Cross-Company security and liquidator challenges: Full Federal Court restores certainty in CEG Direct Securities v Cooper [2025] FCAFC 47

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 vCooper as liquidator of Runtong Investment and Development Pty Ltd (in liq) [2025]FCAFC47, the Court reversed afirst 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 s588 FDA 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 considerings 588 FDA,
• 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 $2million 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 s588 FDA.

1. Not every benefit to arelated party is "unreasonable"

The Court emphasised that commercial context matters. Just because atransaction benefits adirector 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 s588FDAis not ablunt instrument for unwinding intra-group financing simply because things went wronglater.

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

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 acoordinated 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 aclear commercial benefit in the structure, even if this isindirect.
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 s588 FDA 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.

For further information please contact:

Ger­ald Carides, Partner
Phone: + 61 2 9777 8303
Email: gpc@swaab.com.au

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.