A recent Victorian Supreme Court decision considered whether, in the context of liquidation, securing the indebtedness of a third party to avoid potential litigation exposure is an uncommercial transaction. The decision indicates that such a transaction will not necessarily be uncommercial and consequently voidable where the company receives a benefit in avoiding a potential exposure and the company's net position remains the same.

In 640 Elizabeth Street Pty Ltd (in liq) & Ors v Maxcon Pty Ltd [2015] VSC 22 a special purpose vehicle created pursuant to a joint venture had entered into a building contract for residential apartments. Following practical completion, the builder demanded payment of retention monies which had been used by the special purpose vehicle in breach of the building contract. To provide security for the builder for the amounts owing, one of the joint venturers entered into a deed to which the builder was not a party, and pursuant to which the joint venturer charged all of its land and agreed to provide a registrable mortgage to the builder. The builder agreed not to issue proceedings or take any action to recover the balance of the contract price and executed but did not register the mortgage. The deed, the mortgage and the forbearance to sue were considered to be one transaction.

That joint venturer then went into liquidation and the liquidators sought to set aside the transaction. The liquidators claimed that the joint venturer had suffered detriment in incurring a liability to pay the joint venture's debt under the building contract and further encumbering its property, without any corresponding benefit, while the builder had benefited from obtaining security for the payment of the joint venture's debt without suffering any detriment. 

In confirming an earlier decision that the transaction was not an uncommercial one, Justice Sifris held:

  • The joint venturer received a benefit because it would also be affected by any claim against the special purpose vehicle. 
  • The joint venturer did not suffer any detriment because without the transaction, it would have been directly affected by any payment by Elan to Maxcon, and it effectively only replaced a liability to the special purpose vehicle with a liability to the builder.
  • There was no disproportionate benefit to the builder as it was highly likely that otherwise the builder would have been paid by the special purpose vehicle from sales proceeds.
  • The transaction was perfectly reasonable and commercial in the circumstances.

Justice Sifris emphasised that 'an otherwise commercial and entirely appropriate transaction … does not simply become uncommercial because creditors are not treated equally particularly in circumstances where, from the company's point of view, the transaction is reasonable and otherwise desirable and the indebtedness to creditors remains the same.'