Plaintiffs v Defendants

1 By their Originating Process filed on 4 December 2015, the plaintiffs seek the following relief:

(a) relief under Part 5.7B of the Corporations Act 2001 (Cth) ("the Act") against the first and second defendants ("the Sun entities") in respect of securities asserted by them over land owned by the plaintiff company ("GHG"); and

(b) a direction under s 511 of the Act that the plaintiff liquidators are justified in entering, and causing GHG to enter, into a settlement agreement with the third to sixth defendants ("the Settlement Agreement"), who claim security over the same land

2 By agreement with the third to sixth defendants, the operation of the Settlement Agreement is contingent upon the Court making the proposed orders under part 5.7B against the Sun entities. This is the reason why the parties have requested that the Court adjudicate the Part 5.7B claims first. The hearing of this part of the application took place on Wednesday, 13 April 2016.

3 In the interests of expediting the matter and limiting costs, the parties elected to proceed on affidavit and without pleadings or points of claim and defence. The parties are to be commended on taking this course. It was entirely appropriate given the limited issues in the case.

(a) an affidavit sworn by one of the liquidators, Hamish Alan MacKinnon, on 3 December 2015 and the exhibits thereto (HAM-1 - HAM-41);

(b) an affidavit sworn by the first defendant, Guo Zhao (Sunny) Sun (Mr Sun), on 4 March 2016 and the exhibits thereto (GZS-1 - GZS-17).

6 In 2012, GHG became the registered proprietor of a number of parcels of land (collectively, the Land) in Chirnside Park, comprising the Henley Golf Course, the St John Golf Course, the Retreat and Spa of the Sebel Heritage, Yarra Valley, and land referred to as "the Management Lot". The Management Lot formed part of what is known as the "Yarra Valley Lodge". The rest of the Yarra Valley Lodge was owned by another company, Austpac Funds Management Pty Ltd, as responsible entity for the Heritage Lodge Managed Investment Scheme. Most of the facilities used in running the Yarra Valley Lodge were located on the Management Lot.[2]

7 The operation of the Yarra Valley Lodge was governed by a Hotel Management Agreement dated 28 June 2002.[3]

8 Mr Sun is, and has been since its incorporation, a director and shareholder of GHG.[4] Mr Sun is also the trustee of the ABC Investment trust and is, and has been since May 2000, a director of the Second Defendant, Corpsun Pty Ltd ("Corpsun").[5] Corpsun is the trustee of the Sun Family Trust.

9 In August 2013, Morlend Finance Corporation (Vic) Pty Ltd ("Morlend") became registered as the first mortgagee of the Land.

Appointment of administrators and receivers and managers to GHG

10 On 31 January 2014, Morlend exercised it rights under its security to appoint Petr Vrsecky and Glenn Jeffrey Franklin as receivers and managers of the assets and undertaking of GHG. On the same day, Morlend exercised its right under s 436C of the Act to appoint Hamish Alan MacKinnon and Michael Francis Quin as joint and several administrators of GHG.[6]

11 On 17 April 2014, at a meeting convened under s 439A of the Act, GHG's creditors resolved that it be wound up and that Messrs MacKinnon and Quin be the company's joint and several liquidators.[7]

12 In April 2014, the receivers sold the Land other than the Management Lot. After accounting to their appointor (Morlend) for the balance, the receivers retained a fund of $1,392,268.59 from the surplus proceeds to cover the costs of anticipated litigation. Morlend also retains a sum of $918,620.04 from the surplus proceeds to cover anticipated costs.[8]

13 In July 2014, the receivers entered into a contract for the sale of the Management Lot. The sale settled on 19 December 2014.[9] On 9 February 2015, the receivers paid the balance of the proceeds of sale, being $1,882,463.61, into Court ("the Court Fund").[10]

14 The receivers asserted various claims on behalf of GHG against Austpac under the Hotel Management Agreement. On or about 14 December 2014, Austpac paid $670,000 to GHG in settlement of the claims. A sum of $551,755.07, representing the proceeds of settlement after deduction of fees and expenses, is being held by the liquidators ("the HMA Fund").[11]

15 In summary, the surplus funds from the realisation of GHG's assets comprise:

16 Each of the defendants claims a security interest in the surplus proceeds of the sale of the Land. The object of the Settlement Agreement, and the present proceeding, is to resolve those claims.

Claims of Mr Sun as trustee of the ABC Investment Trust and Corpsun as trustee of the Sun Family Trust

17 According to Mr Sun, the ABC Investment Trust made loans to GHG between 1 July 2011 and 29 November 2013 totalling $6,122,089.20, which funds were applied in maintaining, operating and improving the condition of the golf courses owned by GHG.[12] He further deposes that the Sun Family Trust made loans to GHG between 1 July 2011 and 20 December 2014 totalling $5,678,873.07, which was applied in paying down debt and also maintaining and improving the golf-courses.[13]

18 In support of their claims, Mr Sun and Corpsun rely on a Loan Agreement ("the Loan Agreement"),[14] a General Security Agreement ("the Security Agreement")[15] and an unregistered mortgage ("the Mortgage"),[16] each dated 29 December 2013 ("the Transaction").

19 On 27 January 2014, and after the date of the Loan Agreement, the Security Agreement and the Mortgage, Mr Sun gave instructions to a Mr David Honey to "move director loans: sun family trust and ABC investment trust to Equity investor".[17] The following day, Mr Honey requested Mr Sun to confirm that the Board (of GHG) had resolved that the Sun Family Trust and the ABC Investment Trust balances were to be converted to equity.[18] Mr Sun confirmed that the Board had "proved" (presumably, approved or resolved) that the Sun Family Trust and the ABC Investment Trust were no longer to be treated as creditors, but rather as equity investors.[19]

20 Mr Sun's response to this is that he cannot recall why he provided these instructions to Mr Honey, and asserts that he considers the amounts to in fact be loans to GHG.[20]

21 General journal entries in GHG's financial records record that, in accordance with Mr Sun's instructions, a loan from the ABC Investment Trust to GHG totalling $6,122,089.20 was converted to an equity investment as at 28 December 2013.[21] Similarly, general journal entries record that a loan from the Sun Family Trust in the sum of $5,678,873.07 was converted to an equity investment as at the same date.[22]

22 At the time of these transactions, Mr Sun was one of three directors of GHG[23] and one of two directors of Corpsun.[24]

23 On 23 February 2014, Mr Sun lodged a proof of debt in the liquidation of GHG on behalf of the ABC Investment Trust, claiming a debt of $5,488,135[25] and Corpsun lodged a proof of debt on behalf of the Sun Family Trust, claiming a debt of $3,878,873.[26]

24 Mr Sun lodged the Mortgage for registration on the title of the Management Lot on 15 September 2014. A dealing number was assigned to the Mortgage (AL359815G), but it was not registered on the title.[27]

25 For the reasons given in their report dated 8 October 2014, the liquidators contend that GHG was insolvent from no later than 30 June 2012.[28]

26 The first issue is whether the loans made by the ABC Investment Trust and the Sun Family Trust were in fact converted to equity, and if so, whether this had the effect of discharging the loans and related security.

27 If, on the other hand, some liability from GHG to the ABC Investment Trust and the Sun Family Trust remains or for some reason the conversion was ineffective and the loans are and remain secured by any or all of the Loan Agreement, the Security Agreement and the Mortgage, the second issue is whether those transactions are unreasonable director-related transactions within the meaning of s 588FDA of the Act, alternatively, they are uncommercial and insolvent transactions within the meaning of ss 588FB and 588FC respectively, and they are, therefore, voidable transactions within the meaning of s 588FE.

28 It is convenient to deal with the second issue first.

29 In a recent decision the New South Wales Court of Appeal dealt with unreasonable director-related transactions.[29] I gratefully adopt the comprehensive analysis and summary of authorities contained in the decision of Beazley P (with whom MacFarlan & Gleeson JJA agreed). The authorities and principles set out below are, as indicated, taken from that decision.

30 Section 588FF of the Act provides that, on the application of a company's liquidator, the Court may make orders, including an order that monies be paid to the company, if satisfied that a transaction of the company is voidable because of s 588FE. Section 588FE then provides that an "unreasonable director-related transaction of the company" may be a voidable transaction.[30]

31 The unreasonable director-related transaction provisions were inserted into the Corporations Act by the Corporations Amendment (Repayment of Directors' Bonuses) Act 2003 (Cth). The policy behind these provisions is evident from the Explanatory Memorandum to the amending Act:

The object of the Bill is to assist in the recovery of funds, assets and other property to companies in liquidation where payments or transfers of property to directors are unreasonable.

The amendments relate to transactions made to, on behalf of, or for the benefit of a director or close associate of a director. To fall within the scope of the amendments, the transaction must have been unreasonable, and entered into during the 4 years leading up to a company's liquidation, regardless of its solvency at the time the transaction occurred.[31]

32 Pursuant to s 588FDA(1) of the Act, a transaction of a company is an "unreasonable director-related transaction" of the company if:

(a) the transaction is (inter alia) a transfer or other disposition by the company of property of the company, or the incurring by the company of an obligation to make such disposition; and

(b) the disposition is, or is to be (inter alia), made to or for the benefit of a close associate of a director of the company; 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

33 Section 588FDA of the Act, is self-evidently an anti-avoidance provision aimed at preventing errant directors from stripping benefits out of companies to their own advantage. It is to be presumed, therefore, that parliament deployed the language of the section with the intention of achieving that objective.[32] The point of s 588FDA is to catch director-related transactions of kinds not otherwise liable to avoidance as unfair preferences, uncommercial transactions or unfair loans.[33]

34 In contrast to other avoidance provisions in Part 5.7B, the solvency of the company at the time of the transaction is irrelevant to the application of s 588FDA.[34]

35 Section 588FDA(1)(c) of the Act substantially adopts the language used to identify an "uncommercial transaction" under s 588FB. That provision is in the following terms:

(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

(a) the benefits (if any) to the company of entering into the transaction; and

(b) the detriment to the company of entering into the transaction; and

(c) the respective benefits to other parties to the transaction of entering into it; and

(d) any other relevant matter.

(2) A transaction may be an uncommercial transaction of a company 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."[35]

36 In relation to s 588FB, the authors of Ford, Austin & Ramsay's Principles of Corporations Law make the following observation:

When considering whether s 588FB extends to a particular transaction the court is directed by the Acts Interpretation Act 1901 (Cth) s 15AA to prefer a construction which will promote the purpose or object of the provisions about voidable transactions. The purpose or object is to prevent a depletion of the assets of a company which is being wound up by certain transactions entered into within a specified limited time before the winding up, usually transactions at an undervalue: Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535; 15 ACLC 1716 (Full Court, Fed C of A) applied in McDonald v Hanselmann [1998] NSWSC 171; (1998) 28 ACSR 49, discussed (1998) 16 C&SLJ 214." [36]

37 Paragraphs (a) and (b) of s 588FDA(1) were admitted and with respect properly so.

38 The securing of liabilities from GHG to the ABC Investment Trust and the Sun Family Trust under or pursuant to any of the Loan Agreement, the Security Agreement and the Mortgage was a transfer or disposition of property of the company within the meaning of s 588FDA. The creation of a security over a company's property is a transfer or disposition of property for the purposes of Part 5.7B of the Act.[37] Further, the evidence establishes that the disposition was for the benefit of close associates of Mr Sun.

39 The main argument centred around the concepts of 'benefits' and 'detriment' as referred to in s 588FDA(1)(c)(i) and (ii) of the Act.

40 As to the question of whether it may be expected that a reasonable person in GHG's circumstances would not have entered into the Loan Agreement, the Security Agreement and the Mortgage, the weight of authority, it was submitted by the plaintiffs, supports the proposition that the term "benefit" in s 588FDA contemplates indirect, as well as direct, benefit.[38] There can be no question, it was submitted, that the beneficiaries of the ABC Investment Trust and the Sun Family Trust derived an indirect benefit, if not a direct benefit, by virtue of the securing of GHG's liabilities to the trusts.

41 It was submitted by the first and second defendants, that GHG received the benefit of past loans from them. In the case of the loans from ABC, the funds were used to the benefit of GHG to maintain the operation and improve the condition of the golf courses owned by GHG.[39] In the case of the loans from Sun Family, the funds were used similarly and also to pay down the company's debt.[40]

42 Security over past loans may not, it was submitted, be sufficient to constitute a benefit to the company.[41] However, the circumstances in this case are, it was submitted by the first and second defendants, different because the evidence established that the Loan Agreement, the Security Agreement and the Mortgage not only covered amounts already provided but also future loans by them to GHG.[42] The Transaction documents themselves confirm this.

43 Under the Loan Agreement, the definition of "Moneys hereby secured" included the Principal Sum, being $9,955,885 loaned to GHG by the first and second defendants as well as any further amounts advanced by them.[43] The first and second defendants could, under the Loan Agreement, provide further advances from time to time and those amounts would be considered loans and secured by the "Collateral Security".[44] The Loan Agreement set out the interest on the loan and the date of repayment.[45] The "Collateral Security" referred to included any unregistered mortgages and registrable security interest, namely the Security Agreement and Mortgage.[46]

44 Under the Security Agreement, GHG granted a charge to the first and second defendants to secure the payment of the "Secured Money".[47] "Secured Money" means all money that may become actually or contingently liable to pay to the first and second defendants for any reason under or in connection with a "Transaction Document".[48] A Transaction Document included the Loan Agreement.[49] Accordingly, the Security Agreement, it was submitted, secured future advances by the ABC Investment Trust and Sun Family Trust.

45 The Mortgage secured the amount of moneys owing under the "Primary Security Loan Deed" which would include future advances.[50]

46 It is clear, it was submitted by the first and second defendants, that ABC and Sun Family regularly loaned amounts to GHG.[51] There is no reason to doubt, it was submitted, that that would continue to occur in the future, subject to the security being in place.

47 It was standard practice, it was submitted, for GHG to enter into security agreements over its property with unit holders who entered into loan agreements with GHG.[52] Accordingly, it was typical commercial practice for GHG to provide security to the first and second defendants in order to secure future advances from them.

48 The term "detriment" in paragraph 588FDA(1)(c)(ii) should, it was submitted by the plaintiffs, be construed consistently with the same term in s 588FB(1)(b). The provisions are contained in the same part of the Act, have similar objectives and are supported by the same underlying rationale. In the present case, the detriment suffered by GHG was, it was submitted, the charging of its property to secure past indebtedness without any corresponding benefit to the company. According to the general journal entries referred to in [21], the advances making up the loans by the ABC Investment Trust and the Sun Family Trust were all made before 28 December 2013.[53] Thus, any security effected under the 29 December 2013 agreements was it was submitted given in respect of past advances.

49 By contrast, the beneficiaries of the ABC Investment Trust and the Sun Family Trust enjoyed, it was submitted, the benefit of previously unsecured loans becoming secured. This factor is, it was submitted, relevant to the characterisation of the Loan Agreement, the Security Agreement and the Mortgage as unreasonable director-related transactions (see paragraph 588FDA(1)(c)(iii) of the Act).

50 Any detriment to GHG was, it was submitted by the first and second defendants, outweighed by the benefit of providing security for future loans. Although it entered into the Security Agreement and the Mortgage, as stated above, this was both in regard to previous loans but also to secure further loans from the first and second defendants. Accordingly, contrary to the submission of the plaintiffs that there was "no corresponding benefit to the company" of charging its property to secure past indebtedness, GHG benefited, it was submitted, from the promise of further advances on the grant of the security.

51 Balancing any detriment at providing the security with the benefit GHG gained of potential further advances means that there was not, it was submitted, a disproportionate benefit to the first and second defendants.[54]

52 Given the similarities between s 588FDA(1)(c) and s 588FB, authorities concerning "uncommercial transactions" are also of assistance in identifying circumstances that may constitute "unreasonable director-related transactions".[55] Some of the authorities are referred to below.

53 McDonald v Hanselmann[56] concerned transactions by which certain property was sold at undervalue. Young J held that:

In the instant case, I cannot see any sufficient reason why the company would sell the property to a relative of the controller for an undervalue of 21% rather than sell it by auction or in some other way. This conclusion is reinforced by the fact that there does not appear to have been any attempt by the company to explore any other avenue by which it might realize the property.

Furthermore, there is precious little evidence as to what was the process by which the parties to the transaction negotiated the price of $46,000. It would seem from what evidence I have that the amount was more likely worked out because it was what was required to keep the petitioning creditor, the Deputy Commissioner of Taxation, quiet, rather than what was the value of the property.

Accordingly, I cannot see any other circumstances which would make me come to a conclusion other than that the transaction was an uncommercial transaction within the meaning of s 588FB of the Law.[57]

54 In Gibbons v Deputy Commissioner of Taxation,[58] the liquidator claimed that certain payments made by the company, Deemah Marble& Granite Pty Ltd (Deemah), in reduction of unsecured debts owed to the Deputy Commissioner by two related companies were uncommercial. Nicholas J stated:

1. There was no evidence which proved that the payments were referrable to, or in consideration of, any service rendered to Deemah by either company, or that there was benefit to it in making them at times when it was insolvent in discharge of taxation claims for which it was not liable. [Deemah's accountant] was not asked to identify any relevant services or to describe any benefit to Deemah from the payments, and it may be inferred that his evidence would not have assisted either the Defendant or the Respondent on this issue. The invitation extended to the Court on behalf of the Defendant and the Respondent to speculate about the existence of a benefit is rejected.
2. No evidence established an explanation for the payments consistent with normal commercial practice. Put simply, Deemah incurred a detriment to the extent of $330,355.62 for the benefit of the companies with the result that its assets were depleted to the ultimate detriment of its unsecured creditors.
3. Looked at from Deemah's point of view, in my opinion there was no justification for the payments and a reasonable person in Deemah's circumstances would not have made them. Accordingly, I find that the payments were uncommercial transactions ..."

55 In Mulherin v Bank of Western Australia Ltd; McCann v Bank of Western Australia Ltd[59] it was alleged that transactions by which a company, UTC, obtained a bank guarantee facility were uncommercial. There was no evidence lead as to what happened to $2 million apparently lent to a director of UTC as part of these transactions, but a possibility was raised that it was used in the acquisition of land in Hong Kong by UTC.

56 Muir J, with whom McMurdo P agreed, held that the transactions were uncommercial. His Honour pointed to three factors that led to that conclusion. First, his Honour noted that, in the result, UTC derived little or no benefit from the transactions but did suffer detriment.[60] Secondly, his Honour noted that it was relevant that a director appeared to have been the beneficiary of the arrangement and that "on the face of things" he had procured such benefit in breach of his director's duties.[61] Lastly, his Honour noted that a reasonable person in the company's circumstances would have been aware of legal risks that might arise as a result of the director gaining a benefit from the transaction and the potential that the transaction would be found to be unlawful.[62] His Honour concluded that "[i]n short, there [was] little about the subject transaction which accord[ed] with normal commercial practice".[63]

57 Jerrard JA dissented, essentially on the basis that the liquidator had failed to discharge the onus of proving that the impugned transaction in that case was uncommercial.[64]

58 In Capital Finance Australia Ltd v Tolcher,[65] Gordon J summarized the relevant principles as follows:

In seeking to address the third of the requirements [of s 588FB][32] the principles to be applied may be summarised as follows:

(1) as the express words of s 588FB make clear, it is an objective standard to determine if a transaction is uncommercial: see also Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran and Tosich Construction Pty Ltd (in liq) v Tosich;

(2) four criteria are to be considered - the benefits enjoyed by the company (s 588FB(1)(a)), the detriment to the company (s 588FB(1)(b)), the respective benefits others received (s 588FB(1)(c)) and any other relevant matters (s 588FB(1)(d));

(3) The objective criteria are not considered in some vacuum but by reference to "the company's circumstances" which must include the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors: (Tosich Construction at 367); and

(4) for a transaction to be "uncommercial" it must result in "the recipient receiving a gift or obtaining a bargain of such magnitude that it [cannot] be explained by normal commercial practice" or where "the consideration ... lacks a 'commercial quality'": see Peter Pan Management Pty Ltd v Capital Finance Corp (Aust) Pty Ltd; Lewis v Cook and Demondrille Nominees Pty Ltd v Shirlaw and the explanatory memorandum, Corporate Law Reform Bill 1992, para [1044].[66]

59 Whilst transactions at an undervalue may be a focus of s 588FB,[67] transactions caught by s 588FB are not limited to such transactions. The statutory description of uncommercial transactions directs primary attention to a balancing of benefit and detriment. In Lewis (as liquidator of Doran Constructions Pty Ltd (in liq) & Anor v Doran & Ors,[68] Giles JA said:

Transactions at an undervalue were no doubt the primary target of the provisions, but the description of an uncommercial transaction in s 588FB(1) was not limited to such transactions. The description directed primary attention to a balancing of benefit and detriment, only in the broadest sense involving undervalue. A transaction could conceivably be one a reasonable person in the company's circumstances would not have entered into although for full value; or it could be one a reasonable person in the company's circumstances would have entered into although at an undervalue, for example a forced sale to overcome temporary illiquidity. For s 588FB(1), in addition to regard to benefits and detriments to the company, regard was to be had to the benefits to the other parties to the transaction. It appears to have been contemplated that a transaction detrimental to the company but beneficial to other parties to the transaction might not unreasonably be entered into. If, for example, there were no creditors and no prospect of creditors, it may be that the controller of the company could reasonably sacrifice its interests to the interests of other parties to the transaction.[69]

60 In Campbell Street Theatre Pty Ltd v Commercial Mortgage Trade Pty Ltd,[70] Black J said:

A transaction is an uncommercial transaction if it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to the benefit or detriment to the company in entering the transaction, the benefit to other parties to the transaction and any other relevant matter: Corporations Act s 588FB(1). In Demondrille Nominees Pty Ltd v Shirlaw, Foster, Lindgren and Madgwick JJ observed that ss 588FB and 588FE of the then Corporations Law sought to balance the interests of the unsecured creditors of a company being wound up and those who would otherwise be the beneficiaries of pre-winding up transactions entered into by the company and their purpose was:

To prevent a depletion of the assets of a company which is being wound up by, relevantly, "transactions at an under-value" entered into within a specified limited time prior to the commencement of the winding up: see explanatory memorandum, para 1014.

Their Honours also observed, by reference to the explanatory memorandum, that a transaction is uncommercial, for the purposes of s 588FB, where there is a bargain "of such magnitude that it could not be explained by normal commercial practice: Demondrille Nominees Pty Ltd v Shirlaw; see also McDonald v Hanselmann.

The purpose of the section includes preventing companies disposing of their assets or other resources through transactions that result in the recipient receiving a gift or obtaining a bargain of such commercial magnitude that it could not be explained by normal commercial practice: Skouloudis Group Pty Ltd (in liq) v Planet Enterprizes Pty Ltd. In Lewis (as liq of Doran Constructions Pty Ltd (in liq)) v Doran, where Giles JA observed that the description of an "uncommercial transaction" in s 588FB(1) is "directed primary attention to a balancing of benefit and detriment, only in the broadest sense involving undervalue. Whether a reasonable person in the company's circumstances would not have entered into the transaction is determined by an objective inquiry, by reference to the factors specified in s 588FB(1): Tosich Construction Pty Ltd (in liq) v Tosich; Old Kiama Wharf Company (in liq) v Betohuwisa Investments Pty Ltd. The possibility that this section may apply to an agreement under which excessive service fees were paid has been recognised in the academic literature: see A Keay, "Liquidators' Avoidance of Uncommercial Transactions".[71]

61 In considering whether a transaction is for the benefit, or to the detriment, of a company, the interests of the company's unsecured creditors are necessarily relevant. Thus, in Demondrille Nominees Pty Ltd v Shirlaw,[72] the Full Court held in respect of the foregoing by an insolvent company of $120,000 regarding the sale of one of its properties:

... Although there may have been a benefit to Valdivia or to Mr or Mrs Veraar or to both of them in having done so, there was no benefit to [the company] or, indirectly, to its unsecured creditors, in its having done so.[73]

62 Further, a transaction which has the effect of reducing the company's debts may nonetheless be an uncommercial transaction if it adversely affects the interests of other creditors. In Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd[74] Young JA wrote:

The primary judge held at [222] that Buzzle (as distinct from its creditors) suffered no detriment from the relevant transaction.

With respect this cannot be correct. It is true, as the primary judge stated, that in making the payments Buzzle reduced its debts to the resellers. However, that was not the whole picture. Buzzle had limited resources and to deprive itself of liquidity before it legally had to do so, where it had other pressing creditors and a need to expend moneys on its computer accounting system amounted to a detriment.

"Detriment" in the section is not limited to a detriment that can necessarily be measured in money terms. The word refers to commercial detriment.[75] [42]

63 In Re Ashington Bayswater Pty Ltd (in liq)[76] Black J held that the securing by a company of a previously unsecured debt was an uncommercial transaction having regard to the disproportionate benefit received by the company from the transaction.

I am conscious that, in Lewis (as liq of Doran Constructions Pty Ltd (in liq)) v Doran, Giles JA (with whom Hodgson and McColl JJA agreed) observed that the description of an "uncommercial transaction" in s 588FB(1) directed primary attention to a balancing of benefit and detriment and only in the broadest sense involved undervalue and (at [154]) that a Court should be slow to pronounce upon the commercial justification of particular executive decisions. That observation appears to be directed particularly to the context where no straightforward comparison of the value of an asset and the consideration received can be undertaken. On the other hand, in Capital Finance v Tolcher, Lindgren J quoted Professor Andrew Keay's observations as to the importance of undervalue in determining whether a transaction is an uncommercial transaction for the purposes of s 588FB in his article "Liquidators' Avoidance of Uncommercial Transactions" as follows:

"While not dealing exclusively with undervalue, undervalue is at the heart of the section [s 588FB], that is, if the company received less than what is reasonable from the transaction the liquidator may attack it. It is likely that in many cases Courts will be pre-occupied with comparing the value of what the company received in exchange for what it gave or vice a versa."

That passage was in turn cited by Nicholas J in Cussen v Sultan. In Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd, Young JA also recognised the relevance of the consideration received by the company in a transaction, albeit also observing that an assessment of the adequacy of consideration for the purposes of this section does did not require "exact equivalence" but only a fair equivalence between what is given and what is received.

The matters to which the Court is to have regard in determining whether a transaction is an uncommercial transaction, in the requisite sense that a reasonable person in the company's circumstances would not have entered into the transaction, are specified in sub-paragraphs 588FB(1)(a)-(d) as any benefits to the company of entering into the transaction; the detriment to the company of entering into the transaction; the respective benefits to other parties to the transaction of entering into it; and any other relevant matter. In the present case, Employ 96 received the benefit of obtaining professional services from DVT. On the other hand, it suffered the detriment of obtaining those services at double the usual rate that would be charged by DVT for the provision of those services. For the reasons set out below, in my view, the relevant circumstances were not of such a character that an agreement to pay double rates could be explained by normal commercial practice.[78]

...the Court will look at the totality of the business relationship between the parties, and to what the parties under their relationship intended to effect, and how their intention was effected, in part or in whole, by the impugned transaction.[80]

66 There are several cases dealing with unreasonable director-related transactions. The more important authorities are referred to below.

67 Re Lesvos Pty Ltd[81] demonstrates that payments made into the home loan account of a director may, in some circumstances, constitute an unreasonable director-related transaction. As Brereton J's judgment demonstrates, much will turn on the circumstances of the payment, and whether there was relevant benefit or detriment to the company. In relation to the facts there in question, Brereton J reached the following conclusion:

It seems to me that the plaintiffs have established that a reasonable person in the company's circumstances would not have entered into the $70,000 transaction. There was no benefit to the company in entering into the transaction. There was detriment to the extent of $70,000. There were benefits to the directors, and only to the directors, from entering into that transaction.[82]

68 Vasudevan v Becon Constructions (Australia) Pty Ltd[83] was concerned with the question whether there was an unreasonable director-related transaction where a company agreed to assume joint liability for obligations owed by a director to a third party, and to grant a mortgage securing performance of that liability. Nettle JA made the following observations:

[23] ... the natural and ordinary meaning of a requirement that something be for 'for the benefit of' a person is that it be 'for the advantage, profit or good' of the person. So, in this context, just as moneys paid by A to B to discharge C's indebtedness to B would ordinarily be conceived of as paid to B for the benefit of C, so too the incurrence by A of obligations to B in order pro tanto to relieve C of his obligations to B would naturally and ordinarily be conceived of as being for the benefit of C.

[24] ... the natural and ordinary meaning of 'for the benefit of' accords to the objective of the section of preventing directors stripping benefits out of companies to their own advantage. Conversely, 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."

69 McLure JA made the following useful observations in Weaver v Harburn[84] as to what is required to satisfy s 588FDA(1)(c):

[91] 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. 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.

[92] The matters in par (c)(i), (ii) and (iii) of s 588FDA(1) are mandatory relevant matters in the evaluative assessment of what is objectively unreasonable. The 'any other relevant matter' requirement in par (c)(iv) recognises that relevance depends on the facts and circumstances of the particular case.

[93] The only insolvency related elements (ie necessary conditions) of a voidable unreasonable director-related transaction are that the company is being wound up and the transaction was entered into within four years of the relation-back day. Otherwise, the relevance and/or weight to be given to the fact, or risk, of insolvency depends on the facts ... a transaction may, like an unfair loan, be so objectively unreasonable that the financial position of the company at the time of entry into the transaction is not relevant. In other circumstances, the transaction may be unreasonable solely or primarily because of the financial condition of the company at the time of the transaction."

70 Gleeson J recently conducted an 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).[85] The following principles discernible in her Honour's judgment are of relevance to the present case:

(a) Impropriety or breach of director's duty is not necessary to establish an unreasonable director-related transaction;[86]

(b) The inquiry under s 588FDA(1)(c) is concerned with the reasonableness of the company's conduct, objectively assessed;[87]

(c) The inquiry under s 588FDA(1)(c) is conducted by reference to the company's circumstances, encompassing all relevant matters[88];

(d) Normal commercial practice is a relevant but not determinative matter in conducting the s 588FDA(1)(c) inquiry;[89]

(e) A transaction of derivative benefit only can still be for the benefit of the company.[90]

71 In the recent case of Crowe-Maxwell v Frost[91] Beazley P said:

In all the circumstances, it could not be said that the directors received a gift or a bargain of such magnitude that the payments were unreasonable: see Fielding v Dushas, nor could it be said that the Company received no benefit or that it suffered a detriment by paying for personal expenditure of the directors who were otherwise not drawing a wage from the business: Mulherin v Bank of Western Australia. In short, I consider that his Honour did not err in finding at [67] that the payments were not unreasonable director-related transactions.[92]

72 In the case of Ziade[93] Gzell J held that the security of past loans constituted a detriment to a company and obvious benefit to the previously unsecured lenders. The mortgages were held to be voidable transactions under both s 588FB (uncommercial transaction) and s 588FDA(1) (unreasonable director related transaction).

73 Each case must of course be considered in accordance with its peculiar facts, circumstances and context. The cases cited indeed illustrate the diverse range of situations that arise.

74 Having regard to all relevant matters, I consider that the Transaction was, for the reasons set out below, unreasonable.

75 The magnitude of the benefit to the Lenders (fully securing their previously unsecured loans particularly in circumstances where GHG exhibited signs of financial stress or was insolvent) is not explicable by ordinary or normal commercial practice. GHG got nothing in return for encumbering its assets and creating a preferred or secured class of creditor. This was not only a detriment to GHG and its other creditors, but the suggested benefit was totally inadequate and disproportionate. There was no obligation on the Lenders to make further advances, but simply a term that such advances would be secured, if made.

76 Although exact equivalence is not required, the benefit to GHG is so disproportionate to its burden or detriment, so as to conclude that the only justification for the Transaction was to benefit the Lenders. The case has sufficient similarities with Ashington Bayswater and Ziade cited above. The result must be the same.

77 Finally, given the financial position of GHG as at 29 December 2013, it is unlikely that any significant further loans would have been made by the Lenders or others.

78 Having established that the transactions were unreasonable director-related transactions it is not strictly necessary to deal with whether they are also uncommercial transactions. However, the additional requirement of insolvency having been established, the plaintiffs are accordingly entitled to this additional relief.

79 The law relating to uncommercial transactions (within the meaning of s 588FB) was relevantly recently summarised by me in 640 Elizabeth Street Pty Ltd (in liq) v Maxcon Pty Ltd.[94] Those principles apply to the present case. In addition I refer to the relevant authorities cited above.

80 An uncommercial transaction is voidable under s 588FE only if it is also an insolvent transaction within the meaning of s 588FC. The liquidators have, it was submitted, met this requirement by demonstrating, via their insolvency report,[95] that GHG was insolvent as at 29 December 2013. I agree.

81 The transactions of 29 December 2013 were, it was submitted, "uncommercial" in the relevant sense for the same reasons that they were unreasonable director-related transactions; that is to say, they were uncommercial having regard to the benefit derived by the beneficiaries of the ABC Investment Trust and the Sun Family Trust and the absence of any corresponding benefit to the company. GHG and its creditors also suffered obvious detriment in the relevant sense. Again, for the reasons given as set out above, I agree.

82 For the reasons given, it is not necessary to deal with the first issue and I do not propose to do so.

83 I will hear from the parties as to the precise form of order and costs.

[1] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-1'.

[2] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, [7].

[3] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-4'.

[4] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-1'.

[5] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-7'.

[6] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-1'..

[7] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, [5], ex. 'HAM-1'.

[8] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, [38]- [39].; See receivers' letter to Madgwicks dated 24 November 2015, ex. 'HAM-38'.

[9] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, [42].

[10] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, [42], ; 'HAM-39'.

[11] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, [44]-[46].

[12] Affidavit of Guo Zhao Sun sworn 4 March 2016, [20].

[13] Affidavit of Guo Zhao Sun sworn 4 March 2016, [21].

[14] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-31'.

[15] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-32'.

[16] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-33'.

[17] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-34'..

[18] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-34'..

[20] Affidavit of Guo Zhao Sun sworn 4 March 2016 [22(c)] and [23(c)].

[21] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-35'.

[22] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-1'.

[23] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-1'..

[24] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-7'..

[25] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-29'.

[26] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-30'.

[27] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-33'..

[28] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, [37], ex. 'HAM-37'; See solvency report.

[29] Crowe-Maxwell v Frost [2016] NSWCA 46 ("Crowe-Maxwell").

[31] Crowe-Maxwell, [59]. Explanatory Memorandum, Corporations Amendment (Repayment of Directors' Bonuses) Act 2003 (Cth), [1.2] - [1.3].

[32] Vasudevan v Becon Constructions (Aust) Pty Ltd [2014] VSCA 14; (2014) 97 ACSR 627 at [19].

[36] _Crowe-_Maxwell, [65]. Ford, Austin & Ramsay's Principles of Corporations Law at [27.220] - citations omitted.

[37] Re Ashington Bayswater Pty Ltd (in liq) [2013] NSWSC 1008, [55].

[38] Vasudevan v Becon Constructions (Aust) Pty Ltd, [19].

[39] Affidavit of Guo Zhao Sun sworn 4 March 2016, [20].

[40] Affidavit of Guo Zhao Sun sworn 4 March 2016, [21].

[41] Ziade Investment Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; (2006) 57 ACSR 693, [15] ("Ziade").

[42] Affidavit of Guo Zhao Sun sworn 4 March 2016, [24].

[43] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-31'; cl 1.1(1) and Schedule Item 4. (CB 530).

[44] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-31', cl 4..

[45] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-31' Schedule Items 5 and 6.

[46] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-31', Schedule Item 8..

[47] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-32', cl 2.1.

[48] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-32', cl 1.1(k)(iii).

[49] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-32'. cl 1.1(oo)(ii).

[50] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-33', Special Condition 1.

[51] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-35', ex. 'HAM-36'.

[52] Affidavit of Guo Zhao Sun sworn 4 March 2016, [24].

[53] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-35',. ex.'HAM-36'.

[54] See 640 Elizabeth Street, [39].

[56] Crowe-Maxwell, [79]. McDonald v Hanselmann [1998] NSWSC 171; 144 FLR 463.

[58] Crowe-Maxwell, [78]. Gibbons v Deputy Commissioner of Taxation [2003] NSWSC 936.

[59] Crowe-Maxwell, [75]. Mulherin v Bank of Western Australia Ltd; McCann v Bank of Western Australia Ltd [2006] QCA 175.

[60] _Crowe-_Maxwell, [76]. Mulherin v Bank of Western Australia Ltd; McCann v Bank of Western Australia Ltd [2006] QCA 175, [106].

[64] _Crowe-_Maxwell, [77]. Mulherin v Bank of Western Australia Ltd; McCann v Bank of Western Australia Ltd [2006] QCA 175, [27].

[65] [2007] FCAFC 185; (2007) 245 ALR 528) (citations omitted).

[67] Ibid [2007] FCAFC 185; 164 FCR 83, 97; [2007] FCAFC 185; 245 ALR 528, 542 [73] (Lindgren J, dissenting); In the matter of Employ (No 96) Pty Limited (in liquidation) [2013] NSWSC 61 [62] ('Re Employ'). See also Andrew Keay, "Liquidators' Avoidance of Uncommercial Transactions" (1996) 70 Australian Law Journal 390, 397.

[68] [2005] NSWCA 243.

[70] [2012] NSWSC 669 (citations omitted).

[72] [1997] FCA 1220; (1997) 25 ACSR 535 .

[74] (2011) NSWLR 47, ('Buzzle Operations').

[76] [2013] NSWSC 1008, [55] (Ashington Bayswater).

[77] In Re Employ (No 96) Pty Ltd (in liq) [2013] NSWSC 61 (citations omitted).

[79] [2009] NSWSC 1114; (2009) 74 ACSR 496.

[81] Crowe-Maxwell, [73]. Re Lesvos Pty Ltd [2012] NSWSC 1288.

[82] Re Lesvos Pty Ltd [2012] NSWSC 1288, [31].

[83] Crowe-Maxwell, [72]. Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; 41 VR 445.

[84] Crowe-Maxwell, [71]. Weaver v Harburn [2014] WASCA 227; 103 ACSR 416.

[85] [2015] FCA 1119; 109 ACSR 145.

[90] Crowe-Maxwell [70]. Smith (in his capacity as liquidator of Action Paintball Games Pty Ltd) v Starke (No 2) [2015] FCA 1119; 109 ACSR 145, [110].

[91] [2016] NSWCA 46.

[92] Ibid [109] (Macfarlan and Gleeson JJA agreeing).

[93] [2006] NSWSC 457 .

[94] [2015] VSC 22, [32]-[46].

[95] Affidavit of Hamish Alan MacKinnon sworn 3 December 2015, ex. 'HAM-37'. The analysis is detailed and compelling and there is no evidence of any relevance or weight to the contrary.