A sig­nif­i­cant deci­sion from the Full Fed­er­al Court has clar­i­fied the lim­its of liq­uida­tors’ pow­ers to unwind cross-com­pa­ny secu­ri­ty grant­ed to relat­ed entities.

The deci­sion has re-enforced the com­mer­cial via­bil­i­ty of intra-group finance arrange­ments when prop­er­ly struc­tured and documented.

In CEG Direct Secu­ri­ties Pty Ltd v Coop­er as liq­uida­tor of Run­tong Invest­ment and Devel­op­ment Pty Ltd (in liq) [2025] FCAFC 47, the Court reversed a first instance deci­sion that had cast doubt over the enforce­abil­i­ty of group-wide secu­ri­ty struc­tures, par­tic­u­lar­ly in the con­text of unrea­son­able direc­tor-relat­ed transactions.

This deci­sion has impor­tant impli­ca­tions for financiers, insol­ven­cy prac­ti­tion­ers and directors.

The Back­ground

The case arose after Run­tong Invest­ment and Devel­op­ment Pty Ltd (now in liq­ui­da­tion) grant­ed a mort­gage over its prop­er­ty to secure loans made by CEG Secu­ri­ties to oth­er com­pa­nies with­in its cor­po­rate group.

The liq­uida­tor con­tend­ed that the mort­gage con­sti­tut­ed an unrea­son­able direc­tor-relat­ed trans­ac­tion” under s 588FDA of the Cor­po­ra­tions Act 2001 (Cth), on the basis that:

  • Run­tong received no direct ben­e­fit from the loans,
  • The mort­gage ben­e­fit­ed relat­ed enti­ties, and
  • The trans­ac­tion was objec­tive­ly unrea­son­able in the circumstances.
  • The word ben­e­fit should be con­strued wide­ly as extend­ing beyond direct ben­e­fits when con­sid­er­ing s588FDA,
  • Con­se­quent­ly the mort­gage was for the ben­e­fit of Run­tong’s direc­tors, not the com­pa­ny, and
  • A rea­son­able per­son in Run­tong’s posi­tion would not have agreed to grant the mortgage.

At tri­al, the Court agreed, O’Sul­li­van J find­ing that

Con­se­quent­ly, the Court ordered the mort­gage to be set aside and near­ly $2 mil­lion to be repaid.

The Full Court’s Key Findings

On appeal, the Full Fed­er­al Court unan­i­mous­ly allowed CEG’s appeal and over­turned the tri­al deci­sion. The judg­ment pro­vides much-need­ed clar­i­ty on what comes with­in an unrea­son­able” trans­ac­tion and sets clear­er bound­aries around the appli­ca­tion of s 588FDA.

1. Not every ben­e­fit to a relat­ed par­ty is unrea­son­able”

The Court empha­sised that com­mer­cial con­text mat­ters. Just because a trans­ac­tion ben­e­fits a direc­tor or relat­ed enti­ty doesn’t auto­mat­i­cal­ly make it unreasonable. 

Courts must assess the com­mer­cial ratio­nale, risk pro­file, and over­all con­text of the trans­ac­tion, judged objec­tive­ly at the time it was entered into — not with hindsight.

2. Liq­uida­tors bear the onus of prov­ing unreasonableness

The bur­den is square­ly on the liq­uida­tor to prove that no rea­son­able per­son in the com­pa­ny’s posi­tion would have entered into the transaction.

This reaf­firms that s 588FDA is not a blunt instru­ment for unwind­ing intra-group financ­ing sim­ply because things went wrong later.

The Full Court found the Run­tong Mort­gage was rea­son­able under sec­tion 588FDA(1)(c) based on two key points:

  1. Expert evi­dence showed it was com­mon prac­tice for lenders to take cross-secu­ri­ties from relat­ed com­pa­nies, espe­cial­ly when the bor­row­er couldn’t pro­vide enough secu­ri­ty on its own; and
  2. Cred­it assess­ments by NAB and CEG treat­ed Run­tong, Futong, and Datong as a sin­gle group, not sep­a­rate companies.

The Court there­fore dis­agreed with the orig­i­nal judge’s view that the com­pa­nies were inde­pen­dent. Instead, it found they act­ed togeth­er as a coor­di­nat­ed group. Run­tong relied entire­ly on sup­port from the oth­ers and fund­ing from Chi­na, which made the mort­gage com­mer­cial­ly necessary.

3. Cross-com­pa­ny secu­ri­ty struc­tures are not inher­ent­ly vulnerable

Intra-group guar­an­tees and secu­ri­ty are com­mon and often com­mer­cial­ly jus­ti­fied. The Court con­firmed that such struc­tures can be legit­i­mate and enforce­able, pro­vid­ed there is a clear com­mer­cial ratio­nale and appro­pri­ate documentation.

Prac­ti­cal Impli­ca­tions for Financiers and Directors

This case serves as a use­ful reminder that robust doc­u­men­ta­tion and con­tem­po­ra­ne­ous deci­sion-mak­ing are the best defences against post-insol­ven­cy challenges.

The list below sets out some key take­aways aris­ing from the deci­sion which lenders and direc­tors should pay care­ful atten­tion to:

  1. Intra-group lend­ing gen­er­al­ly: Lenders and direc­tors should ensure that each enti­ty can demon­strate a clear com­mer­cial ben­e­fit in the struc­ture, even if this is indirect.
  2. Secu­ri­ty doc­u­ments: These should avoid includ­ing boil­er­plate ratio­nales and valu­able con­sid­er­a­tion claus­es. Tai­lored and detailed recitals which demon­strate how the secu­ri­ty ben­e­fits the grantor, not just the group are more like­ly to with­stand challenge.

  3. Board process­es: Direc­tors should main­tain and lenders require detailed records of approvals, advice received, and ratio­nale for group security.
  4. Due dili­gence: Lenders in par­tic­u­lar should also always stress test poten­tial s 588FDA expo­sure in dis­tressed acqui­si­tions or refi­nanc­ing work.

Look­ing Ahead

This deci­sion restores con­fi­dence in com­mon­ly used finance and secu­ri­ty struc­tures, but it also sig­nals that evi­den­tiary rigour remains critical.

Liq­uida­tors will con­tin­ue to test the lim­its of void­able trans­ac­tions, espe­cial­ly in close­ly-held or direc­tor-con­trolled groups where cor­po­rate gov­er­nance may have been lax.

Lenders and advi­sors should assume that any cross-com­pa­ny trans­ac­tion in the twi­light of sol­ven­cy may be scru­ti­nised — and struc­ture and doc­u­ment com­mer­cial ratio­nales accordingly.

If you would like to repub­lish this arti­cle, it is gen­er­al­ly approved, but pri­or to doing so please con­tact the Mar­ket­ing team at marketing@​swaab.​com.​au. This arti­cle is not legal advice and the views and com­ments are of a gen­er­al nature only. This arti­cle is not to be relied upon in sub­sti­tu­tion for detailed legal advice.

Publications

Cross-Com­pa­ny Secu­ri­ty and Liq­uida­tor Chal­lenges: Full Fed­er­al Court Restores Cer­tain­ty in CEG Direct Secu­ri­ties v Coop­er [2025] FCAFC 47

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