It Never Raines But It Pours - Court of Appeal Confirms Raine Square Refinancing Not An Uncommercial Transaction

In the recent decision in Westgem Investments Pty Ltd v Commonwealth Bank of Australia [2022] WASCA 132 the WA Court of Appeal considered (amongst a myriad of other things) the question of whether the entry into certain refinancing documents by Westgem Investments Pty Ltd (Westgem) with its financiers in 2009 and 2010 constituted uncommercial transactions within the meaning of section 588FB of the Corporations Act 2001 (Cth) (Act).

The liquidator of Westgem (Liquidator) contended that the detriments caused by the entry into these refinancing documents were so severe that they outweighed any benefit to the company and that a reasonable person in Westgem’s circumstances would not have entered into these transactions.

This claim was dismissed at first instance and the Liquidator appealed this finding to the WA Court of Appeal.

Background

It should be noted at the outset that this was a very complex matter, with both the Liquidator and the respondents (who were the successors to the original financiers to Westgem) (Financiers) being represented by experienced Senior Counsel.  There were a total of 33 grounds of appeal and the WA Court of Appeal’s judgment runs to 346 pages.  This publication focusses only on the issue of whether the relevant transactions were uncommercial transactions within the meaning of section 588FB, and the description of the relevant factual matters has been heavily summarised out of necessity.  

Westgem was incorporated in 2004 as a special purpose joint venture by prominent property developers Mr Saraceni and Mr Pourzand for the purposes of the Raine Square commercial property development in Perth, Western Australia (Project).

Westgem engaged Salta Construction Pty Ltd (Salta) to carry out the construction works pursuant to a c$281 million lump sum building contract, and financed the Project via a $327m multi-option facility agreement (MOFA) with the Financiers which expired on 30 June 2010.  The MOFA was secured by a real property mortgage over the Raine Square site and a fixed and floating charge over all of the assets of Westgem.  Mr Saraceni and Mr Pourzand also provided support by way of share mortgages over their shares in Westgem as well as personal guarantees.

A key term of the MOFA was that there could be no cost overruns on the Project, and that if there was a cost overrun then Westgem would be required to make a payment to in effect contribute further equity to the Project (Cost Overrun Debt).  If a demand for a Cost Overrun Debt was not paid within five business days, this would constitute an event of default and the Financiers would become entitled to appoint receivers to the Project.

Unfortunately the construction of the Project encountered a number of issues and by July 2009 the relationship between Westgem and Salta had deteriorated to the point where Salta wanted to renegotiate its contract for a much higher price and Westgem was considering replacing Salta with another builder.

The following key events then occurred:

• the Financiers issued a demand for a first Cost Overrun Debt of $12.9m on 22 July 2009.  Westgem only partly paid this amount and the Financiers issued a default notice on 10 August 2009.  This debt was subsequently cleared on 1 September 2009 pursuant to a bridging facility;
• the Financiers issued a demand for a second Cost Overrun Debt of $17m on 18 September 2009.  This debt was disputed by Westgem;
• on 18 November 2009, Westgem and the Financiers entered into a letter agreement by which the Financiers agreed to extend the time for payment of the second Cost Overrun Debt and Westgem agreed to procure additional security for the Financiers;
• on 24 December 2009, Westgem and the Financiers agreed to a payment plan for the second Cost Overrun Debt;
• on 8 February 2010 Salta suspended work on the Project and on 25 February 2010 Salta terminated its construction contract with Westgem;
• on 5 March 2010, the Financiers issued a notice of default to Westgem in respect of the suspension and termination of the Salta contract, as well as with respect to the non-payment of the balance of $10m of the second Cost Overrun Debt;
• Westgem and the Financiers entered into negotiations to refinance the Project, and as part of those negotiations agreed to extend the expiry date of the MOFA to 31 August 2010 and then to 30 September 2010; and
• Westgem and the Financiers ultimately entered into an amended and restated MOFA (Restated MOFA) on or around 22 September 2010 pursuant to which the facility limit was increased to $446.6m, the expiry date was extended to 30 September 2011, the facility was to be repaid in four tranches with the first $23m tranche due on 30 September 2010, and further securities and guarantees were provided by Mr Saraceni and Mr Pourzand.

Westgem did not pay the first repayment tranche on 30 September 2010 (8 days after entry into the Restated MOFA).  This was then rolled into the next tranche, meaning that Westgem had to repay $50m by 31 December 2010.  This payment was also not made.

On 11 January 2011, the Financiers appointed receivers and managers to the property of Westgem and Westgem was placed into voluntary administration.

The Liquidator’s contentions

At the risk of not doing justice to the detailed contentions of the Liquidator, it appears that the Liquidator’s case on why the various agreements entered into by Westgem with the Financiers between November 2009 and October 2010 including the Restated MOFA were uncommercial transactions was as follows:

• the position in relation to the second Cost Overrun Debt was not clear and this debt was disputed by Westgem.  However, in order to secure the time to negotiate the ultimate refinancing with the Financiers, Westgem conceded that it was liable to pay the second Cost Overrun Debt;
• the Restated MOFA involved the provision of an additional $72m in security, as well as significant fees including a $1.5m extension fee and significantly increased interest;
• at the time that Westgem entered into the Restated MOFA it knew that it wasn’t going to be able to pay the first repayment tranche due 8 days later on 30 September 2010, and therefore also knew that it would almost immediately go into default and the Financiers would not be obliged to allow any further draw downs on the facility;
• the effect of the above was to deliver a windfall to the Financiers of the concession of the second Cost Overrun Debt, the significant additional fees and interest under the Restated MOFA, and the additional $72m in securities, in circumstances where Westgem would not receive any benefit as the Financiers would not be obliged to continue funding the Project (due to the immediate default); and
• given these matters, no reasonable person in Westgem’s circumstances would have entered into these transactions.

Uncommercial transactions under section 588FB

Section 588FB(1) of the Act provides that:

A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

(a)  the benefits (if any) to the company of entering into the transaction; and
(b)  the detriment to the company of entering into the transaction; and
(c)  the respective benefits to other parties to the transaction of entering into it; and
(d)  any other relevant matter.

Where a transaction is found to be an uncommercial transaction it may be voidable where it is also an insolvent transaction entered into during the relation-back period.

As noted by the WA Court of Appeal, the key principles in determining whether a transaction is an uncommercial transaction were helpfully summarised by the Victorian Court of Appeal in the case of Queensland Phosphate Pty Ltd v Korda (No 2)¹ as follows:

• an objective standard is to be applied;
• the four criteria in section 588FB(1) are to be considered by reference to the company’s circumstances including the knowledge of its directors at the time (but without the influence of hindsight);
• for a transaction to be uncommercial it must result in the recipient receiving a gift or bargain that cannot be explained by normal commercial practice, or where the consideration lacks a commercial quality;
• the section should be interpreted and applied having regard to its purpose to prevent a depletion of a company’s assets at an undervalue;
• it must positively appear that a reasonable person in the company’s circumstances would not have entered into the transaction;
• detriment can mean more than just monetary detriment; and
• the Court will have regard to the totality of the business relationship between the parties, including matters requiring greater scrutiny such as personal relationships between individuals involved in the transaction.

The Appeal

Two separate judgments were delivered by Murphy JA (with whom Fraser AJA agreed on this issue) and Mitchell JA.  Ultimately Murphy JA and Mitchell JA both agreed that the transactions were not uncommercial transactions and that the Liquidator's appeal on this point should be dismissed.

Murphy JA conducted a detailed analysis of the evidence and the arguments of the Liquidator before making the following findings:

• the alternative to the Restated MOFA was that Westgem would have become immediately liable to repay the whole of the amounts owing under the MOFA;
• the Restated MOFA provided the chance that the Project could continue to be developed;
• while it was true that there was a risk of immediate termination (due to Westgem failing to make the first repayment due 6 days after execution of the Restated MOFA), this risk had to be assessed in the context of (amongst other things) the Financiers’ ongoing support despite events of default since September 2009, the entry by the Financiers into related agreements which assumed the completion of the Project, and the fact that the Financiers were on notice that the first repayment might not be paid on time and that their conduct supported an inference that the Financiers would give genuine consideration to a waiver of any failure to make that first repayment;
• while it was also true that the Restated MOFA carried significant additional fees and expenses, it had not been established that they were of a kind or degree which was uncommercial; and
• as to the additional $72m in security, this was not Westgem’s property (it belonged to Mr Saraceni and Mr Pourzand) and it was not clear that the provision of this security to the Financiers prejudiced Westgem’s creditors (for example by depriving them of the potential for future access to those assets).

In the circumstances, Murphy JA was not satisfied that the transactions were uncommercial transactions within the meaning of section 588FB of the Act.

Mitchell JA agreed with these reasons, and also observed that when considered overall, a reasonable person in Westgem’s circumstances might well have regarded “a bird in the hand as being worth two in the bush” and might have considered it better to take the terms which were on the table and hope to negotiate a deferral of the first $23m payment obligation.  Mitchell JA noted that given the alternative of a certain default, there was no significant disadvantage in Westgem signing the Restated MOFA and seeking a deferral of payment, and if such an extension was refused then Westgem would be in no substantively worse position than if the Restated MOFA had not been signed and the Financiers appointed receivers in September 2010.

Lavan comments

This decision provides both a useful confirmation of the principles to be applied in assessing whether a transaction is an uncommercial transaction under section 588FB of the Act, as well as a helpful example of how this type of analysis will be carried out by the Courts.

In particular, it shows that the Courts will take a practical and commercial approach in assessing whether a reasonable person in a company’s circumstances would have entered into a transaction having regard to the commercial benefits and detriments of the transaction.

It is also worth noting that the litigation funder involved in this matter released a statement on 4 November 2022 advising that an assessment was being undertaken as to whether leave should be sought to appeal to the High Court.

If you have any questions about this case or about uncommercial transactions, the experienced Lavan team is ready to help.