Mortgage Declared as an Unreasonable Director-Related Transaction

The recent case of Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) v CEG Direct Securities Pty Ltd [2024] FCA 6 (Runtong v CEG) saw the Federal Court give judgement where a liquidator was successful in declaring a mortgage as an unreasonable director-related transaction.

Facts of the Case

Runtong executed a mortgage over a property in favour of CEG. A pre-existing mortgage, however, was already in favour by the National Australia Bank meaning the CEG mortgage was secondary. Consequently, CEG, after registering its mortgage, gained possession of the land and entered a contract for the sale of the land.

Attempting to avoid the mortgage, Runtong applied to the Federal Court claiming the transaction was voidable as an unreasonable director-related transaction under s 588FE and s 588FDA of the Corporations Act 2001 (Cth). The Court assessed multiple submissions by Runtong and ultimately questioned whether a reasonable person in the same position as Runtong would have granted the mortgage to CEG. Ultimately, the Court found that the mortgage was an unreasonable director-related transaction and was voidable pursuant to s 588FE(6A) of the Corporations Act. Consequently, the onus then shifted to CEG where they were unable to meet the evidentiary burden of raising a commercial explanation. ?

The Case of Runtong v CEG exemplifies the importance of caution for lenders when relying on cross-securities, particularly in relation to property law and mortgages.