Director Related Transactions: The Federal Court’s decision in Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd [2024] FCA 6
Director Duties and Unreasonable Transactions: Insights from Recent Australian Cases
In the corporate governance landscape of Australia, directors’ duties and the scrutiny of their transactions are of paramount importance. Recent legal cases have brought to light the consequences of director-related transactions that do not align with a company’s best interests. This article unpacks these cases and offers guidance for Australian directors to navigate their responsibilities effectively.
Understanding Director-Related Transactions Director-related transactions refer to any dealings involving a company’s directors or related parties. The Corporations Act 2001 (Cth) sets out specific provisions under sections 588FE and 588FDA, which aim to protect the company’s interests and those of its creditors from unreasonable transactions that may benefit directors personally.
The Runtong Case: A Benchmark for Director Transactions The Federal Court’s decision in Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd [2024] FCA 6 has become a benchmark in assessing the reasonableness of director-related transactions. The court found that the mortgage granted by Runtong to CEG was an unreasonable transaction, as it did not provide a commercial benefit to Runtong and was not in the company’s best interest.
The Case at a Glance The Federal Court of Australia’s decision in Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd [2024] FCA 6 has set a significant legal precedent. The court found that a mortgage granted by Runtong to CEG was an unreasonable director-related transaction, voidable under sections 588FE and 588FDA of the Corporations Act 2001 (Cth)1.
Background of the Dispute Runtong, a property development company, executed a mortgage over real property located in Adelaide in favour of CEG Direct Securities Pty Ltd (CEG). This mortgage was secondary to a pre-existing mortgage with the National Australia Bank. CEG later took possession of the property and sold it, reducing the contingent liability of Runtong’s directors under personal guarantees.
The Legal Contention The crux of the case revolved around whether a reasonable person in Runtong’s position would have granted the mortgage to CEG, from whom Runtong had not sought any funding. The court had to consider if there was a benefit to the directors of Runtong and if there was a commercial benefit to Runtong itself2.
Court’s Decision and Reasoning Justice O’Sullivan declared the mortgage an unreasonable director-related transaction. The court concluded that the transaction was voidable and ordered CEG to pay $1.9 million for the benefit of Runtong’s creditors. The decision was based on the finding that the mortgage did not serve Runtong’s interests and was primarily aimed at reducing the directors’ personal liabilities.
Implications for Directors The ruling has significant implications for directors, particularly those involved in financial and property development sectors. It underscores the importance of ensuring that all transactions, especially those involving related parties, are conducted with a clear commercial benefit to the company.
For Directors: A Checklist
Review all transactions for commercial benefit.
Consult legal advisors when in doubt.
Maintain meticulous records of decision-making processes.
Ensure all director-related transactions are at arm’s length.
Regularly update knowledge on corporate law.
Conclusion The Runtong case is a cautionary tale for directors to conduct transactions with due diligence and a clear understanding of their legal responsibilities. It highlights the need for transparency and the pursuit of the company’s best interests in all dealings.
Note Not Legal AdviceYou acknowledge and accept that nothing on our website or this article is intended to be, or should be treated as, legal advice. All content is of a general and non-specific nature which is not tailored to your specific circumstances and therefore may not be suitable to you. We do not warrant or guarantee that any material or information appearing on our website from time to time is up to date, complete or accurate. Before acting on information or content observed our website you must obtain independent legal advice from a qualified practising Australian Lawyer.