640 Elizabeth Street Pty Ltd (in liq) & Ors v Maxcon Pty Ltd [2015] 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 transaction”.

BACKGROUND

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.

DECISION

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”.

COMMENT

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