The operators of a formwork business borrowed money through their company secured by a mortgage.
The ATO issued a winding up notice against the compnay and they quickly established another company to carry on their business.
They arranged for the mortgage payments to be made by the new company.
They subsequently then entered into a deed of company arrangement whereby they recovered the old company.
They then put the new company into liquidation (with a substantial debt to the ATO).
The liquidators of the second compnay alleged the mortgage payments were uncommercial transactions under s 588FB of the Corprations Act.
Section 588FB of the Corporations Act provides that 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.
The defence argued the totality of the dealings between the parties involved the provision of substantial monies by the first company to the new company and also included the provision of the plant and equipment necessary to enable the new company to conduct its trading activities.
The judge rejected the argument commenting:
The obvious and fundamental difficulty with that proposition, there is no basis to think that the amount of the Mortgage Payments was referrable to a fair charge for the supply of such equipment or comparable to the costs which would have been incurred by had it hired the equipment from a third party supplier.
It seems to me that the Mortgage Payments are such that a reasonable person would not have made them, at least without inquiry as to whether the benefits of obtaining equipment from that source, as distinct from hiring it from third parties, outweighed the substantial cost of those payments. There is no suggestion that any such inquiries were made. Those transactions were therefore “uncommercial transactions”.
The liquidators sought to be subrogated to the rights of the lender to recover the monies from the mortgagors. This was rejected on the grounds an order for an equitable charge over the securirty property was sufficient to avoid an unconscionable result whereas a remedy in subrogation would potentially affect the interests of the lender.