640 Elizabeth Street Pty Ltd (in liq) & Ors v Maxcon
Pty Ltd  VSC 22 confirms that the granting of security by a
company to avoid a proceeding against a related company will not
necessarily constitute an "uncommercial
640 Elizabeth Street Pty Ltd (640) and Jabbour
640 Pty Ltd entered into a joint venture agreement to develop the
property at 640 Elizabeth Street, Melbourne, which 640 owned. Elan
Apartments Pty Ltd (Elan), a special purpose
vehicle, was set up and appointed as the development manager or
nominee and entered into a building contract with Maxcon Pty Ltd
(Maxcon) pursuant to which Maxcon agreed to
construct 54 residential apartments for $14,750,000.
Subsequent to practical completion of the development, Maxcon
demanded payment of retention moneys that had been spent by Elan,
in breach of the building contract with Maxcon. To give Maxcon
security that it would receive the amounts owing, 640 charged the
remainder of the units it owned with payment of the amounts owing
by Elan to Maxcon, and agreed to provide a legal mortgage in
registrable form upon request (Transaction).
Liquidators were subsequently appointed to 640 and made
application for the Transaction to be set aside as an uncommercial
transaction under Part 5.7B Division 2 of the Corporations Act
2001. The trial judge refused to set aside the Transaction,
and the liquidators appealed to the Supreme Court of Victoria.
The Supreme Court dismissed the liquidators' appeal. Justice
Sifris agreed with the trial judge that 640 had received a benefit
from the Transaction in the form of avoiding the costs associated
with litigation commenced by Maxcon, to which 640 was likely to be
a party as well as Elan. In any event, such costs of litigation
incurred by Elan would reduce the amount of profits able to be
shared by 640 and the other joint venturer, so this would also be
to 640's benefit.
Justice Sifris also rejected a submission by the liquidators to
the effect that 640 suffered detriment as a result of the
transaction. Given that Elan had a right of indemnity from the
joint venturers under the joint venture deed for expenses incurred
in respect of the development, if the Transaction had not been
entered into, the payment to Maxcon would have been made by Elan,
which would have resulted in a diminished profit return to 640 of
exactly the same amount as that sought by Maxcon under the security
granted to it by 640. Alternatively, Elan could have sought to be
indemnified by 640 in any event.
His Honour did not consider that the transaction conferred a
disproportionate benefit upon Maxcon. Had the transaction not taken
place, the facts demonstrated that it was highly likely that Maxcon
would still have been paid from the proceeds of sold apartments in
the development by Elan.
Finally, Justice Sifris considered the transaction to be
"perfectly explicable and ...readily and easily ...explained
by normal commercial practice".
This case makes it clear that a transaction will not necessarily
be uncommercial where a company assumes obligations without any
legal compulsion to do so (e.g. securing the indebtedness a third
party). This is particularly the case where the company's
position, including its position against its creditors, does not
materially change as a result of the transaction. It may be to the
benefit of a company to grant security over its assets where to not
do so would potentially expose the company, or a third party with
commercial ties to the company, to litigation. Where such a benefit
is not accompanied by a counterbalancing detriment to the company,
it is likely a court will find that such transactions are in the
nature of reasonable commercial prudence, and therefore not
amenable to being set aside as uncommercial within the meaning of
Part 5.7B Division 2 of the Corporations Act 2001.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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