on funds being provided from China, which in turn created the imperative to enter into the Runtong Mortgage. Given these commercial realities, it followed (despite the limited evidence as to the nature or purpose of the transaction) that the grant of the Runtong Mortgage was not a departure from normal commercial practice and was therefore not a voidable transaction.

Key takeaways

• The Full Court’s decision emphasises the importance of rigorous analysis of the surrounding commercial circumstances (including accepted industry practice) when considering the application of s 588FDA to a particular transaction. Accordingly, the judgment illustrates that liquidators bear a substantial evidentiary burden in establishing the objective unreasonableness of the impugned transaction.
• The Full Court’s judgment affirms a long-standing structure for the financing of commercial property developments by special purpose vehicles within corporate groups, an outcome that offers greater commercial certainty for financiers and investors.
• It is likely that the Full Court’s reasoning may influence and inform future judicial consideration of the duties of directors of corporate borrowers and correspondingly, implications for the future application of the Banking Code of Practice.

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Authored by:
Pravin Aathreya, Partner
William Doble, Associate

[1] Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd [2024] FCA 6.

[2] CEG Direct Securities Pty Ltd v Cooper as liquidator of Runtong Investment and Development Pty Ltd (in liq) [2025] FCAFC 47.