Insolvency Update, September 2006

2006 may be remembered by the insolvency profession for the collapse of the Westpoint Group, which engaged in property development across Australia with use of investors’ funds in mezzanine style finance arrangements.

The Westpoint property development model worked by the incorporation of project development companies, and special purpose "mezzanine" companies which raised funds from investors. The mezzanine companies would lend investors’ funds to the development company’s corporate trustee, in exchange for receiving a second ranking security. The first ranking security was usually given to an external bank. The mezzanine companies received a guarantee from other designated companies in the Westpoint group to give investors further reassurance, although these guarantees ultimately proved worthless.