CEG Direct Securities Pty Ltd v Cooper as liquidator of Runtong Investment and Development Pty Ltd (in liq)
[2025] FCAFC 47
•9 April 2025
FEDERAL COURT OF AUSTRALIA
CEG Direct Securities Pty Ltd v Cooper as liquidator of Runtong Investment and Development Pty Ltd (in liq) [2025] FCAFC 47
Appeal from: Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd [2024] FCA 6
Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd (Costs) [2024] FCA 120
File number(s): SAD 18 of 2024 Judgment of: CHEESEMAN, GOODMAN AND MCEVOY JJ Date of judgment: 9 April 2025 Catchwords: CORPORATIONS – unreasonable director-related transaction within the meaning of s 588FDA of the Corporations Act 2001 (Cth) – where the transaction in issue is the grant of mortgage by one company over real property the subject of a commercial property development to secure loan extended by second tier financier to two other companies – where issue arises as to the commercial relationship between the three companies – whether the transaction was relevantly for the benefit of a director within the meaning of s 588FDA(1)(b) – whether the liquidator of the company discharged his onus to establish that the relevant transaction answered the statutory definition of unreasonable director-related transaction – if so, whether the relevant transaction was such that it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction –Held: appeal allowed. Legislation: Acts Interpretation Act 1901 (Cth) ss 2C, 15AA, 23(b)
Corporations Act 2001 (Cth) ss 9, 477, 530A, 530B, 530C, 588FB, 588FDA, 588FE, 588FF, 596A, 596B, 597
Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003 (Cth)
Treasury Laws Amendment (Modernising Business Communications and Other Measures) Act 2023 (Cth)
Cases cited: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) [2009] HCA 41; (2009) 239 CLR 27
Australian Securities and Investments Commission v Commonwealth Bank of Australia [2023] FCAFC 135; (2023) 299 FCR 604
Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345
Aviation 3030 Pty Ltd (in liq) v Lao, in the matter of Aviation 3030 Pty Ltd (in liq) [2022] FCA 458
BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 117 ACSR 18
Blatch v Archer (1774) 1 Cowp 63; 98 ER 969
Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83
Capitalink Pty Ltd v Withnall [2024] NSWCA 172
Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd [2024] FCA 6
Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd (Costs) [2024] FCA 120
Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450
Crowe‑Maxwell v Frost [2016] NSWCA 46; (2016) 91 NSWLR 414
Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535
Ellis v Central Land Council [2019] FCAFC 1; (2019) 267 FCR 339
Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118
Frigger v Trenfield (No 3) [2023] FCAFC 49
Gerard Cassegrain & Co Pty Ltd v Cassegrain [2013] NSWCA 453; (2013) 87 NSWLR 284
GLJ v Trustees of Roman Catholic Church for Diocese of Lismore [2023] HCA 32; (2023) 97 ALJR 857
Ho v Powell [2001] NSWCA 168; (2001) NSWLR 572
House v R [1936] HCA 40; (1936) 55 CLR 499
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Lee v Lee [2019] HCA 28; (2019) 266 CLR 129
Lewis (as liquidator of Doran Constructions Pty Ltd (in liq) v Doran [2005] NSWCA 243; (2005) 219 ALR 555
Minister for Immigration and Border Protection v SZVFW [2018] HCA 30; (2018) 264 CLR 541
Ogden Industries Pty Ltd v Lucas [1970] AC 113
Pleash (Liquidator), in the matter of SFG Relocations Pty Ltd v Fourie (No 3) [2024] FCA 583
Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355
Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) v Canstruct Pty Ltd [2024] FCAFC 141; 305 FCR 465
R v A2 [2019] HCA 35; 269 CLR 507
Re Gondon Five Pty Ltd (in liq) [2020] NSWSC 1769
Re Great Wall Resources Pty Ltd (in liq) [2013] NSWSC 354
Re Sans Pareil Estate Pty Ltd (in liq) [2024] NSWSC 255
Robinson Helicopter Co Inc v McDermott [2016] HCA 22; 331 ALR 550
Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39
Shot One Pty Ltd (in liq) v Day [2017] VSC 741
Smith v Starke, in the matter of Action Paintball Games Pty Ltd (in liq) (No 2) [2015] FCA 1119; (2015) 109 ACSR 145
SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 262 CLR 362
Tosich Construction Pty Ltd (in liq) v Tosich [1997] FCA 979; (1997) 78 FCR 363
Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; (2014) 41 VR 445
Warren v Coombes [1979] HCA 9; (1979) 142 CLR 531
Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416
Ziade Investments Pty Ltd (in liq) v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; (2006) 57 ACSR 693
Herzfeld P and Prince T, Interpretation (3rd ed, Thomson Reuters, 2024)
Ford, Austin & Ramsay’s Principles of Corporations Law (LexisNexis Butterworths, as at July 2024)
Division: General Division Registry: South Australia National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 344 Date of hearing: 9 August 2024 Counsel for the Appellant: Mr F Assaf SC with Mr A Lazarevich Solicitor for the Appellant: Ronayne Owens Lawyers Counsel for the Respondent: Mr G T Bigmore KC with Mr A S Narayan Solicitor for the Respondent: Travancore Legal & Advisory
Table of Corrections 4 July 2025 In the last sentence of paragraph 106, “gives meaning to the” has been replaced with “gives meaning to”. 4 July 2025 In paragraph 136, the word “be” has been inserted before “confined in the way in which CEG contends”. 4 July 2025 In paragraph 155, “[121]” has been replaced with “[340]”. 4 July 2025 In paragraph 262, “Huang Ping” has been replaced with “Ping Huang”. 4 July 2025 In paragraph 270, “16 October 2024” has been replaced with “16 October 2014”. 4 July 2025 In paragraph 308(3), “(J[128] (and [13])” has been replaced with “(J[128])”. 4 July 2025 In paragraph 309(2), “entering granting” has been replaced with “entering into”. 4 July 2025 In paragraph 333, the list numbering has been corrected to be (1), (2) and (3). ORDERS
SAD 18 of 2024 IN THE MATTER OF RUNTONG INVESTMENT AND DEVELOPMENT PTY LTD (IN LIQ)
BETWEEN: CEG DIRECT SECURITIES PTY LTD ACN 150 878 587
Appellant
AND: NICHOLAS DAVID COOPER AS LIQUIDATOR OF RUNTONG INVESTMENT AND DEVELOPMENT PTY LTD (IN LIQUIDATION)
Respondent
ORDER MADE BY:
CHEESEMAN, GOODMAN AND MCEVOY JJ
DATE OF ORDER:
9 APRIL 2025
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.The orders made on 12 January 2024 and 23 February 2024 in proceeding SAD 119 of 2019 be set aside and in lieu thereof it be ordered that:
“The respondent’s originating process dated 12 June 2019 in proceeding SAD 119 of 2019 be dismissed with costs.”
3.The respondent pay the appellant’s costs of the appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
CHEESEMAN AND MCEVOY JJ:
INTRODUCTION
These reasons concern an appeal from the primary judge’s orders in which the primary judge declared that the grant of a mortgage was an unreasonable director-related transaction within the meaning of s 588FDA of the Corporations Act 2001 (Cth) and from the order made pursuant to ss 588FF(1)(c) and 588FF(4) of the Act that the mortgagee pay the mortgagor $1,983,100.40 in consequence: Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd [2024] FCA 6 (PJ). The appeal extends to the costs orders made against the mortgagee which were the subject of separate reasons: Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd (Costs) [2024] FCA 120.
The appellant is the mortgagee, CEG Direct Securities Pty Ltd. The respondent is the liquidator of the mortgagor, Nicholas David Cooper as liquidator of Runtong Investment and Development Pty Ltd (in liquidation). Mr Cooper was appointed to Runtong as liquidator on 18 June 2018. The unreasonable director-related transaction at the centre of this appeal is a mortgage granted by Runtong to CEG over the real property at 114‑122 Waymouth Street, Adelaide (the Runtong Property) on 12 December 2014 which was subsequently registered (the Runtong Mortgage) (referred to below as the CEG Direct Mortgage). As liquidator, Mr Cooper was successful in obtaining relief under s 588FF of the Act on the basis that Runtong’s grant of a mortgage to CEG was an “unreasonable director‑related transaction” within the meaning of s 588FDA of the Act and thus a “voidable transaction” under ss 588FE(1)(b) and (6A) of the Act.
Runtong was incorporated on 5 June 2012 for the purpose of purchasing the Runtong Property from the Corporation of the City of Adelaide (Council). The contract for sale completed on 8 October 2012. The purchase was financed by the National Australia Bank Limited (NAB) on the security of a mortgage granted in October 2012 (the NAB Mortgage). The relevant NAB credit submission was progressed as part of what the bank treated as an aggregation group relating to Australian Datong Investment & Development Pty Ltd and its related companies, Futong Investment and Development Pty Ltd and Runtong (the NAB Datong Aggregation Group). It appears to have been the third business loan submission that the NAB had considered in respect of property developments of the NAB Datong Aggregation Group. We will return to the interrelationships and commercial arrangements between Runtong, Datong and Futong below.
Colliers International valued the Runtong Property at $2.2 million (exclusive of GST) as at 7 June 2012, on instructions from the NAB. Colliers International described the property as a “cleared development site” on the “western fringe of Adelaide’s office core.”
By entering the Runtong Mortgage in December 2014, Runtong provided security over the Runtong Property to CEG as part of a suite of security given to secure borrowings by Datong and Futong from CEG.
The relevant directors in respect of the impugned transaction are Jin Liang and Ping Huang, who as at 12 December 2014 were two of the directors of Runtong. The other Runtong directors were Yong Liu, Shaohua Liu and Chenhao Liang. Relevantly, Messrs Liang and Huang were also two of the directors of Datong and Futong. It is convenient to refer to Messrs Liang and Huang as the Runtong Directors but we do not intend by that description to suggest that they were the only directors of Runtong. They are the relevant directors for the purpose of the liquidator’s contention that the Runtong Mortgage was an unreasonable director-related transaction.
Critical to the relief granted by the primary judge was his Honour’s conclusion that:
(1)the grant of the Runtong Mortgage was “for the benefit of” the Runtong Directors in that the effect of it was to reduce the contingent liability of the Runtong Directors under personal guarantees that each had given in favour of CEG to secure the borrowings from time to time of Datong and Futong; and
(2)a reasonable person in Runtong’s circumstances would not have entered into the Runtong Mortgage having regard to the statutory criteria in ss 588FDA(1)(c)(i) to (iv).
ISSUES DETERMINED BY THE PRIMARY JUDGE
The primary judge identified the following as the issues requiring determination (PJ[9]):
(1) Did Runtong effect a disposition of its property within the meaning of s 588FDA(1)(a) by granting the [Runtong Mortgage] on 12 December 2014?;
(2) If so, was the granting of the [Runtong Mortgage] made to a person on behalf of, or for the benefit of, a director of Runtong within the meaning of s 588FDA(1)(b)?;
(3) May it be expected that a reasonable person in Runtong’s circumstances would not have entered into the Transaction having regard to the matters set out in s 588FDA(1)(c)?; and
(4) Is the plaintiff entitled to the relief sought?
In relation to Issue (1), the primary judge was satisfied that the criteria in s 588FDA(1)(a) was established, on the basis that the grant of the Runtong Mortgage was either a disposition by Runtong of its property (588FDA(1)(a)(ii)), or the incurring of an obligation by Runtong to make such a disposition (588FDA(1)(a)(iv)): PJ[37] and PJ[38]. Indeed, so much was common ground below and on this appeal.
In relation to Issue (2), the primary judge was satisfied that s 588FDA(1)(b)(iii) was established on the basis that the grant of the Runtong Mortgage was made to CEG for the benefit of the Runtong Directors, as it reduced their contingent liability to CEG under the personal guarantees that they had provided: PJ[73].
In relation to Issue (3), the primary judge was satisfied that s 588FDA(1)(c) was satisfied because the primary judge concluded that it may be expected that a reasonable person in Runtong’s circumstances would not have granted the Runtong Mortgage having regard to the matters set out in ss 588FDA(1)(c)(i) to (iv): PJ[151].
In relation to Issue (4), having determined the first three issues in favour of the liquidator, the primary judge was satisfied that the Runtong Mortgage was an unreasonable director-related transaction within the meaning of s 588FDA and thus a voidable transaction under s 588FE of the Act: PJ[153]-[155]. The primary judge made a declaration accordingly, and ordered, pursuant to ss 588FF(1)(c) and (4) of the Act, that CEG pay the sum of $1,983,100.40 to Runtong. The primary judge subsequently made orders in favour of the liquidator in relation to interest and costs.
GROUNDS OF APPEAL
By an amended notice of appeal filed on 31 May 2024, CEG raised five grounds of appeal. Ground three is not pressed. The grounds of appeal may be broadly grouped as follows:
(1)The first ground is directed to challenging the primary judge’s conclusion that the Runtong Mortgage satisfied the criteria in s 588FDA(1)(b), namely that the transaction was made to CEG “for the benefit of a director” of Runtong within the meaning of s 588FDA(1)(b) of the Act;
(2)The second ground is directed to challenging the primary judge’s conclusion that the Runtong Mortgage satisfied the criteria in s 588FDA(1)(c), namely that the transaction was such that it may be expected that a reasonable person in Runtong’s circumstances would not have granted the Runtong Mortgage; and
(3)Grounds four and five challenge the approach taken by the primary judge to the issue of compensation under s 588FF(4) of the Act.
CONCLUSION IN SUMMARY FORM
For the reasons developed below, we have concluded that the appeal must be allowed. While the challenge to the primary judge’s conclusion that the Runtong Mortgage met the criteria in s 588FDA(1)(b) must fail, we are persuaded that the primary judge erred in concluding that s 588FDA(1)(c) was satisfied. As the requirements of s 588FDA(1) are cumulative, it follows that the Runtong Mortgage is not properly characterised as an unreasonable director-related transaction within the meaning of s 588FDA of the Act and is not a voidable transaction on that basis. In these circumstances, it is unnecessary to consider grounds four and five, which challenge the primary judge’s approach to the issue of compensation.
We have had the benefit of receiving a draft of Goodman J’s reasons. Our reasons for concluding that the appeal must be allowed are different to those of Goodman J. The principal area in which we diverge is in relation to whether the evidence led by the liquidator was sufficient to shift the evidentiary burden of proving the negative condition in s 588FDA(1)(c) to CEG. In our assessment of the evidence, it was. Justice Goodman concludes that the quality of the evidence was such that the evidential burden did not shift. Notwithstanding that we have concluded that the liquidator’s evidence was sufficient in the present context to shift the evidentiary burden, we have concluded that on the basis of our review of the whole of the evidence, including that led by CEG and the inferences that should be drawn from that evidence, the liquidator did not discharge the legal onus to establish the negative condition in s 588FDA(1)(c). We thus arrive at the same dispositive conclusion as Goodman J, but by a different path. By virtue of the different conclusions we and Goodman J have each reached in relation to the shift in the evidential burden, it has been necessary for us, like Goodman J, to set out in some detail our findings based on the evidence to expose why we have concluded as we have in relation to the commercial explanation as to why, objectively assessed, Runtong did not act unreasonably in entering into the Runtong Mortgage. That results in some minor repetition between our respective sets of reasons in relation to some findings of fact but is necessary in order that the two distinct analyses of the evidence are each independently comprehensible.
FACTUAL BACKGROUND
The evidence before the primary judge comprised principally:
(1)two affidavits of the liquidator, in which he annexed documents and described various transactions;
(2)an affidavit of the solicitor for CEG, in which he annexed various business records of CEG concerning its dealings with Datong, Futong and Runtong;
(3)an expert report of Mr Kym Dreyer, in which Mr Dreyer opined that the Runtong Property had an estimated market value of $2.2 million as at 12 December 2014;
(4)an expert report of Ms Robyn Karam, described below; and
(5)business records of the NAB, including internal credit submissions and reviews relating to the three companies and bank statements issued by the NAB to Datong and Futong.
The parties also provided a statement of agreed facts and issues.
The facts recorded below are principally unchallenged findings of fact made by the primary judge, many of which were agreed between the parties and formed part of the statement of agreed facts and issues or are drawn from the business records of the NAB or CEG that were in evidence before the primary judge. The outcome of this appeal does not depend on this Court assessing any contentious oral evidence. The evidence below was on affidavit. Ms Karam, a chartered accountant and forensic accounting specialist, was cross-examined: PJ[81]. None of the directors of Datong, Futong and Runtong gave evidence: PJ[95].
On 22 June 2010, Datong was registered: PJ[19(3)]. The directors were Jin Liang (22 June 2010 to 10 November 2019), Yong Liu (22 June 2010 to 10 November 2019), Ping Huang (22 June 2010 to 8 February 2018) and Wei Xiao (22 June 2010 to 1 September 2014).
On 17 February 2011, Futong was registered: PJ[19(4)]. Over time, the directors were as follows: Jin Liang (17 February 2011 to 18 June 2012, and then 4 March 2013 to 2 May 2021), Ping Huang (17 February 2011 to 18 June 2012 and then 12 March 2013 to 2 May 2021), Shaohua Liu (4 March 2013 to 8 December 2017), Hong Liu (1 March 2011 to 20 March 2013), Gang Sun (18 June 2012 to 13 March 2013), Yueming Liu (18 June 2012 to 4 March 2013), Gangda Song (18 June 2012 to 4 March 2013), Yiyong Jiang (17 February 2011 to 18 June 2012), Yong Liu (17 February 2011 to 18 June 2012) and Wei Xiao (17 February 2011 to 18 June 2012).
On 5 June 2012, Runtong was registered: PJ[19(2)]. The directors as at 12 December 2014, when the Runtong Mortgage was granted, were Jin Liang, Yong Liu (both of whom were appointed on 5 June 2012 and continued as directors at the date of the liquidator’s appointment), Chenhao Liang (1 September 2014 to 13 February 2018), Ping Huang (1 October 2014 to 8 February 2018) Shaohua Liu (5 June 2012 to 8 December 2017) and Wei Xiao (5 June 2012 to 1 September 2014). As mentioned, the relevant directors for the purpose of this appeal are Mr Liang and Mr Huang, who were both directors at the date the Runtong Mortgage was granted.
On 19 June 2012, Ms Karin Stone of the NAB created a credit submission in respect of the NAB Datong Aggregation Group (the NAB Credit Submission). As mentioned, that credit submission appears to be the third credit submission prepared by the NAB in respect of finance for the NAB Datong Aggregation Group. The submission was made in support of a request for finance in connection with the proposed purchase of the Runtong Property. Under the heading “Approval Request”, Ms Stone recorded (as written):
Applicants have contracted to purchase Commercial Property located at [the Runtong Property].
Purchase price is $2.2M.
Property will be purchased in the name of newly established entity – [Runtong].
Funding is as follows:
Purchase Price $2,200,000-
GST $ 220,000-
Fees & Costs $ 110,000-
$2,530,000-
Less Customer Cont $ 990,000-
Loan amount $1,540,000-
GST Portion of $220K to be repaid after 3 months.
Funding is to be by way of NBM Facility for initial period of 1 Year (LVR 66% inclusive of Term Deposit Security initially and 56% following GST repayment)
Facility will be secured by - 1st RM over Commercial Property M/V $2.2M B/V $1.54M
- GSA
- Term Deposit $150K
- Directors G & I Unsupported
Term Deposit security has been provided to cover initial years interest on facility.
Site has been purchase by applicants as a future commercial property development site and as such will be untenanted for the near future.
...
(emphasis in original)
Under the subheading “Background/History”, Ms Stone recorded (as written):
[Runtong] was established 6/2012 for the purchase of Commercial Property located at 114 - 122 Waymouth Street, Adelaide.
Directors are: Wei Xiao (15%), Yong Liu (15%), Jin Liang (40%) & Shaohua Liu (30% O/Seas Resident)
Clients were originally managed by Retail branch and later on have been introduced to NAB business via Broker Jonathon Hii however clients no longer deal through this channel.
Initial introduction was for purchase of Commercial Property located at 201 - 209 Pulteney Street, Adelaide via [Datong].
Directors are: Wei Xiao (20%) Jin Liang (45%) Yong Liu (30%) & Ping Huang (5% Overseas Resident)
Additional Commercial Property purchase was undertaken 4/2011 for purchase of property at 271 - 281 Gouger Street, Adelaide for $2.6M via [Futong].
Directors are: Jin Liang (60%) Wei Xiao (20%) Yong Liu (10%) Ping Huang (5% O’seas) Yiyong Jiang (5%).
Up until recent property purchases in Adelaide, applicants have completed large scale developments throughout South East Asia and South Australia. We have been provided with a copy of the past 20 years developments that the clients have completed overseas.
Clients have been in the property industry in China for a period of time and have been well performed in Kun Ming City in YunNan Province China, is currently recognised as one of the major contributors over there.
Mr Liang and his property development group have committed to invest in South Australia on a long term basis, have been liaising with City Council and State Government in terms of their ongoing development plans for Adelaide City.
The group have been helping to introduce a number of quality investors to the state and NAB.
It is evident able the company has built up a good reputation in both China and South Australia in the past, and willing to carry forward the existing great relationship with NAB towards to the future.
We interpolate to note that the property located at 271-281 Gouger Street owned by Futong (the Futong Property) was referred to by the primary judge as the Futong land: PJ[19(9)].
Under the heading “Financial Analysis / Financial Analysis Commentary”, Ms Stone continued (as written):
Comments for Financial Analysis
Company has been established as the vehicle to purchase the Commercial Property therefore no financial information is to hand. Opening Balance Sheet to be obtained from applicants accountant. Property is untenanted with a view to Commercial Property Development in the future.
Transaction is stand alone and separate from previous transactions to Australian Datong & Futong Investments.
Comments for Debt Servicing
Facility will be interest only for the initial 1 year. Term deposit funds have been provided to cover initial 12 months interest at affordability of 11.10% on $1.32M (Balance after repayment of GST) in the event that applicants fail to meet interest repayments. Actual interest rate on facility is in the vicinity of 7.3%.
Projected interest as per debt servicing table is $96K pa. Debt servicing indicates a loss of some $145K. EBIT is negative $48K which represents adopted outgoings on the property as per valuation report.
Applicants are reliant on overseas income to service interest portion of this debt along with property outgoings. Funds will also be forthcoming from overseas to cover Equity Contribution for initial purchase.
The funding table included in the NAB Credit Submission noted that the total outlay for the acquisition of the Runtong Property was $2,530,000 which was comprised of “Equity/Customer Contribution” of $990,000 and “Funding requirement NAB” of $1.54 million. It was noted in the NAB Credit Submission that “Equity contribution via funds held in China GST portion of $220K to be repaid after 3 months.”
The NAB Credit Submission culminated in a recommendation that the financing be approved (as written):
Rationale for Recommendation
Overall end position to bank is 66% LVR (56% following repayment of $220K GST after 1st 3 months) and comfort is provided by term deposit security held for to cover intial years interest on facility.
Account conduct of current Australian Datong & Futong entities is excellent with good deposit funds held at all times.
Group has access to large amount of funds from overseas.
Directors are in sound financial position with SPs as follows:
Wei Xiao - A - $3.77M L - $900K
Jing Liang - A - $21.87M L - $Nil
Yong Liu - A - $1.138M L - Nil
Term Deposit funds to be held prior to settlement.
Recommended for approval.
On 4 July 2012, the NAB offered Runtong a loan with a limit of $1.54 million. On 5 July 2012, Runtong accepted the NAB’s offer.
The commencement date of the NAB loan was 3 July 2012. The last date for drawdown was 3 October 2012 and the expiry date was 31 July 2013.
The loan was secured by the following security arrangements: a security interest and charge over all present and future rights, property and undertaking of Runtong; a registered mortgage over the Runtong Property; a term deposit letter of set off; and director guarantees and indemnities for $1,540,000 from the then directors of Runtong, being Shaohua Liu, Mr Liang, Yong Liu and Mr Xiao.
On or about 8 October 2012, Runtong was registered as the proprietor of the Runtong Property, having completed the purchase from the Council: PJ[4], PJ[19(6)]. The contract for the sale of the Runtong Property contemplated the development of the Runtong Property by the construction of a building of at least 10 levels, with underground carparking and ground floor retail outlets. Importantly, the Council had an option to repurchase the property if construction did not commence within 18 months and did not complete within 36 months of the date of commencement. As mentioned, contemporaneously with its acquisition of the Runtong Property, Runtong granted a mortgage over the Runtong Property to the NAB: PJ[4], PJ[19(7)].
The Runtong Property was subject to a caveat registered by the Council. The caveat served, amongst other things, to protect the Council’s contractual entitlement to repurchase the Runtong Property if Runtong did not commence construction within 18 months of 8 October 2012 (being 8 April 2014) and complete the development within 36 months of commencing the development: PJ[118(4)].
On 24 April 2013, SMEC (an engineering firm) prepared a Preliminary Environmental Site Assessment for the Runtong Property.
On 23 September 2013, Ms Stone and/or Mr Gu of the NAB prepared an “Annual review and renewal” for the NAB Datong Aggregation Group. The facilities up for renewal included the NAB Facility that Runtong had used to complete the purchase of the Runtong Property. Under the subheading “Purpose”, the NAB officer recorded that (as written):
Application raised for renewal of the following facilities:-
[Runtong] –
NBM Facility - $1.54M originally approved for the purchase of commercial property located at [the Runtong Property] from the Adelaide City Council. Applicants have engaged an Architect and are finalising plans to be lodged for DA Approval for the construction of a Mixed Use Hotel / Apartment Complex for the site. Condition of purchase contract was that DA Approval was in place within 18 months being July 2014. Facility to be renewed for a futher 12 months pending redevelopment.
Bank Guarantee Facility $100K - Condition of purchase of the above property was that purchasers construct a Pedestrian Link to the vendors satisfaction. Guarantee will be returned upon satisfactory completion of work. Construction is still underway, with faclity to be extended for a further 12 months.
[Datong]:-
NBM Facility $2.88M - Facility approved to assist with the purchase of Commercial Property located at Cnr Flinders & Pulteney Streets Adelaide. Australian Datong are currently occupying the premises and also leasing out the carparking space. This property is also a future development site, however main focus at this point is on the Runtong development given the strict timeframes allowed for commencement of property development. Facility to be renewed for a further 12 months.
Under the subheading “Comments for Financial Analysis”, the NAB officer recorded that (as written):
Companies have been established as the vehicle to purchase the Commercial Properties
Runtongs Waymouth Street property building is currently vacant, and subject to development over the next 12 months. Whilst planning is being undertaken the property is receiving a small income from carparking which was some $17K for 2013 FY.
[Datong] is currently occupying and carrying on business from the Flinders/Pulteney Street premises hence the only rental income for these premises is also from carparking which was some $16.8K.
There is no formal lease agreement in place which covers car parking income, therefore this has not been included for debt servicing.
Facilities are serviced from overseas income.
Under the subheading “Comments for Debt Servicing”, the following appeared (as written):
Facilities will continue on interest only basis for a further 12 months. Term deposit funds have been provided to cover 12 months interest at affordability of 11.10% on both facilities in the event that applicants fail to meet interest repayments. Actual interest rate on facility is in the vicinity of 6.5%. These funds are not to be utilised to assist with servicing. Because of the nature of this group classified as property developer, it’s been the case of relying on TD with interest cover to fund for development site in the past with a strong Secondary exit.
Servicing indicates deficit due to properties being partially vacant, on the ground car park only generates a small amount of income, land is due to be developed in the next 12 months.
Applicants are reliant on overseas income to service interest portion of this debt along with property outgoings which not evidenced as Runtong is part of Australian Datong Group who is one of the top 3 property developers in Kunming, Yunnan Province, China. This group holds a significant amount of cash deposit with NAB which has been used to service the debt, and backed up by its mother company in China, Funds transfer in is on regular basis as this group has been heavily encouraged and protected by State Government SA as known as one of the major investors from mainland China.
There is no change to Group’s financial position over the last 12 months.
All facilities have been serviced in a satisfactory manner over the past 12 months.
Secondary Exit
Banker is aware of commercial property at Corner of Flinders St and Pulteney St is currently used as Group’s head office, with an on the ground car park leased to Park Fast. Development plan for this property was DA approved in the past to build the tallest building in Adelaide CBD, due to limit height has been changed hence group is now working on revised development plan for this site, and working towards to DA submission which will happen after Waymouth Street DA gets approved (Runtong Investment Pty Ltd). This is not related to this renewal submission as it is due April 2014. Banker will be updated with Datong Group’s decision in early 2014 about time frame and planning decision of Flinders St and Pulteney St Corner property. The intention is to build the tallest mixed use commercial property with Hotels, Offices and Retails.
Between April and July 2014, a Waste Report, a Wind Impact Assessment Report, a Heritage Impact Report and a Water Classification Report for the Runtong Property were prepared.
From 11 August 2014 at the latest, Runtong was the recipient of regular funds transfers from Datong or Futong. Runtong also transferred some funds to Futong. No bank statements for Runtong are in evidence.
On 28 August 2014, the Council granted conditional planning consent to Runtong for the development of the Runtong Property which was referred to as U2 on Waymouth.
By September 2014, Datong and Futong were engaged in the development of the Futong Property, which was referred to as Aria on Gouger: PJ[19(9)].
On 5 September 2014, Ms Tracy Gornall, Director and Head of Valuations and Advisory – South Australia of JLL (Jones Lang LaSalle Advisory Services Pty Ltd), sent an email to Mr Jonathan Hii of Datong (as written):
The draft prices for the proposed apartments of the U2 Apartments in Waymouth Street is provided below for your review
We provide these draft numbers to advise of likely sale prices for the proposed apartment building, assuming the imminent commencement of a marketing campaign to achieve pre-sales
We confirm that they are inclusive of GST and exclude carparks
This advice is subject to the provision of our full report and is subject to the conditions, limitations and assumptions contained therein. This report will provided to you as soon as possible.
...
Ms Gornall included in her email, value estimates for some 257 apartments, with a total estimated value in the order of $116 million.
In September 2014, marketing of U2 on Waymouth commenced and pre-sales of apartments in that development opened.
On 8 September 2014, Datong (as borrower) and CEG (as lender) entered into a loan agreement (First Loan Agreement): PJ[19(10)]. The First Loan Agreement provided for an advance of $2,008,823.82 at an interest rate of 4% per month, reducing to 2% per month provided that Datong was not in default, and for a term of two months. The advance is recorded at PJ[47] as $2,008,323.82 in what appears to be a minor typographical error.
The First Loan Agreement was secured by:
(1)a second mortgage over the property at 207-209 Pulteney Street, Adelaide owned by Datong (the Datong Property);
(2)a General Security Agreement executed by Datong on 8 September 2014 (the Datong GSA); and
(3)a Guarantee and Indemnity granted by the Runtong Directors, together with Yong Liu and Shaohua Liu (the Four Guarantors) on 8 September 2014 (the First Guarantee).
Pursuant to the First Guarantee, the Four Guarantors guaranteed to CEG the due and punctual payment by Datong of, inter alia, their present or future indebtedness to CEG under the First Loan Agreement. Contrary to the primary judge’s finding at PJ[48(3)] the First Guarantee was limited to apply to Datong’s obligations as “Debtor” and did not extend to any obligations that Futong may have had to CEG. That is made plain by the definition of “Debtor” in the First Guarantee, which is limited to mean Datong. We note that similarly, the Datong GSA executed at this time only lists Datong as a “debtor”.
On 12 September 2014, Mr Gu of the NAB authored a new credit submission for the NAB Datong Aggregation Group which sought approval in respect of an additional loan of $18.3 million to Futong to assist with the Aria on Gouger development on the Futong Property, the renewal of one of the Datong NAB facilities for three years on an interest only basis and the renewal of Runtong’s facility for a further year on an interest only basis.
Under the heading “Approval Request”, Mr Gu recorded (as written):
BE # 6 – [FUTONG]
P6.2 - NBM Facility $18.3M
File is submitted seeking approval of the following:
Loan in the name of [Futong] for $18,300,000 to assist with the development of the project known as Aria Apartment on Gouger Street. (271-281 Gouger Street, Adelaide, Title Reference: Volume 5432 Folios 292&293)
Loan to be provided will cover construction costs and refinance P6.1 which was initially approved to finance land purchase.
Funding Table:
To Date Claim 14 September work complete on $13,890,850 Amount to complete the work $16,700,000 TotalConstructionCost
ToFund:$30,590,850 (Excl GST) Payoutexisting NABLoan $ 1,600,000 Construction $16,700,000 NAB Loan Amount $18,300,000
Contingency of $765,000 is considered as part of this $16,700,000
It is expected that debt to be fully repaid upon completion of the project including original land debt.
...
Credit Checks have been completed on both the Company and Guarantors which indicate nothing adverse.
BE# 1 – [DATONG]
P1.1 - NBM $2.88M
Facility to be renewed for a further 3 years on an interest only basis. This property will be the third in line to be subject to re-development following completion of the Aria Apartments and subsequent property development at [the Runtong Property].
Facility originally approved 10/2010 with policy waiver sought to extend interest only period beyond 5 years.
BE# 7 – [RUNTONG]
P7.2 - NBM $1.54M
P7.1 - Bank Guarantee $100K
NBM Facility to be renewed for a further 1 years on an interest only basis. Property will be the next on the lust (sic) for re-development following completion of the Aria Development. This will take total interest only term to 3 years.
Bank Guarantee Facility to be renewed for a further 12 months and is supported on a Cat A basis by TD security
(emphasis in original)
Under the subheading “Background/History”, Mr Gu recorded (as written):
Datong (China) Established for 26+ years, Developed 30+ projects, Total 3,000,000+ m2, Employed 500+ employees Datong (Australia) 4 years till now, 4 Australian projects (3 in Adelaide, 1 in Sydney)
A strong and professional team of 27 international elites and local talents.
Datong Australia landed in Adelaide and kick started its very first project in 2012 after two years of preparations.
It’s 5 years plan 2012-17 includes: Focused on mid to high density living in the city
Purchased quality lands in major cities
Established as a reputable and responsible developer
Establishes and improves operational and developmental formula
Trains efficient, conscientious and professional employees
Datong (Aust) List of Projects in Adelaide
Name Type Area Level Cost Aria mid-high 8638 m2 2+12 $52M U2 High 26654 m2 23 $110M Domain SA Ultra High 48760 m2 36 $200 M Town Max Compound 98374 m2 X $600M [Futong] was founded on 17/02/2011 was solely attached to Aria Apartment Project
Directors are: Jin Liang (48%) Yong Liu (18%) Ping Huang (4%) Shaohua Liu (30%)
Mr Liang (Chairman) and his property development group have committed to invest in SA on a long term basis, have been liaising with City Council and Statement Government in terms of their ongoing development plans for Adelaide City.
Clients have been in the property industry in China for a period of time over 20 years and have been well performed in Kun Ming City in YunNan Province China, is currently recognised as one of the major contributors over there.
The group has been helping to introduce a number of quality investors to the state and NAB.
It is evident able the company has built up a good reputation in both China and South Australia in the past, and willing to carry forward the existing great relationship with NAB towards to the future.
Project Site Area 1,402 sqm
Residential Apartment 95 apartments
Commercial/Retail Lots 7 Lots
Car Parking Spaces 71 spaces + disabled
Presale on23/06/2012
Construction Commenced April 2013
Construction Completes Dec 2014
Sales outcomes: Residential 63% Commercial 100% Parking 42%
(emphasis in original)
On 26 September 2014, Datong and Futong (as borrowers) and CEG (as lender) entered into another loan agreement (Second Loan Agreement): PJ[19(11)]. The Second Loan Agreement was executed by Mr Liang and Mr Huang on behalf of Datong and Futong. The Second Loan Agreement provided for an advance of $5 million at an interest rate of 4.6% per month but while Datong and Futong are not in default, 2.3% per month, and was for a term of six months: PJ[51].
The Second Loan Agreement was secured by a suite of securities given by Datong and Futong which included:
(1)a second mortgage over the Datong Property;
(2)a second mortgage over the Futong Property;
(3)the Datong GSA;
(4)a General Security Agreement executed by Futong on 26 September 2014 (the Futong GSA); and
(5)a Guarantee and Indemnity executed by the Four Guarantors on 26 September 2014 (Second Guarantee) pursuant to which the Four Guarantors guaranteed to CEG the performance by Datong and Futong of their obligations to repay their indebtedness.
Contrary to the primary judge’s finding at PJ[52] that the Second Guarantee was simply an updated version of the First Guarantee, the Second Guarantee extended the scope of the obligations the subject of the guarantee to include those of Futong pursuant to the Second Loan Agreement whereas the First Guarantee was in respect of the obligations of Datong only.
On 15 October 2014, Futong as “Part of the Datong Group of Companies” issued a Payment Certificate on the letterhead of Datong with respect to a payment claim for the Aria on Gouger project in the sum of $3,259,590.79 (including GST). This Payment Certificate was the sixteenth progress payment in relation to the contract works at the Aria on Gouger project completed by 30 September 2014. On the basis of the Payment Certificate, it appears that approximately $19 million of work, out of a total contract value of approximately $30 million, had been completed at this time, although only $3,259,590.79 had been certified. The assessment in the Payment Certificate was based on site inspections carried out by Futong and RLB (Rider Levett Bucknall SA Pty Ltd). RLB appears to be a quantity surveyor engaged for the U2 on Waymouth development.
In addition to the $5 million advanced under the Second Loan Agreement, CEG advanced further moneys totalling $4 million to Datong and Futong under variations to the Second Loan Agreement. Each advance of further money was recorded in an agreement. The relevant variation agreements were in evidence.
On 1 December 2014, Mr Jim Ventrice of CEG sent an email to [email protected] (as written):
Sam please start ne Datong/Futong U2 apartments file for me
We infer that “ne” is a typographical error and should be read as “new”.
In that email, Mr Ventrice forwarded an email from Mr Huang (i.e. one of the Directors) which Mr Huang had sent earlier that day with the subject line “U2 apartments”.
On or about 1 December 2014, Datong, Futong and Runtong applied to CEG for a loan in the sum of $6 million.
Also on or about 1 December 2014, CEG received a request for a further loan facility of (Loan Request). The Loan Request was in the following terms (as written):
LOAN REQUEST
FUNDER: Advan Investments Finance AIF 37 BORROWER/S: COMPANY BORROWER/S:
[Datong ] LOAN #6
Directors: Jin Liang, Yong Liu and Ping Huang[Futong]
Directors: Jin Liang, Ping Huang and Shaohua Liu[Runtong]
Directors: Jin Liang, Yong Liu, Shaohua Liu, Ping Huang and Chenhao LiangNON-COMPANY INDIVIDUAL BORROWER/S:
Jin Liang
Ping Huang
Chenhao Liang
Yong Liu
Shaohua LiuLOAN AMOUNT: (INCLUSIVE OF FEES) $6,000,000.00 Line of Credit LOAN PURPOSE: Construction Funding LOAN TERM: MONTHLY PAYMENTS: COMPOUNDED AND CAPITALIZED: 18 Months $138,000.00 No INTEREST RATE: FUNDER: 2.30% per Month 2.30% per Month ...
(emphasis in original)
The security proposed in respect of this Loan Request included extending the existing security that was in place for the First and Second Loan Agreements to cover this loan (comprised of the registered second mortgages over the Datong Property and the Futong Property, the Datong GSA and the Futong GSA) and new and additional security in the form of a registered second mortgage over the Runtong Property and a general security agreement from Runtong. The following details were included in relation to the relevant properties:
(1)the Datong Property was valued by CEG at $4.5 million, and noted to be subject to a loan of $2.88 million secured by a first mortgage in favour of the NAB;
(2)the Futong Property was valued by CEG at $35 million, and noted to be subject to a loan of $18.3 million secured by a first mortgage in favour of the NAB; and
(3)the Runtong Property was valued by CEG at $3.5 million, and noted to be subject to a loan of $1.54 million secured by the first mortgage in favour of the NAB.
In the Loan Request, it was also recorded that the request was associated with two prior loans which together totalled $9,110,715.07. As at 9 December 2014, the balances owing by Datong and Futong to CEG under the First Loan Agreement and the Second Loan Agreement totalled $9,110,715.07: PJ[19(13)].
The primary judge observed that the Loan Request was the first time that Runtong was named as an applicant on a relevant loan request, but that Runtong was not ultimately named as a borrower in the loan agreement which culminated from the Loan Request: PJ[55].
Within CEG’s documents relating to the Loan Request are the following documents, which were considered by the primary judge at PJ[129] and PJ[133]-[135] respectively:
(1)an undated handwritten note, which includes:
Datong
Funds to commence U2 $60m
...
(2)a Loan Summary dated 9 December 2014, which includes the purpose of the proposed $6 million loan as being:
To cover prelim marketing, Display suite, GST Aria & General cashflow
$4m – 17/12/201 (sic – 2014)
$2m – 5/1/2015
As at 12 December 2014, the directors of the relevant companies were as follows: PJ[19(19)]
(1)Runtong: Mr Liang, Mr Huang, Yong Liu, Shaohua Liu and Chenhao Liang;
(2)Futong: Mr Liang, Mr Huang and Shaohua Liu; and
(3)Datong: Mr Liang, Mr Huang and Yong Liu.
An agreed fact between the parties was that the Runtong Property “has recently been independently valued at $2.2 million as at 12 December 2014”: PJ[19(15)].
On 12 December 2014, Mr Huang sent an email to Mr Ventrice at CEG attaching a licence agreement between Datong and the Minister for the Arts, South Australia, bearing a date of 16 October 2014, but unexecuted, which contemplated the grant of a licence by the Minister to Datong to enable Datong to construct a display suite for the U2 on Waymouth development using land owned by the Minister.
On 12 December 2014, Datong and Futong (as “the Borrowers”), the Four Guarantors (as “the Guarantor”) and CEG (as “the Lender”) entered into a document titled “Variation Agreement” (Third Loan Agreement): PJ[19(16)]. The recitals acknowledge that Datong, Futong and the Four Guarantors requested that CEG make an additional advance under the Second Loan Agreement and that CEG agreed to make the additional advance and vary the Second Loan Agreement in accordance with the terms of the Third Loan Agreement. By clause 1, the parties agreed that the Third Loan Agreement was “supplemental and collateral to all documents referred to in the recitals” which relevantly included the Second Loan Agreement, the variation of the Second Loan Agreement dated 27 October 2014 and the existing second mortgages, GSAs and director guarantees granted as security for the Second Loan Agreement.
The Third Loan Agreement varied the Second Loan Agreement effective from 9 December 2014 by, inter alia, (1) altering the Principal Sum from $9,110,715.07 to $15,110,715.07 (an increase of $6 million); (2) making the loan repayable in full by 14 May 2015; and (3) by supplementing the existing security provided to CEG.
Clause 3.3 of the Third Loan Agreement provided that the “Borrower agrees to the grant of the additional Securities” as follows:
(1)Second mortgage over the Runtong Property (the Runtong Mortgage);
(2)General Security Agreement granted by Runtong (the Runtong GSA); and
(3)Guarantee & Indemnity granted by Chenhao Liang and Runtong (the Runtong Guarantee).
Clause 3.4 provided that subject to the granting of the additional securities in Clause 3.3, CEG agrees to make an additional advance of $6 million on the date of the Third Loan Agreement.
Clause 4.1 confirmed that the existing securities continued to secure all amounts owing under the Second Loan Agreement, as varied. Clause 4.2 provided that any additional security granted under the Third Loan Agreement secured, without limitation, all amounts owing pursuant to the Second Loan Agreement, together with any other secured amounts pursuant to the terms of the securities. Clause 4.3 provided that the representations and warranties set out in the Second Loan Agreement and existing securities are deemed to have been repeated by the parties.
On 12 December 2014, Runtong executed the following documents:
(1)the Runtong Mortgage, which secured the borrowings of Datong and Futong: PJ[5] and PJ[19(22)];
(2)the Runtong GSA: PJ[19(23)] and PJ[34(6)]; and
(3)together with Chenhao Liang, the Runtong Guarantee: PJ[19(23)] and PJ[34(6)].
The Schedule to the Runtong Mortgage referred to in the Memorandum of Standard Terms and Conditions between Runtong and CEG was extracted by the primary judge at PJ[63]. It provides as follows:
SCHEDULE
Borrower means [Datong] and [Futong]
Lender means [CEG]
Owner means [Runtong]
Principal Sum means $15,110,715.07
Property means the [Runtong Property]
THE AGREEMENT
You (the mortgagor) agree with us (the mortgagee) as follows:
1. The Memorandum of Standard Terms and Conditions of Mortgage filed in the Lands Titles Office as No. 8367687 (the Memorandum) is incorporated in this mortgage. You acknowledge that you received, read and understood Memorandum before signing this mortgage. A reference to "this mortgage" in the cover sheet, this schedule, the Memorandum or in any annexure to this mortgage is a reference to the mortgage constituted by the cover sheet, this schedule, the Memorandum and each of those annexures.
2. You acknowledge that this mortgage is collateral to the following agreement:
(a) Loan agreement in respect of a loan advance of $5,000,000.00 between [Datong] and [Futong] and the Mortgagee on or about the date of this mortgage and any variation of that loan agreement.
3. You acknowledge giving this mortgage and incurring obligations and giving rights under it for valuable consideration received from us.
4. You acknowledge that, as at the date of this mortgage, we have agreed to lend $15,110,715.07 to you or at your request. This amount, together with any further advances and other amounts more fully described in the Memorandum, is called the Mortgage Moneys.
5. You acknowledge indebtedness to us for the Mortgage Moneys and agree to pay to us the Mortgage Moneys, together with interest and all other money due to us at the times agreed with us, or failing agreement on demand. You agree that the covenants set out in the Loan Agreement(s) in respect of the Mortgage Moneys, are deemed to be covenants included in this mortgage.
If the wordings in the Memorandum are inconsistent with this Schedule, the terms of this Schedule prevail.
For the consideration expressed herein and for the better securing to the Mortgagee the payment of the monies hereby secured the MORTGAGOR MORTGAGES TO THE MORTGAGEE the estate and interest herein specified in the land above described, subject to the encumbrances and other interests set out above and to be held by the mortgagee in the mode specified herein and COVENANTS WITH THE MORTGAGEE in accordance with the terms and conditions expressed in memorandum No. 8367687 subject to such exclusions and amendments specified herein.
(bold and italics in original, underlining emphasis added)
Upon the $6 million being advanced by CEG, the principal sum increased to $15,110,715.07: PJ32(6).
In the six months following the grant of the Runtong Mortgage, Runtong received $1,116,000 from Datong and/or Futong.
Between 27 October 2015 and 28 July 2017, Runtong undertook the development of the Runtong Property: PJ[19(31)]; PJ[98]. CEG advanced money to Runtong for that development, principally by making various payments to Built Environs Pty Ltd, the building firm retained on the project, in the amount of $10,160,200.07 (Runtong Advances), as follows: PJ[19(31)]
Date Amount
27 October 2015 $40,000.00
28 October 2015 $2,460,000.00
22 February 2017 $814,000.00
3 March 2017 $1,074,090.60
1 May 2017 $1,010,626.10
1 June 2017 $1,509,398.00
28 June 2017 $1,066,219.70
28 July 2017 $2,185,865.67
Built Environs lodged a proof of debt in the winding up of Runtong in the sum of $5,234,915.
In July 2016, the NAB prepared a “Property Client Evaluation – Development” report for the “Australian Datong Group” concerning a request for construction funding of $48 million (July 2016 Evaluation). That report included references to Runtong as the “Borrower/Owner” and Datong as the “Developer” of the Runtong Property. It also contained financial projections for the project including a projected net profit of $20.75 million; and recorded “works having commenced, preliminaries and underground works progressing” and “Sales rate achieved has been 12 contracts per month since launch in September 2014”.
On 10 October 2017, CEG registered the Runtong Mortgage over the Runtong Property: PJ[6]; PJ[19(22)].
On 27 February 2018, CEG entered into possession of the Runtong Property as mortgagee in possession: PJ[7].
On 2 March 2018, the liquidator and Mr Dominic Cantone were appointed as joint and several administrators of Runtong: PJ[2]; PJ[19(35)]. As mentioned, on 18 June 2018, Runtong’s creditors resolved to wind up Runtong and appointed the liquidator to Runtong: PJ[1]; PJ[19(36)].
On 27 July 2018, CEG, as mortgagee in possession of the Runtong Property under the Runtong Mortgage, entered into a contract for the sale of the Runtong Property for the sum of $14 million (plus GST) to Wingfold Holdings Pty Ltd as purchaser: PJ[7]; PJ[19(37)]. On or about 19 October 2018, that contract completed: PJ[19(38)]; PJ[25]. CEG realised about $12 million from that exercise of its power of sale under the Runtong Mortgage: PJ[7]; PJ[19(40)].
Against that factual background, we now turn to the relevant statutory framework.
THE STATUTORY FRAMEWORK
Section 588FDA, as at 12 December 2014 (being the date of the Runtong Mortgage), provided:
588FDAUnreasonable director‑related transaction
(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 mentioned in subparagraph (i) or (ii); and
(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 detriment 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.
(2) To avoid doubt, if:
(a) the transaction is a payment, disposition or issue; and
(b) the transaction is entered into for the purpose of meeting an obligation the company has incurred;
the test in paragraph (1)(c) applies to the transaction taking into account the circumstances as they exist at the time when the transaction is entered into (rather than as they existed at the time when the obligation was incurred).
(3) A transaction may be an unreasonable director‑related transaction because of subsection (1):
(a) whether or not a creditor of the company is a party to the transaction; and
(b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
(emphasis in original)
Relevantly, for present purposes, the granting of a mortgage comes within the definition of “transaction” in s 9 of the Act. By s 2C of the Acts Interpretation Act 1901 (Cth), “person” in s 588FDA(1)(b)(iii) includes a company or corporation.
The phrase “for the benefit of” in s 588FDA(1)(b)(iii) is to be understood by reference to the expansive definition of “benefit” in s 9 of the Act, which provides that benefit means “any benefit, whether by way of payment of cash or otherwise”. The reference to “benefits” in s 588FDA(1)(c)(i) and (iii) are also to be read by reference to that broad definition. Section 23(b) of the Interpretation Act provides that, subject to any contrary intention, words in the singular number include the plural and words in the plural number include the singular.
To satisfy the description of being an unreasonable director-related transaction, the transaction must answer the criteria in each of s 588FDA(1)(a), (b) and (c). That is to say the requirements of s 588FDA(1)(a) to (c) are cumulative.
The liquidators contend that the grant of the Runtong Mortgage was an unreasonable director‑related transaction of Runtong because it was a disposition by Runtong of its property, or the incurring by Runtong of an obligation to make such a disposition, and the disposition is, or is to be, made to CEG on behalf of, or for the benefit of a director of Runtong and it may be expected that a reasonable person in Runtong’s circumstances would not have entered into the transaction.
For completeness we note that s 588FDA(1)(b) has since been amended by the Treasury Laws Amendment (Modernising Business Communications and Other Measures) Act 2023 (Cth). In its current iteration, s 588FDA(1)(b) has been amended so that it presently reads:
(b) the payment, disposition or issue is, or is to be, made to:
(i) a director of the company; or
(ii) a relative of a director of the company; or
(iii) a relative of a spouse of a director of the company; or
(iv) a person on behalf of, or for the benefit of, a person of a kind referred to in subparagraph (i), (ii) or (iii); and
For the purpose of this appeal the relevant part of the subsection is (1)(b)(i) — a director of the company — which remains in the same form as when it was introduced.
Unreasonable director-related transactions may be voidable subject to their proximity to the relation-back day. Section 588FE relevantly provides:
(1) If a company is being wound up:
…
(b) a transaction of the company may be voidable because of subsection (6A) if the transaction was entered into on or after the commencement of the Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003; and
…
(2A) The transaction is voidable if:
(a) the transaction is:
…
(iv) an unreasonable director‑related transaction of the company; and
(b) the company was under administration immediately before:
(i) the company resolved by special resolution that it be wound up voluntarily; or
(ii) the Court ordered that the company be wound up; and
(c) the transaction was entered into, or an act was done for the purpose of giving effect to it, during the period beginning at the start of the relation‑back day and ending:
(i) when the company made the special resolution that it be wound up voluntarily; or
(ii) when the Court made the order that the company be wound up; and
(d) the transaction, or the act done for the purpose of giving effect to it, was not entered into, or done, on behalf of the company by, or under the authority of, the administrator of the company.
…
(6A) The transaction is voidable if:
(a) it is an unreasonable director‑related transaction of the company; and
(b) it was entered into, or an act was done for the purposes of giving effect to it:
(i) during the 4 years ending on the relation‑back day; or
(ii) after that day but on or before the day when the winding up began.
Section 588FF provides for the orders that can be made in relation to voidable transactions. Section 588FF of the Act relevantly provides that:
(1)Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
…
(c) an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction;
…
(4) If the transaction is a voidable transaction solely because it is an unreasonable director-related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between:
(a)the total value of the benefits provided by the company under the transaction; and
(b)the value (if any) that it may be expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c).
CONSIDERATION
We begin by addressing the proper construction of s 588FDA of the Act which is key to the determination of the dispositive grounds of appeal.
The principles in relation to construing a statutory provision to ascertain the intended meaning of the words used are well-established. The question as to the meaning of a statutory provision must be answered by having regard to the text, context, and purpose and consequence. The task of statutory construction must begin, and end, with a consideration of the statutory text construed in its context: Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; 250 CLR 503 at [39] (French CJ, Hayne, Crennan, Bell and Gageler JJ).
In SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; 262 CLR 362, Kiefel CJ, Nettle and Gordon JJ reiterated the approach to statutory interpretation at [14]:
The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected.
(Footnotes omitted.)
A provision should be construed so that it is consistent with the language and purpose of all the provisions of the statute and its meaning must be determined by reference to the language of the statute viewed as a whole: Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; 194 CLR 355 at [69] (McHugh, Gummow, Kirby and Hayne JJ). It is well accepted that even words having an apparently clear ordinary or grammatical meaning may be ascribed a different legal meaning after the process of construction is complete. This is because consideration of the context for the provision may point to factors that tend against the ordinary usage of the words of the provision: R v A2 [2019] HCA 35; 269 CLR 507 at [32] (Kiefel CJ and Keane J).
Section 15AA of the Interpretation Act provides that in interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.
Context includes the general purpose and policy of a provision, in particular the mischief it is seeking to remedy: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) [2009] HCA 41; 239 CLR 27 at [47] (Hayne, Heydon, Crennan and Kiefel JJ).
Applying these principles to the construction of s 588FDA, we begin with the text which we consider in the broader statutory context, and then we move to consider purpose.
Section 588FDA(1) defines what constitutes an unreasonable director-related transaction. It sets out three conditions which are necessary and sufficient in order for there to be an unreasonable director-related transaction of the company, in paragraphs (a), (b) and (c): Re Gondon Five Pty Ltd (in liq) [2020] NSWSC 1769 at [12] (Leeming JA sitting at first instance). The interrelation of the non-exhaustive definition of transaction in s 9 and s 588FDA is that a transaction will only be an unreasonable director-related transaction if it satisfies all of the elements in s 588FDA(1)(a)-(c): Crowe-Maxwell v Frost [2016] NSWCA 46; 91 NSWLR 414 at [63] (Beazley P, Macfarlan and Gleeson JJA agreeing).
The conditions in s 588FDA(1)(a) and (b) are threshold requirements whereas s 588FDA(1)(c) requires the court to reach a state of satisfaction based on an evaluation of the reasonableness of the company’s entry into the transaction in the whole of the company’s circumstances, objectively assessed. The matters in s 588FDA(1)(c)(i)-(iii) are mandatory relevant matters in the evaluative assessment of what is objectively unreasonable. The “any other relevant matter” requirement in s 588FDA(1)(c)(iv) serves to recognise that relevance depends on the facts and circumstances of the particular case. See Crowe-Maxwell at [68] and Weaver v Harburn [2014] WASCA 227; 103 ACSR 416 at [91]-[92] (McLure P).
The component subparagraphs of s 588FDA(1) operate as progressive filters – at least one of the criteria in each of s 588FDA(1)(a)(i)-(iv) and (b)(i)-(iii) must be satisfied before it is necessary for the court to move to the evaluative assessment required by s 588FDA(1)(c). A transaction will only qualify as an unreasonable director-related transaction if each of the three filters, including the final filter, being that the court is satisfied that entry into the transaction was in the company’s circumstances objectively unreasonable, are satisfied.
The consequence of a transaction meeting the description of an unreasonable director-related transaction within the meaning of s 588FDA(1) is that the court may, subject to satisfaction of the matters in s 588FE(2A), be empowered to make an order declaring the transaction void at and after the time it was entered into and or an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction. Whether the court grants relief in a given case will depend on a range of considerations including in particular the interests of parties and third parties who might have acted in good faith with respect to the transaction: Vasudevan v Becon Construction (Australia) Pty Ltd [2014] VSCA 14; 41 VR 445 at [36] (Nettle JA, Beach JA and McMillan AJA agreeing). In this way, the statutory framework provides what in practice operates as a final check and balance, on the grant of relief under s 588FF of the Act.
As mentioned, there is no issue in this appeal as to satisfaction of s 588FDA(1)(a)(ii).
The controversy raised by ground 1 is directed to the interpretation of the word benefit as used in s 588FDA(1)(b)(iii) relevantly — “the … disposition … is, or is to be, made to … a person … for the benefit of, a [director]”. The nub of CEG’s argument on ground 1 is that the word “benefit” should be narrowly construed. We will return to address CEG’s submissions in support of ground 1 below. It suffices to presage at this point, that for the reasons which follow we have concluded that in its proper construction, the concept of a disposition for the benefit of a director in s 588FDA(1) is not confined in the narrow way in which CEG contends.
The word “benefit” is defined in s 9 of the Act. The definition is broad — in short, it extends to “any benefit”. The example given in the definition of the benefit as being “by way of payment of cash” is used in an illustrative way and does not limit the defined meaning being “any benefit”. The final part of the definition — “or otherwise” — makes it plain that the incorporated illustration of “payment by cash” is given on an inclusive, and not an exclusive, basis. The statutory definition is silent on whether the benefit need be direct or whether an indirect benefit will be captured. The natural reading of the phrase “any benefit” in s 9 of the Act extends to both direct and indirect benefits. In ordinary usage, a “benefit” may include anything that is for the “good of a person or thing”: Macquarie Dictionary (8th ed, Macquarie Dictionary Publishers, 2020). The phrase “have the benefit of” is defined in the Macquarie Dictionary as “to gain an advantage from”. In Vasudevan, Nettle JA described the natural and ordinary meaning of a requirement that something be “for the benefit of” a person as that it be “for the advantage, profit or good” of the person citing the Oxford English Dictionary (at [23]). In our view, the natural and ordinary meaning of, relevantly, a requirement that a disposition be “for the benefit of” a director extends to the circumstance where a director obtains the right to the chance of an advantageous outcome.
In the context of s 588FDA(1)(b), the phrase with which we are concerned appears as part of a compound expression “on behalf of, or for the benefit of, a person.” In Vasudevan at [21]-[24], Nettle JA rejected an argument to the effect that the phrase requires that the disposition result in an equitable interest or at least something in the nature of an equity in the disponed property in favour of the director and would therefore exclude mere financial interests and mere contractual rights. The argument proceeded on the basis that “on behalf of” is intended to capture cases in which the director in question derives an equitable interest in the disponed property and that “for the benefit of” is directed at cases in which the director in question derives a mere equity in the disponed property (as where the disposition is in favour of a trustee of a discretionary trust of which the director is an object). In rejecting the argument, Nettle JA observed that although the objects of a discretionary trust may not have an interest as such in the assets of the trust, it is commonplace to refer to assets of that kind as being held on behalf of the objects of the trust: Vasudevan at [22]. His Honour said that there was no reason to suppose that Parliament had not similarly adopted the commonplace usage of the phrase “held on behalf of” to cover such interests. This led to a conclusion that the phrase “for the benefit of” would be rendered otiose if it was confined to transactions resulting in a director obtaining a mere equity in the disponed property. A statutory construction that gives meaning to all the words used in the section is to be preferred to one that assumes redundancy: Project Blue Sky at [71].
There was for a period a debate in the authorities as to whether the phrase “for the benefit of” should be given a narrow interpretation so as to exclude an indirect, or derivative, benefit that the director of the transferor gets as a shareholder of the transferee company. The narrower approach was adopted in, for example, Ziade Investments Pty Ltd (in liq) v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; 57 ACSR 693 at [86]-[89] (Gzell J) and Re Great Wall Resources Pty Ltd (in liq) [2013] NSWSC 354 at [46] (Brereton J). A wider construction of the phrase “for the benefit of” which extended to indirect or derivative benefits was embraced in obiter dicta by the Victorian Court of Appeal in Vasudevan at [19] and [26]-[31]. That wider approach has been followed in this Court and in the Supreme Court of New South Wales in a number of single judge decisions: see Pleash (Liquidator), in the matter of SFG Relocations Pty Ltd v Fourie (No 3) [2024] FCA 583 at [64]-[65] (Stewart J) and the authorities cited therein, Stewart J concluding that the wider construction was correct.
The wider approach was similarly favoured, and followed, by Leeming JA (sitting at first instance) in Re Gondon Five. At [16]-[18], Leeming JA said:
[16] I have, helpfully, been taken to the decision of the Court of Appeal in Crowe-Maxwell v Frost …, where Beazley P reproduced a deal of authority on this section at [70]-[79]. In particular, her Honour reproduced, with evident approval, what Nettle JA had said writing for the Victorian Court of Appeal in Vasudevan v Becon Constructions (Aust) Pty Ltd … at [24]. In that decision, his Honour reviewed a number of first instance decisions of this Court which had taken a narrow approach to the meaning of “for the benefit of”. Speaking very generally, those decisions had required there to be a direct benefit to the director or his or her close associate, such that a benefit to companies they controlled, even if they were the sole shareholder, was insufficient. These decisions were reviewed in Re Great Wall Resources Pty Ltd (in liq) …at [28]-[46].
[17] In Vasudevan, Nettle JA gave a broader meaning to those words, and referred to the “objective of the section of preventing directors stripping benefits out of companies to their own advantage”. His Honour said at [24] that:
“given the ease with which an errant director might channel benefits from a company under his charge to another company in which he is financially although not legally or equitably interested, there is every reason to suppose that Parliament intended not to confine the meaning of the expression to something in the nature of an equitable interest”.
[18] The Court of Appeal, in Crowe-Maxwell v Frost, did not in terms overturn the narrow construction given to “for the benefit of” in earlier decisions. Even so, and notwithstanding the earlier first instance decisions of this Court, I should follow the decision of the Victorian Court of Appeal on the construction of federal legislation, unless I am convinced it is plainly wrong: Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492; [1993] HCA 15. I am far from being convinced it is plainly wrong. I note further that, more recently, Black J, in SX Projects Pty Ltd (in liq) v Battaglia [2018] NSWSC 1830 at [57] and in In the matter of HPack Investments Pty Ltd [2020] NSWSC 1638 at [53], followed the broader approach taken in Vasudevan, stating that a disposition might be “for the benefit of” a director where it “legally or financially advantages the director in question regardless of whether it is paid or directed to a close associate of the director”.
(some citations omitted).
Having reviewed the authorities and having regard to the text of s 588FDA(1) read as a whole and in context, our view is that the wider construction is the proper construction. Relevantly in the present context what is required for the “benefit” criteria to be satisfied is that the disposition in issue “legally or financially advantages the director in question”.
That may first be tested by assuming that the wider construction is correct and asking whether that construction is likely to result in outcomes that could not have been objectively intended by the legislature. In our view that question must be answered in the negative. The wider construction of s 588FDA(1)(b) does not produce an unintended outcome when read with the cumulative requirement that the relevant transaction be objectively unreasonable following the evaluative inquiry required by s 588FDA(1)(c). Section 588FDA(1)(c) enables the court to winnow out transactions that would otherwise be captured by ss 588FDA(1)(a) and (b) but which, when objectively assessed, were not entered into unreasonably having regard to all of company’s relevant circumstances.
Section 588FDA(1)(c) requires the court, in performing its evaluative task, to have regard to:
(1)“the benefits (if any) to the company of entering into the transaction”, where the term “benefits” is relevantly defined in broad terms to include “any benefit, whether by way of payment of cash or otherwise”: s 588FDA(1)(c)(i) and s 9 of the Act and s 23(b) of the Interpretation Act;
(2)“the detriment to the company of entering into the transaction”, where the term “detriment” in s 588FDA(1)(c)(ii) is not defined but it is generally accepted that it “refers to ‘commercial detriment’ but is not limited to a detriment that can necessarily be measured in money terms”: Shot One Pty Ltd (in liq) v Day [2017] VSC 741 at [211] (Sloss J); Re Sans Pareil Estate Pty Ltd (in liq) [2024] NSWSC 255 at [62] (McGrath J);
(3)“the respective benefits to other parties to the transaction of entering into it”: s 588FDA(1)(c)(iii); and
(4)any other relevant matter: s 588FDA(1)(c)(iv).
The condition in s 588FDA(1)(c) requires the court to undertake an evaluative inquiry as to whether it may be expected that a reasonable person in the circumstances would not have entered into the transactions: Crowe-Maxwell at [68]. The test of unreasonableness in s 588FDA of the Act is objective — it is what a reasonable person in the company's circumstances may be expected not to do. In performing its evaluatory task the court must have regard to the mandatory considerations itemised in s 588FDA(1)(c)(i)-(iv) in assessing what is objectively unreasonable. As McLure P observed in Weaver at [91], the “company’s circumstances” encompass all relevant matters, starting with its status as a company and what flows from that; its controllers, shareholders, business and other activities; and the facts and circumstances of, and surrounding, the transaction. See also Gleeson J’s extensive review of the authorities on s 588FDA in Smith (in his capacity as liquidator of Action Paintball Games Pty Ltd) v Starke (No 2) [2015] FCA 1119; 109 ACSR 145 (Smith v Starke (No 2)) at [104]-[112].
We next test the wider construction by asking whether it is consistent with the purpose of s 588FDA, objectively identified.
In what follows, we are conscious that judicial statements expounding the interpretation of a statute are not a substitute for the words of the statute itself: Herzfeld P and Prince T, Interpretation (3rd edition, Thomson Reuters, 2024) at [33.150]. In this respect, the observations of Lord Upjohn in Ogden Industries Pty Ltd v Lucas [1970] AC 113 at 127 are apposite:
It is quite clear that judicial statements as to the construction and intention of an Act must never be allowed to supplant or supersede its proper construction and courts must beware of falling into the error of treating the law to be that laid down by the judge in construing the Act rather than found in the words of the Act itself.
Each of s 588FDA(1)(c)(i) to (iii) is a mandatory consideration in the requisite evaluative assessment: Weaver at 429 [92].
The manner in which the impugned transaction is defined in a pleading which alleges that it is an unreasonable director-related transaction may affect the scope of the questions for determination under s 588FDA(1)(c)(i) to (iii). For example, the narrower the formulation of the impugned transaction, the narrower the likely range of benefits and detriments to the company from its entry into that transaction. However, the manner in which a particular transaction is pleaded cannot operate to diminish the scope of the inquiry required by s 588FDA as a whole when s 588FDA(1)(c)(iv) compels consideration of “any other relevant matter”. This is an expression of the widest import.
The inquiry under s 588FDA(1)(c) is concerned with the reasonableness of the company’s conduct, objectively assessed by reference to the company’s circumstances and encompassing all relevant matters: Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 at 366 to 367 (Burchett, Foster and North JJ); Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83 at 109 [129] (Gordon J, Heerey J agreeing); Crowe‑Maxwell v Frost [2016] NSWCA 46; (2016) 91 NSWLR 414 at 427 [70] (Beazley P, Macfarlan and Gleeson JJA); Smith v Starke, in the matter of Action Paintball Games Pty Ltd (in liq) (No 2) [2015] FCA 1119; (2015) 109 ACSR 145 at 162 ([104] to [105] and [107]) (Gleeson J); Weaver at 428 to 429 [91].
The task on this appeal is to conduct a real review of the evidence that was before the primary judge and of the primary judgment to determine whether the primary judge has erred in fact or law: Lee v Lee [2019] HCA 28; (2019) 266 CLR 129 at 148 to 149 [55] (Bell, Gageler, Nettle and Edelman JJ). In view of the nature of the evidence before the primary judge, this Court is in as good a position as the primary judge to consider what inferences, if any, ought be drawn from the basal facts: Warren v Coombes [1979] HCA 9; (1979) 142 CLR 531, a proposition with which senior counsel for the liquidator agreed.
A striking feature of this case is the deficiency in the evidence before the primary judge as to Runtong’s circumstances as at the time that it granted the CEG Direct Mortgage, and the evidence of other relevant matters.
The evidence before the primary judge comprised principally:
(1)two affidavits of the liquidator, in which he did little more than annex documents and describe various transactions;
(2)an affidavit from the solicitor for CEG to which he annexed various business records of CEG concerning its dealings with Datong, Futong and Runtong;
(3)an expert report of Mr Kym Dreyer, in which Mr Dreyer opined that he had had a market value of $2.2 million as at 12 December 2014;
(4)an expert report of Ms Karam, the effect of which is summarised at [299], [301] and [303] above;
(5)business records of the NAB, including in particular internal credit submissions and reviews and bank statements issued by the NAB to Datong and Futong; and
(6)a Statement of Agreed Facts.
The inadequacy of the evidence was the subject of a number of comments by the primary judge. In particular:
(1)“I pause to note that how Datong and Futong could covenant with CEG for Runtong to grant the CEG Direct Mortgage as security for their borrowings in circumstances where apart from the Directors there were other directors of Runtong has not been explained.” (J[59]);
(2)“None of the directors of Datong, Futong and Runtong gave evidence” (J[95]);
(3)“The paucity of the evidence presented as to any relationship between the three companies, whatever that may have been, including happenstance, in circumstances where there were a number of other directors who were not directors of Runtong and a number of different shareholders both beneficial and otherwise, does not allow such an inference to be drawn.” (J[95]);
(4)“... the evidence falls far short of establishing that Runtong, Datong and/or Futong are part of a ‘property development group’” (J[107]);
(5)“…Ms Karam concluded that as she did not hold the financial records of Runtong as of 12 December 2014 nor any internal memos recording Runtong’s decision to grant the CEG direct mortgage, she was unable to comment on the totality of Runtong’s circumstances at the time of the transaction and it did not form part of her analysis.” (J[109]):
(6)“There is no evidence that Runtong had requested the advance of any money at the time the CEG Direct Mortgage was granted.” (J[116]);
(7)“... the facts and circumstances of and surrounding the transaction, such as I have been able to ascertain them ...” (J[125]);
(8)“The evidence in this matter is incomplete and lacking in a number of important respects.” (J[126]);
(9)“There is no direct evidence of any imperative for Runtong to grant the CEG Direct Mortgage.” (J[127]);
(10)“... no evidence was called from either of the Directors or any other of Runtong’s directors. As I understand it, those individuals are no longer in Australia but there is no evidence as to any attempt by CEG to have any of Runtong’s directors give evidence in person or otherwise”(J[128]);
(11)“Other than the reference to overseas funding from China there is no evidence that funding occurred, was to occur or was the subject of confirmed funding.” (J[132]);
(12)“The purpose behind the advance of $6 million has not been explained.” (J[136]);
(13)“There is no evidence to suggest it was to Runtong’s benefit to encumber the Land by granting the CEG Direct Mortgage whether for cash flow purposes or otherwise. Further, there was no suggestion any money was actually advanced to Runtong until October 2015.” (J[137]);
(14)“Overall, the evidence does not reveal any adequate commercial explanation for the Transaction, nor does it reveal any benefit to Runtong as at 12 December 2014.” (J[138]);
(15)“... there was no evidence of any intention by Datong or Futong to obtain further advances ...” (J[144]); and
(16)“As I have noted, the evidence in this matter is imprecise and unsatisfactory in a number of important respects.” (J[172]).
The adequacy of the evidence before the Court is a question directly relevant to whether the Court can be satisfied that the liquidator has discharged his onus of proof. This is because the Court must consider whether the evidence placed before it provides an appropriate basis on which to reach a reasonable decision as to whether that onus has been discharged. In Ho v Powell[2001] NSWCA 168; (2001) 51 NSWLR 572 at 576 ([14] to [15]), Hodgson JA (Beazley JA agreeing) explained:
14There is a long-standing controversy whether the civil standard of proof requires a numerical probability in excess of 50 per cent (see Davies v Taylor [1974] AC 207 at 219), or belief amounting to reasonable satisfaction (see Briginshaw v Briginshaw (1938) 60 CLR 336 at 361–362). My own opinion is that the resolution of the controversy involves recognition that, in deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision. I discussed this in some detail in an article published at (1995) 69 ALJ 731 (D H Hodgson, “The Scales of Justice: Probability and Proof in Legal Fact-finding”).
15 In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so: cf 69 ALJ at 732–733, 736, 740. As stated by Lord Mansfield in Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970: “... [A]ll evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted”. See also Azzopardi v The Queen (2000) 75 ALJR 931 at 935 [10]; 179 ALR 349 at 353 [10].
(bold emphasis added)
That passage has been endorsed and followed numerous times in appellate courts in this country. Recent examples include GLJ v Trustees of Roman Catholic Church for Diocese of Lismore [2023] HCA 32; (2023) 97 ALJR 857 at 875 [58] (Kiefel CJ, Gageler, and Jagot JJ); Frigger v Trenfield (No 3) [2023] FCAFC 49 at [314] (Allsop CJ, Anderson and Feutrill JJ), citing Coshott v Prentice [2014] FCAFC 88; (2014) 221 FCR 450 at 468 to 469 ([80] to [82]) (Siopis, Katzmann and Perry JJ); and Capitalink Pty Ltd v Withnall [2024] NSWCA 172 at [60] (Bell CJ) and [86] (Leeming JA).
Also relevant to the question of whether the liquidator has discharged his onus is the nature of the statutory task set by s 588FDA(1)(c) of the Act. As noted above, that sub-section requires the Court to consider whether it may be expected that a reasonable person in the company’s circumstances would not have entered into the impugned transaction. This requires identification of the company’s circumstances and then consideration of whether the Court is satisfied that it may be expected that a reasonable person in such circumstances would have not entered into the impugned transaction. The two questions identified by Hodgson JA in Ho v Powell must be borne in mind when making this assessment.
I am not satisfied that the evidence adduced before the primary judge, considered in its entirety, provides a satisfactory or sufficient basis from which to reach a conclusion as to what Runtong’s circumstances were when it granted the CEG Direct Mortgage, much less a conclusion that a reasonable person in such circumstances would not have granted that mortgage. I have reached that conclusion for the following reasons.
First, as noted above, Runtong’s circumstances encompass all relevant matters, starting with its status as a company and what flows from that; its controllers, shareholders, business and other activities; and the facts and circumstances of, and surrounding, the transaction. Similarly, “any other relevant matter” is, as also noted above, an expression of the widest import.
Secondly, the evidence of Runtong’s circumstances and of other relevant matters is slender and inadequate. There is no evidence from any person associated with Runtong, Datong or Futong. There is also no evidence of business records (including financial statements or minutes) held by Runtong, Datong or Futong. Nor is there an explanation from the liquidator as to why such evidence was not adduced. By way of illustration only, there is no evidence of the existence (or absence) of:
(1)communications or discussions between the directors of Runtong (or Datong and Futong) either within or between those companies concerning the CEG Direct Mortgage or more broadly the developments that were in train;
(2)arrangements between the three companies for the development of the Datong Land, the Futong Land and the Land, including as to profit sharing; or
(3)an ability of any of the borrowers and the security providers (i.e. Datong, Futong and Runtong and the various directors) to meet their obligations to CEG.
Such matters may be expected to be directly and centrally relevant to a determination of the likely benefits and risks resulting from the granting of the CEG Direct Mortgage and thus as to whether it may be expected that a reasonable person in Runtong’s circumstances would not have granted the CEG Direct Mortgage.
Thirdly, to the extent that there was evidence before the primary judge which casts light upon Runtong’s circumstances, such evidence was sufficient to suggest that there may have been a commercial justification for the granting of the CEG Direct Mortgage and thus that the negative proposition in s 588FDA(1)(c) is not established. In particular:
(1)as at June 2012 and continuing until at least September 2014 the NAB regarded Runtong, Datong and Futong – companies which had common directors – as members of a group of companies experienced in the large scale development of land in South Australia and Southeast Asia ([235], [236], [243] to [245] and [255] to [256] above);
(2)in June 2012 Runtong was registered for the purpose of purchasing the Land for the group and it purchased the Land in October 2012;
(3)as at September 2013, plans for approval for the construction of a mixed use hotel/apartment complex on the Land were being finalised for lodgement ([243] above);
(4)during 2014, steps were taken toward obtaining development approval ([246] above);
(5)between 11 August 2014 and the grant of the CEG Direct Mortgage on 12 December 2014, Datong and Futong advanced $497,000 to Runtong (and Runtong advanced $495,000 to Futong) ([247] above);
(6)in August 2014, the Council gave conditional planning consent to Runtong for the development of the Land ([248] above);
(7)from September 2014 there was marketing of the Land and some pre-sales of apartments occurred. In the same month, a valuer estimated the 257 proposed apartments to have a value in the order of $116 million ([250] and [251] above) and the NAB had recorded that the estimated building cost was $110 million ([256] above); and
(8)in the six months following the Third Loan Agreement and the grant of the CEG Direct Mortgage, Datong and Futong advanced $1,116,000 to Runtong ([274] above).
I make no finding of the kind urged by CEG, to the effect that it may be expected that a reasonable person in Runtong’s circumstances would have granted the CEG Direct Mortgage ([318(4)] above). For the reasons explained above, there is insufficient evidence to allow such a finding to be made. Critically, the matters described at [335] above demonstrate that – even on the slender and inadequate evidence that was adduced – a state of satisfaction that a reasonable person in Runtong’s circumstances would not have granted the CEG Direct Mortgage cannot be reached.
Finally, this is not a case in which it can be said that CEG bore any (legal or) evidentiary onus.
Where a party who bears the legal onus of proving a negative proposition produces sufficient evidence from which the negative proposition may be inferred, the evidentiary onus shifts to the other party to adduce evidence that tends to show that the negative proposition is not true: see Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39 at [78] (Campbell JA; McColl JA and Handley AJA agreeing); Ellis v Central Land Council [2019] FCAFC 1; (2019) 267 FCR 339 at 385 [126(f)] (Barker, Griffiths and White JJ). In Crowe-Maxwell, at 428 [74] Beazley P noted the similarities between s 588FDA and s 588FB of the Act (which concerns uncommercial transactions but which is expressed in similar terms to s 588FDA(1)(c) and thus requires proof of the negative proposition that a reasonable person would not have entered the transaction). At 432 [89] to [91], her Honour explained:
89A common thread in the uncommercial transaction cases is that, where there is limited evidence of the nature or purpose of a transaction, but the surrounding circumstances show it to be a departure from normal commercial practice and to raise inferences 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 may be said with respect to the identification of unreasonable director-related transactions.
90In those limited circumstances, for practical purposes, a defendant may be said to bear an “onus”, sometimes referred to as an evidentiary onus, of raising some commercial explanation for the transaction. Thus, in Hawksford v Hawksford (2005) 191 FLR 173; [2005] NSWSC 463 Campbell J explained, at [54]:
“[54] The distinction between an onus of proof and an onus of adducing evidence is of particular relevance in the present situation. Where party A has the legal onus of proving a negative proposition, and relevant facts are peculiarly in the knowledge of party B or where party B has the greater means to produce evidence relating to those facts, then provided party A establishes sufficient evidence from which the negative proposition may be inferred, party B then comes under an evidential burden, or an onus of adducing evidence.” (Citations omitted)
91Hawksford concerned a challenge to a solicitor’s retainer with two corporate entities in which the plaintiffs had interests. Campbell J, at [55], considered that while the legal onus of proving the absence of a retainer lay on the plaintiffs, once they had raised an inference of the negative proposition, the defendants carried an evidential burden “to advance in evidence any particular matters with which (if relevant) the plaintiffs would have to deal in the discharge of their overall burden of proof”: Apollo Shower Screens Pty Ltd v Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561 at 565 (Hunt J). Campbell J’s statement is an application, in the context of proof of a negative proposition, of the principle in Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 at 970 that:
“… all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted.”
In the present case, the evidentiary onus did not shift to CEG because, to adopt the expressions used by Beazley P in Crowe-Maxwell at 432[89], the surrounding circumstances established by the evidence – such as that evidence is and taken as a whole – do 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.
Further, there is no basis from which to conclude that CEG had greater means to produce evidence of Runtong’s circumstances than the liquidator had. Indeed, the converse is plainly true. The liquidator, by virtue of his position, had the benefit of various provisions of the Act (e.g., ss 477(3), 530A to 530C, 596A, 596B and 597(9)) which enabled him to require the production of books and records of Runtong, and to require the provision of information concerning Runtong’s circumstances; in addition to the processes of the Court (such as subpoenas) available to any litigant.
Thus, it was for the liquidator, and not CEG, to call witnesses and adduce business records establishing a sufficient picture of Runtong’s circumstances and of other relevant matters.
It follows 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 CEG Direct Mortgage. The evidence before the primary judge was insufficient to allow that conclusion. Further, the primary judge took a narrow view of the limited evidence that had been adduced and overly focussed upon the transaction documents at the expense of the other contemporaneous documents; and relied upon evidentiary lacunae, the responsibility for and effect of which were incorrectly attributed to CEG rather to than the liquidator.
E. CONCLUSION
The challenge to the primary judge’s finding that s 588FDA(1)(b) was satisfied must fail. However, the challenge to the primary judge’s finding that s 588FDA(1)(c) was satisfied must succeed. As s 588FDA is satisfied only if each of s 588FDA(1)(a), (b) and (c) is satisfied, the primary judge’s finding that the grant of the CEG Direct Mortgage was an unreasonable director-related transaction cannot stand and the appeal should be allowed. It is unnecessary to consider the grounds of appeal concerning the primary judge’s findings as to relief under s 588FF of the Act.
The orders made by the primary judge in the primary judgment and in the subsequent judgment concerning interest and costs should be set aside; and in lieu thereof the liquidator’s originating process dated 12 June 2019 should be dismissed with costs. Costs of the appeal should follow the event.
I certify that the preceding one hundred and twenty-five (125) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Goodman. Associate:
Dated: 9 April 2025
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