Non-corporate receivership – when is it appropriate and how does it work? – 5 September 2001

In brief: Scott Couper looks at non-corporate receivership and examines how such receivers are appointed.

• Introduction

• What is the purpose of non-corporate receivership?

• Types of appointment

• Appointment under powers contained in a security document

• Appointment under conveyancing legislation

• Appointment of a receiver by the court

• Appointment of a receiver – partnership

• Receivers' power of sale – general law duties

• A receiver's duty when selling property of an individual or a partnership – Property Law Act 1974 (Qld)

• Summary
  

Introduction

A receiver is a person appointed to collect or protect property for the benefit either of the appointor or of the persons ultimately held to be entitled to that property¹. If, in addition, the receiver is given power to manage the property in respect of which the appointment is made, he or she is generally described as a receiver and manager².

Receivership as a form of insolvency administration is more readily associated with corporations. The most common instance of the appointment of a receiver is that in respect of the whole or part of the property of a corporation, especially where the appointment is made out of court pursuant to an express power in an instrument such as a mortgage or debenture. However, receivership is applicable to both corporate and non-corporate businesses and assets.

This paper shall focus on matters unique to non-corporate receivership, particularly in relation to the various methods of appointment of a receiver to such assets. Non-corporate receivership is the appointment of a receiver where the party to whose property the receiver is appointed is not a corporation, for example an individual or a partnership.

What is the purpose of non-corporate receivership?

The structure and purpose of non-corporate receivership is not contained in statute like that of corporate receivership, although a limited number of statutes grant the power to appoint a receiver over non-corporate assets.

Commonly, a receiver is appointed over a non-corporate entity to collect or make safe income or assets or both, for the purpose of realisation or at least protection of those assets for the benefit of a party or to protect a party's contractual rights. A common example of this is the appointment of a receiver over the assets of a partnership in respect of a partnership dispute.

The nature of any receivership will be dependant upon its particular facts. However the purposes of a non-corporate receivership may include:

• winding up the affairs of a partnership or sole proprietor's business;
• the protection of property pending the determination of a dispute as to the distribution of property to particular persons;
• less commonly, the power to continue a partnership or sole proprietor business and the examination of the trading performance and financial position of that business.

The rights available to a party who seeks an appointment of a receiver will dictate how a receivership is initiated. A non-corporate receivership may be instigated by the documentary appointment of a receiver pursuant to powers contained in an earlier contract between the debtor and a supplier or lender. Alternatively a receivership may result from a court appointment during the course of litigation resulting from a dispute between parties to a partnership.

The appointment pursuant to powers contained in an instrument such as a mortgage will be automatic unless there are grounds for challenging the validity of the appointment. In respect of a court appointment, the court will always have a discretion whether or not to appoint a receiver.

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Types of appointment

There are three distinct methods of appointments available in respect of non-corporate entities. Firstly, private appointments pursuant to an express power in an instrument such as a mortgage. Secondly, a private appointment pursuant to statute such as the Property Law Act 1974 (Qld) or the Conveyancing Act 1919 (NSW). Thirdly, the appointment of a receiver by the court whether pursuant to the court's inherent power or pursuant to an application for the appointment of a receiver under a specific statutory provision.

Private appointments are made pursuant to powers contained in an express agreement between the parties interested in the property over which an appointment is sought. For example an appointment pursuant to a mortgage deed or a bill of sale.

Certain statutes imply the power to appoint a receiver into a mortgage deed. For example, s109 of the Conveyancing Act 1919 (NSW) and s83 the Property Law Act 1974-1978 (Qld) permit the appointment of a receiver privately under a mortgage deed which does not expressly provide for the appointment of a receiver. This legislation implies the power to appoint a receiver into the mortgage deed where the deed is silent as to the power to appoint a receiver.

Court appointments of receivers are made pursuant to the court's inherent jurisdiction to appoint a receiver and are expressly allowed under the relevant Supreme Court statute. In Queensland, the relevant provisions are contained in the Uniform Civil Procedure Rules 1999 (Qld), Chapter 8 Part 3, ss266 to 274 and in New South Wales, the relevant provision is s67 of the Supreme Court Act 1970 (NSW).

The Court appointment of a receiver may also arise from other statutory powers (see s65A Legal Practitioners Act (NSW) and, in respect of corporations, the Corporations Act 2001 ss486A, 1114 and 1323).

Appointment under powers contained in a security document

Where the security document provides for the appointment of a receiver, that appointment will be in relation to a particular asset. For example most mortgages will contain a clause which gives the mortgagee the power to appoint a receiver of the income and rents of the mortgaged property if there is a default by the mortgagor. The procedure for the appointment of a receiver will be contained in the security document. Apart from certain conveyancing statutes discussed below, there is no method laid down in statute for the appointment of a receiver to a non-corporate entity pursuant to the power of appointment contained in a security document.

If the relevant security document allows for the appointment of a receiver, the bankruptcy of the debtor or the fact that the debtor is subject to a Part X arrangement under the Bankruptcy Act 1966 (Cth) is no legal bar to the appointment of a receiver.

Conversely, the appointment of a privately appointed receiver does not prevent creditors or the debtor him or herself from seeking to initiate bankruptcy, controlling trusteeship or a Part X arrangement under the Bankruptcy Act 1966 (Cth).

It should also be noted however that in the case of a mortgage by a natural person, any provision enabling the mortgagee to appoint a receiver if the mortgagor becomes bankrupt, commits an act of bankruptcy or executes a deed of assignment or a deed of arrangement under the Bankruptcy Act 1966 (Cth) is void pursuant to section 302 of that Act.

A receiver's appointment under the security document continues until he or she is discharged, resigns or is replaced or is removed by the appointor, or by the court, or the receivership is terminated because of invalidity or the appointment of another receiver by a secured creditor with prior rights.

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Appointment under conveyancing legislation

If the mortgage document does not contain an express power for the appointment of a receiver, the mortgagee under an instrument of mortgage may rely upon the implied power to appoint a receiver pursuant to relevant conveyancing statutes. In New South Wales, such power is contained in s109 of the Conveyancing Act 1919 (NSW) and in Queensland, the power is contained in s83 Property Law Act 1974 (Qld). This legislation imputes the power to appoint a receiver of mortgaged property as if that power were conferred by the mortgage document itself. Section 83(4) of the Queensland Act limits the application of that section to instruments of mortgage of land. The New South Wales Act does not appear to be so limited. The relevant legislation also contains the procedure for the appointment of a receiver, yet this procedure may be varied or extended by the mortgage document itself.

However, the appointment of a receiver under this legislation has several shortcomings. For example the receiver can only be appointed after the statutory power of sale becomes exercisable. As a result a formal demand will be required. In addition the legislation envisages a very limited type of receivership. That is, the power is limited to the appointment of a receiver of the income of the mortgaged property or collection of rent. The legislation does not include a power to appoint a receiver and manager.

Because of these shortcomings, appointments under this legislation are not common and have been replaced by the more common use of specific contractual powers contained in the mortgage documents allowing for the appointment of a receiver.

Generally the main reason for the appointment of a receiver under the relevant conveyancing legislation is to enable the income from the mortgaged property to be collected and applied in reduction of the debt owed to the mortgagee. This will be the primary function of the receiver so appointed – to get in the income and apply it towards the reduction of the debt.

Procedure for appointment under conveyancing legislation

Before the appointment of a receiver can take place under s83(1)(c) of the Property Law Act 1974 (Qld) the mortgagor must be in default, the mortgagee must have served notice of default under s84 of the Act and the default must have continued for 30 days. Similar preconditions for the appointment of a receiver, and the regulations of the exercise of the power of sale, are contained in s115A of the Conveyancing Act 1919 (NSW).

In addition to the requirements set out in the relevant conveyancing statutes, where the mortgage is governed by the Consumer Credit Code the requirements imposed by s80 of the Code must be satisfied³. These requirements are in addition to any other notice requirements for the enforcement of real property mortgages⁴.

A provision in a mortgage providing for the appointment of a receiver usually provides that the receiver is the agent of the mortgagor. Where a receiver is appointed under the statutory power in the conveyancing legislation, the receiver is deemed to be the agent of the mortgagor, and the mortgagor shall be solely responsible for the receiver's acts or defaults unless the instrument of mortgage otherwise provides⁵. Consequently, the power to appoint a receiver under this legislation has the great advantage that the mortgagee will generally not be liable for the acts or default or negligence of the receiver so appointed. The receiver does, however, owe a duty to the mortgagor to act in good faith and not to recklessly disregard the interest of the mortgagor⁶. The nature of this duty is discussed below.

Powers of receiver appointed under conveyancing legislation

Section 92 of the Property Law Act 1974 (Qld) and s115 of the Conveyancing Act 1919 (NSW) set out the powers, remuneration and duties of a receiver appointed under those Acts.

The relevant powers and duties of a receiver so appointed are as follows:

• the receiver shall have the power to demand and recover all income of which he or she is appointed receiver, to give effectual receipt for such and to exercise any powers which may have been delegated to the receiver by the mortgagee under the relevant Act⁷;
• a person paying money to the receiver shall not be concerned to inquire as to the receiver's authority to act⁸;
• a receiver may be removed and a new receiver appointed by the mortgagee, such appointment to be in writing⁹;
• the receiver's remuneration is set at a rate of not exceeding 5% on the gross amount of all money received, as is specified in the receiver's appointment, and if no rate is specified, then at the rate of 5% on that gross amount, or such other rate as the Court thinks fit on an application by the receiver¹⁰;
• the receiver shall if directed in writing by the mortgagee insure out of the money received by the receiver any buildings, effects and property subject to the mortgage being of an insurable nature¹¹;
• money received by the receiver is to be applied in the following manner:
• in discharge of rents, rates, taxes and other outgoings relating to the mortgaged property;
• in payment of annual sums or other payments (including principal and interest) which have priority to the mortgagee which appointed the receiver;
• in payment of the receiver's commission and insurance premiums and the cost of any necessary and proper repairs to the property;
• in payment of any interest due on the mortgage debt;
• in discharge of the principal if so directed on the mortgage debt.

Any surplus is to be paid to the person entitled to receive the income in the absence of an appointment of a receiver or the person entitled to the mortgaged property¹².

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Appointment of a receiver by the court

The High Court of Australia, the Federal Court of Australia and the State and Territory Supreme Courts all have a statutory jurisdiction to appoint a receiver in any case in which it appears to the court to be just and convenient to do so. Pursuant to s67 of the Supreme Court Act 1970 (NSW):

The Court may, at any stage of proceedings, on terms, appoint a receiver by interlocutory order in any case in which it appears to the Court to be just and convenient so to do.

Chapter 8 part 3 of the Uniform Civil Procedure Rules 1999 (Qld) (UCPR) contain the relevant provisions for the appointment of a receiver by the Court in Queensland. This part of the UCPR does not, however, apply to the Magistrates Courts or situations controlled or regulated by the Corporations Law¹³.

Rule 267(1) provides a person must not be appointed as a receiver unless the person's written consent to act as receiver is filed in the court. Pursuant to Rule 268(1), unless the court otherwise orders the appointment of a receiver by the court does not start until the receiver files security acceptable to the court for the performance of the receiver's duties. However, the requirement to file security may be varied or vacated at any time.

Rule 267(2) provides that the court may set aside the appointment of a receiver at any time for an appropriate reason and make the orders it considers appropriate about the receivership and the receiver's remuneration. Pursuant to Rule 269 a receiver is allowed the remuneration, if any, which the court sets.

The nature of a court appointed receiver's authority and the extent of his or her powers are derived from the court order appointing him or her. In addition, a court appointed receiver is an officer of the court responsible to discharge certain duties prescribed by the court order appointing him or her. The extent to which those powers may involve the carrying on of the business and the sale of assets, and the assets which shall be under the receiver's control will depend upon the particular facts of the receivership and the terms of the order made by the court¹⁴.

The powers of a receiver appointed by the court are set out in Rule 272. This provides that the court may appoint a receiver and manager on conditions specified in the order and may authorise a receiver to do anything the party might do if without legal incapacity.

Rule 272(3) contains a catch all provision whereby the court may, on application by an interested person, give directions it considers appropriate.

In contrast to a corporate receiver, a receiver appointed to the assets of a non-corporate entity is not required by legislation to have any specific qualifications. In practice however a court will often appoint a person registered as an official liquidator. The applicants seeking the appointment of a receiver may nominate a person to act as receiver. This right has long been recognised by the court¹⁵.

Grounds for appointment

There are numerous grounds for the appointment of a receiver by the court in respect of the assets of a non-corporate entity. Some of the more common grounds are noted below.

Enforcement of security

The court will appoint a receiver on the application of a secured creditor whose security has become enforceable whether or not the statutory power contained in the relevant property statute is available and notwithstanding that there is express provision for the appointment of a receiver made in the security document¹⁶. However, as a matter of practice it is likely the court would be reluctant to appoint a receiver if the relevant security document allows for the appointment of a receiver privately.

Protection of property

The court will appoint a receiver under its statutory power for the protection or preservation of property for the benefit of persons who have an interest in such property. A proprietary interest is not required, but the applicant must show that he or she has some legal or equitable right which will be protected or enforced by the making of the order sought and that no other available remedy is adequate for that purpose¹⁷. A receiver may be appointed, in respect of the protection of property, for the following reasons:

1. to protect a person's right to be paid out of a particular fund¹⁸;
2. to protect property the subject of a contract for sale pending the hearing of specific performance or recision proceedings¹⁹;
3. to protect a right of action²⁰;
4. to protect an unpaid vendor's lien or a purchaser's lien²¹;
5. to protect a deceased's estate where no legal personal representative has been appointed²²;
6. to protect the partnership assets at the suit of the representative of a deceased partner²³.

Although the court has jurisdiction to appoint a receiver of the assets of a financially embarrassed debtor at the suit of a creditor, that jurisdiction will not be exercised unless the debtor consents or does not oppose the appointment or unless there is evidence of actual or threatened dissipation of assets²⁴.

Disputed title

A receiver may be appointed where the title to land or other property is in dispute but only in special circumstances where the defendant is in occupation²⁵. Similarly, a landlord bringing proceedings for possession may obtain the appointment of a receiver of rents and profits where the appointment is necessary to preserve the property²⁶.

Executors or trustees

A receiver may be appointed on the application of a beneficiary or creditor where the executor or trustee is bankrupt or insolvent²⁷. In general, a beneficiary may obtain the appointment of a receiver where the appointment is required for the safety of the trust property or the due administration of the estate or trust. An appointment will be made if the executor or trustee is guilty of gross misconduct, waste or neglect, or other breaches of trust or is out of the jurisdiction permanently. However, if there is a co-trustee able and willing to act, an injunction restraining the offending trustee from dealing with the trust property may be sufficient without the appointment of a receiver²⁸. A receiver will not be appointed in the case of a trustee refusing to act unless all co-trustees and beneficiaries consent to that appointment²⁹.

Partners

Receivers are readily appointed following dissolution of a partnership or prior to dissolution of a partnership if there has been such breakdown of good faith between the partners as to make dissolution inevitable³⁰. The appointment of a receiver of partnership assets is discussed more fully below.

Equitable execution

The court will appoint a receiver at the suit of a judgment creditor and by way of enforcement of the judgment, but only where the debt cannot be recovered by legal execution³¹.

Special statutory provisions

There are numerous statutory provisions which allow for the appointment of a receiver. For example, as noted above pursuant to the Legal Practitioners Act (NSW) and pursuant to the Corporations Act 2001.

Reasons for refusing appointment

As a general rule, a receiver may be appointed even though all of the necessary parties are not before the court, if the appointment of a receiver cannot prejudice those non-present parties' interests³².

The objection of some, or even most, of the persons interested in the property subject to the application is no obstacle to an appointment being made in respect of that property⁰. However, where an appointment in such circumstances is made, normally the order will be framed so as not to prejudice the rights of persons other than the applicant who are interested in the property and, if a court cannot do so, the appointment will be refused³⁴. Conversely, the court may be more willing to appoint a receiver if the defendant consents to, or does not oppose, the appointment.

An appointment of a receiver will not be made if it is sought for an improper purpose as, for example, to obtain for a partner powers beyond those in the partnership agreement³⁵. A receiver will not be appointed where the remedy will be ineffective or if the relevant property is of no value³⁶.

It should also be noted that it is possible to appoint a bankruptcy trustee to take interim control of a debtor's property under s50 of the Bankruptcy Act 1966 (Cth) between the presentation of a bankruptcy petition and the making of a bankruptcy order. Such appointments have become known as the appointment of an interim receiver.

Reporting requirements

Pursuant to the Supreme Court Act 1970 (NSW) there are no formal reporting requirements imposed on a receiver of non-corporate property appointed by a court pursuant to that act. However in practice a receiver is likely to report to interested parties and the court appointing him or her.

In Queensland, the UCPR require a court appointed receiver to submit accounts. In this respect Rule 270 provides as follows:

1. Unless the court otherwise orders, a receiver must submit accounts under this rule.
2. A receiver must submit accounts to the parties and at intervals or on the date the court directs.
3. A party to whom a receiver is required to submit accounts may, on giving reasonable written notice to the receiver, inspect, either personally or by an agent, the documents and things on which the accounts are based.
4. A party who objects to the accounts may serve written notice on the receiver:

1. specifying the items to which objection is taken; and
2. requiring the receiver to file the receiver's accounts with the court within a stated period of not less than 14 days after the notice is served.

1. The party must file a copy of the notice served with the court.
2. The court may examine the items to which objection is taken.
3. The court must by order declare the result of an examination under sub-rule (6) and may make an order for the costs and expenses of a party or the receiver.
4. In the event that a receiver contravenes rule 270 of the UCPR the court may impose the following sanctions pursuant to rule 271(1) of the UCPR:

1. set aside the receiver's appointment;
2. appoint another receiver;
3. order the receiver to pay the costs of an application under this rule;
4. deprive the receiver of remuneration and order the repayment of remuneration already paid to the receiver; or
5. if the receiver did not pay money into court as required by the court – charge the receiver with interest at the rate currently payable on order debts in the court for a period the court considers appropriate.

Rule 271(2) provides that this rule does not limit the powers of the court about the enforcement of orders or the power of the court to punish for contempt.

Pursuant to Rule 273 if a receiver dies the court may, but only on application of a party, make orders for the filing and passing of accounts by the deceased receiver's representative and the payment into court of an amount shown to be owing.

It should be noted that the appointment of a court receiver does not introduce any statutory recovery possibilities such as the recovery of voidable preferences. In order to pursue such recovery in relation to assets of an individual or partnership, a trustee must be appointed under the Bankruptcy Act 1966(Cth).

The order in which monies coming into the hands of a receiver are to be applied will depend upon:

• the nature of a charge (if any) and the mode of appointment;
• whether there are specific directions by the court;
• commercial practice; and
• need to pay a debt to obtain financial advantage during the course of the receivership.

There is no formal or statutory requirement on the receiver to convene a meeting of creditors. However, a meeting of creditors or at least the major creditors may be advantageous in order to assist in the continuation of the receivership.

Court appointed receiver – legislation

A recent example of an appointment under legislation is the case of Reuters Australia Pty Ltd v The Credit Connection Pty Ltd³⁷. This decision involved an application for the appointment of a receiver pursuant to s39B of the Commercial Agents and Private Enquiry Agents Act 1963 (NSW) (CAPIAA).

Briefly, the facts in this case were that Credit Connection was a licensed commercial agent. There was an agreement dated 16 April 1999 between Credit Connection and a former employee of Reuters Australia Pty Ltd (Reuters) for Credit Connection to collect debts on behalf of Reuters. These monies were held on trust for Reuters, and Credit Connection was authorised to apply such monies in trust for payment of its commission and disbursements. Reuters submitted that it was not aware of any agreement until shortly after the employee resigned on 24 August 1999. Reuters subsequently withdrew any instructions to collect its money on 1 September 1999. Withdrawals continued after 1 September 1999 until 7 February 2000. Reuters claimed for the amount of the debt collected ($500,000) whilst Credit Connection claimed set-off for payment of commission. The commission was 10% of all debts listed ($500,000). Reuters' response to this was that commission was not due because the agreement stated that commission was only payable 7 days after the date of account when rendered at a proper time, but monies had been extracted from the trust account held for Reuters before the account was rendered.

The court held that Reuters was a creditor of Credit Connection because courts had tended to give a wide meaning to the term "creditor" and the purpose of the CAPIAA is to protect those who deal with a licensee by way of financial transaction. It was found that even if there was a set-off, that did not prevent Reuters from being a creditor.

Pursuant to the definitions in s39A of the CAPIAA, only dishonest and criminal acts are to be included in the definition of defalcation for the purposes of considering whether to appoint a receiver under s39B. It was held that on the balance of probabilities, there may have been defalcation because Credit Connection had withdrawn particular sums of money before the account was rendered, there was no actual authority to make withdrawals, and Credit Connection made assurances that the money was safe in the trust account when it was not safe.

Credit Connection argued that Reuters' claims might damage its reputation and business opportunities. Accordingly the court considered the issue of whether an undertaking as to damages should be required. Young J held that it was not required because he did not see why Reuters should be at the risk of an undertaking when it claimed that it was seeking a remedy in the public interest. The claim was not only to protect its own money, but also the money of other people that may have had dealings with Credit Connection.

Young J resolved to grant the application for a receiver to be appointed. A stay of 7 days was however granted to Credit Connection so that the matters could be considered, albeit in a preliminary way, in the Court of Appeal. The mere fact that there were arguable grounds of appeal was not of itself a sufficient basis for the exercise of a discretion to grant a stay. A stay was granted because Credit Connection was willing to provide an undertaking not to dispose of assets and that the receiver would continue in office.

Court appointed receiver – inherent power

A recent example of the appointment of a receiver pursuant to the court's inherent powers is the case of Yunghanns v Candoora No.19 Pty Ltd³⁸.

This case, a decision of Warren J in the Supreme Court of Victoria, concerned the issue of whether the court should appoint a receiver of trust assets and undertaking in circumstances when the trust funds were in danger of being dissipated on litigation and the entitlement of an infant beneficiary was at risk. After considering the relevant principles to be applied in determining whether to appoint a receiver of the assets of a trust, the court was satisfied that it was appropriate to exercise the discretion in favour of the appointment of a receiver.

The court considered that the relevant principles to be applied in determining whether to appoint a receiver of the assets of a trust were:

• the courts will appoint a receiver of trust property (on an interlocutory and/or permanent basis) where the property is in jeopardy through misconduct, waste, improper disposition, breach of trustees' duty or the unsuitable character of the trustee;
• the case in favour of appointment of a receiver must be a strong one but in assessing the risk to the trust, the courts will apply a qualitative judgment;
• a receiver will be appointed to preserve the benefit of a person who has interest in the trust property.

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Appointment of a receiver – partnership

Receivers are readily appointed following dissolution of a partnership or prior to dissolution if there has been such a breakdown of good faith between the parties as to make dissolution inevitable. Courts are generally not inclined to interfere in partnership matters during the continuation of the partnership business and normally would only appoint a receiver and manager after an order for dissolution of the partnership has been made³⁹. Nevertheless, the general rule is not to be applied where it would work manifest injustice by forcing a dissolution which would be disadvantageous to the plaintiff.

When considering the appointment of a receiver in the case of ongoing partnerships the court will have regard to the nature of the business carried on and the probable effects which such appointment would have on the reputation of the firm and the partners. This will be particularly relevant in the case of a professional practice⁴⁰. In addition the court will consider the size of the firm. Generally, the larger the firm the more reluctant the court will be to interfere otherwise than by way of injunctive relief.

Upon dissolution of a partnership, whether by operation of law, court order or agreement, any partner or the representatives of a deceased, bankrupt or incapacitated partner may apply to the court for the appointment of a receiver to wind up the business and affairs of the partnership and to have the property of the partnership applied in payment of the debts and liabilities of the firm and to have the surplus assets applied in payment to what is due to the partners of the firm⁴¹.

The appointment by the courts is not automatic as courts have recognised that it is ordinarily simpler and more cost effective for partners to conduct a winding up themselves without their interference⁴². However, a receiver will be appointed almost as a matter of course where partnership assets are in danger, the partners are in serious dispute or if they agree upon such an appointment⁴³.

Factors relevant to appointment

The starting point for considering the factors relevant to the appointment of a receiver in a partnership situation is the general statement in Tate v Barry⁴⁴. There, the defendant denied the existence of the partnership. The plaintiff claimed that a partnership existed and that he had been excluded from his rights as a partner in that partnership. Accordingly, the plaintiff sought interim relief through the appointment of a receiver.

Long Innes J found that the plaintiff had made out a prime facie case for interim relief and then stated:

It must now, I think, be regarded as settled that in a suit instituted in equity for the winding up of a partnership already dissolved, or for the dissolution of an admitted partnership in which it is clear that dissolution will be granted at the hearing, the plaintiff is entitled as a general rule, and practically as a matter of course, to the appointment of an interim receiver.

His Honour found that the contention that a receiver would not be appointed where the existence of the partnership was disputed, unless the assets were in danger, was not well-founded. After reviewing some early authorities, his Honour determined that there was no rule of practice which precluded the appointment of a receiver to a partnership where one party denied the existence of the partnership. Rather, the denial of an alleged partnership was merely one of the factors to be taken into consideration in each case. It did not, of itself, prevent the court from appointing a receiver.

Assets at risk

The decision of Parker J in the Supreme Court of Western Australia in Wedge v Wedge is an illustration of the principal that a receiver will be appointed almost as a matter of course, where partnership assets are in danger or the parties are in serious dispute⁴⁵.

The partnership had been dissolved due to disputes between the plaintiff and defendant partners. The partnership had cleared its debts to third parties. The plaintiff sought orders for the appointment of a receiver and manager with a view to the sale of the partnership assets. The defendant sought the appointment of a valuer with a view to the defendant having an opportunity to buy out the plaintiff's interest at valuation. Each party was opposed to the other's proposal.

Parker J held that the interests of the parties were best served by the appointment of an independent receiver and manager with freedom to determine the most appropriate method of realising the assets of the partnership. While there was no apparent risk to the assets of the partnership, the circumstances of the partnership in recent years and the breakdown of the relationship between the parties brought the case within the category of serious dispute between the parties and, as such, the normal approach was for a receiver to be appointed.

Need for impartial administration

The Court will also more readily appoint a receiver where an independent investigation is warranted. This was the case in Anderson Group Pty Ltd (in liquidation) v Davies⁴⁶. In Anderson there were factors which warranted the attention of an impartial person appointed by the court. Principally, it was held that a receiver was required because of the intermingling of the financial affairs that had occurred between the partnership and the service company. Barret J concluded that this was a sufficient ground for the appointment of a receiver.

The court is reluctant to appoint a stranger as receiver of partnership assets and will usually appoint one of the active partners to act in that capacity⁴⁷. However, in Boyle v Willis⁴⁸ it was held that, where one of the partners has been improperly excluded from participation in the conduct of a winding up of the firm's business, the court will appoint an independent receiver, although the winding up could be conducted more economically by the partners. In the same way, if one partner purports to expel a co-partner and then proceeds to dispose of the partnership's stock-in-trade, a receiver will be appointed⁴⁹.

Where the court considers it is desirable for a non-partner to be appointed as receiver, it will seek to appoint a person who is impartial. However, the mere fact that one of the partners has some business connection with a person does not automatically disqualify that person from being appointed. In King v Griffiths it was held that the onus is upon the person objecting to the appointment to produce actual evidence of partiality⁵⁰.

In addition, other grounds recognised by the court as appropriate for the appointment of a receiver, or receiver and manager to the assets of a partnership are:

• breach of a dissolution agreement under which the parties have given up their personal right to wind up the firm's affairs;
• misconduct plus jeopardy to the partnership assets;
• fraud;
• wrongful exclusion from the partnership⁵¹

Subject to court's discretion

The general proposition in Tate is subject to the Court's discretion having regard to the circumstances in each case.

Special circumstances

This was demonstrated in Adsett as Trustee v Berlouis (trading as Hervey Bay Kitchens) and Anor⁵². This case concerned a partnership consisting of two solvent persons and several insolvent persons who were bankrupt. In regard to the general principles in Tate, Thomas J stated that:

That case contains observations of a general nature which are, I think, inapplicable when one has regard to the more specific statements in the cases concerning the administration of partnerships where one partner is solvent and another is bankrupt.

No further analysis of this was provided as the circumstances of the case did not warrant the appointment of a receiver. Notwithstanding this, his Honour's comments suggest that where the circumstances are more complex, the Court reserves its discretion as to whether to appoint a receiver. In Adsett, Thomas J refused to appoint a receiver because of the widely divergent agendas that existed between the trustee in bankruptcy seeking to appoint the receiver and the solvent partners.

No evidence of partnership

Floydd v Cheney⁵³, was another case where the existence of a partnership was asserted on one side and denied on the other. Ultimately Megarry J held that there was no prima facie evidence of a partnership, nor was there a substantial threat to the assets of the partnership. His Honour commented that although the reasoning in Tate was "wholly convincing", the Court should be slow to appoint a receiver where the existence of the partnership was in issue⁵⁴.

On this basis, his Honour exercised the discretion not to appoint a receiver. His Honour was careful to mention, however, that the reluctance to appoint a receiver arose from the fact that there was no evidence to support the contention that a partnership had existed. It follows that where the issue of a partnership is truly in contention, the Court should not be so reluctant to appoint⁵⁵.

Injury to defendant

It was recognised in Tate that the stigma surrounding the appointment of a receiver could have serious consequences on the defendant. As such, a court may be reluctant to appoint a receiver in the case where an appointment would inflict irreparable injury upon a defendant who might succeed at the hearing.

A court will be particularly reluctant to appoint a receiver where some other adequate protection could be afforded to the plaintiff. For instance in Tate, the partnership remained a viable business, notwithstanding the substantial dispute between the alleged partners. His Honour considered that in the circumstances an injunction would serve adequately to protect the assets of the partnership.

Injury to the defendant was recently referred to in Anderson Group Pty Ltd (in liquidation) v Davies⁵⁶. A dispute arose between the partners who owned and managed the North Woollongong Hotel. It was common ground in the proceedings that the partnership had existed, but had been dissolved, although there was no agreement as to the date or manner of dissolution. Amongst other things, the plaintiff sought an order for the appointment of a receiver and manager of the partnership business.

Having concluded that the partnership had existed and had been dissolved, Barratt J turned to the question of whether a receiver should be appointed. The plaintiff relied on the general passage from Tate stating that where a partnership has been dissolved, the plaintiff is entitled as a general rule and as a matter of practicality, to the appointment of an interim receiver.

The defendant countered, citing a passage by Powell J in Fitzgibbon v Khoury⁵⁷:

This general rule notwithstanding, it is equally well established that it is not inevitable that, in any such case, an interim receiver and manager will be appointed, and that the court retains a residual discretion as to whether any appointment should be made; one of the basis upon which, in an appropriate case, an appointment will be refused, is that the consequences of such an appointment will be 'ruinous'".

Barret J approved of this principle, however his Honour concluded that, in the circumstances, the appointment of a receiver would not cause undue detriment to the defendant or the hotel business.

The potential commercial harm caused by the appointment of a receiver was also considered a valid factor in Affinity Computing Ltd v Independent Systems Integrators Pty Ltd⁵⁸. In this case, Hamilton J recognised that such harm had often been considered in the courts. In this particular case, the potential commercial harm caused by the appointment of a receiver was obviated by the provision of an undertaking by the defendant.

A more balanced view was given in the case of Henry and Anor v Stewart and Ors⁵⁹. It was recognised in this case that the appointment of a receiver may cause unjustified concern to those who have dealings with the partners or their new firms. However, Cohen J qualified this view by stating that:

I cannot, however, accept that this possible result can of itself be a substantial cause for refusing to make an appointment. It is a factor to be taken into account⁶⁰. (emphasis added)

Relevant issues following appointment

The effect of an order appointing a receiver is to vest the personal property of the partnership together with the right to recover all debts owing to the partnership in the person appointed as receiver, but he or she cannot compel a partner to hand over the proceeds of sale of partnership property which came into the partner's hands prior to the making of the order⁶¹.

Once a receiver has been appointed, any attempt by the partners to interfere with the exercise of a receiver's duties or to deal with property vested in him or her constitutes contempt of court⁶². In special circumstances, the court may authorise a receiver to appoint a partner to manage the business at a salary pending sale. In Pretty v Jackson the court permitted a partner, whose conduct in continuing the business following dissolution and refusal to grant the other partner access to the business premises or records had necessitated the application, to be appointed manager of the business after evidence was received concerning the special nature of the skills required to maintain the tropical aquarium, which was a principal asset of the business⁶³.

A receiver of partnership assets appointed by the court may be removed by that court upon the application of any person who bears an interest in the winding up of the partnership affairs⁶⁴. The partnership's creditors cannot be joined as parties to the application to appoint a receiver as an action for dissolution is a matter for the partners or their representatives⁶⁵. Furthermore, a creditor who obtains a judgment against the partnership cannot levy execution upon the partnership's property in the hands of a receiver, without first obtaining permission of the court. As a general rule, such permission is not granted but an order is made directing the receiver to pay the judgment debt and costs out of the partnership assets in its possession⁶⁶.

Financial exposure of receiver of partnership

A receiver appointed by the court is neither the agent of the parties to the action nor of the party on whose application he or she was appointed. Accordingly, a court appointed receiver is liable as a principal on contracts entered into by him or her during the receivership unless the receiver expressly excludes personal liability⁶⁷. The receiver is not personally liable for contracts entered into by the debtor before the receiver's appointment, or where the receiver simply completes such contracts. Of course, a receiver is entitled to an indemnity from the assets over which the receiver is appointed and this right takes priority over the claims of the creditors of the partnership. Where a receiver expressly excludes personal liability but represents that he or she has authority to enter the contract on behalf of the debtor, the receiver may be liable in damages for a breach of warranty of authority if that is not the case⁶⁸.

Although a receiver appointed by the court has a right of indemnity out of partnership assets for expenses or liabilities incurred, in the event of a deficiency, the receiver does not have the ability to pursue the former partners in order to be indemnified in respect of liabilities which are not covered by the assets of the partnership⁶⁹.

If a receiver adopts a contract during the receivership he or she is likely to be personally liable. Where the receiver incurs a liability during the receivership, the creditor concerned will have the right to be repaid by the receiver personally and, failing that, will have a subrogated claim against the assets available to indemnify the court appointed receiver. However, if a receiver's personal liability is expressly or by inference excluded, the creditor will have no subrogated right, as there is no indemnity⁷⁰.

In Choudhri v Palta & Ors⁷¹ during the course of a dispute as to the affairs of the partnership certain property was required to be sold and a court appointed receiver was given power to sell that property. However, two banks who held charges over that property were not parties to the action before the court where the receiver was appointed. Subsequently the receiver discovered that the secured debts exceeded the estimated value of the property over which he was appointed and which he intended to sell. The receiver was concerned as to how his remuneration would be paid and made an application to court. The court at first instance ordered the receiver's proper remuneration and costs be a first charge on the property in priority to the charges held by the two banks. On appeal the English Court of Appeal found the court did not have the power to order that a receiver's costs, expenses and remuneration be paid in priority to sums secured under prior or paramount charges. The court held that it could not interpose a charge to secure the receiver's costs and remunerations in front of existing charges⁷².

A trustee in bankruptcy is likely to have the power to question a court appointed receiver's accounts, and may appeal against the court's certification of such accounts⁷³.

The court appointment of a receiver usually suspends the rights of action held by other parties that arise out of pre-existing contracts with the partnership. Before such a party can exercise the right under such a contract, leave of the court must be obtained⁷⁴.

In respect of an indemnity, a receiver should endeavour, and if necessary seek a direction from the court to retain sufficient assets to discharge liabilities personally incurred in the course of his or her duties, or alternatively, secure or rely on the protection of an indemnity, whether that it be an existing indemnity negotiated at the time of the appointment, or a new indemnity negotiated before the receiver ceases to act. Although the receiver is normally indemnified from assets subject to its control, such indemnity appears to be forfeited once such assets are distributed, if they are, or the receivership ceases⁷⁵.

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Receivers' power of sale – general law duties

The general law is the source of the duties and obligations imposed upon a receiver appointed to a non-corporate entity.

The general law imposes at least three duties upon such a receiver. These duties are:

1. The receiver has a duty to the mortgagee to collect and realise the assets of the mortgagor for the purpose of discharging the security⁷⁶;
2. The receiver holds in trust for the mortgagor, any proceeds from the sale of the mortgagor's assets after the satisfaction of the claims of the mortgagee and subsequent creditors⁷⁷; and
3. The receiver, as the donee of a power, must exercise the powers and duties granted to him or her in good faith and for a proper purpose⁷⁸.

It is the content and scope of this last duty that is most relevant for present purposes. The receiver's duty to exercise the powers and duties granted to him or her in good faith and for a proper purpose is closely aligned with and has long being regarded as very similar to the duty of a mortgagee to act in good faith, without wilfully or recklessly sacrificing the interests of the mortgagor⁷⁹. This formulation of the duty imparted upon a mortgagee (and therefore a receiver) was originally stated by Lord Herschell in Kennedy v De Trafford⁸⁰. His Lordship's formulation was subsequently adopted and applied by Griffith CJ in Barnes v Queensland National Bank Limited⁸¹. In that case, the evidence indicated that the mortgagee had conducted the sale in pursuit of a personal vendetta against the mortgagor. Griffith CJ posited that a power of sale exercised not for the purpose of obtaining payment of a debt, but to deprive the mortgagor of the opportunity of retaining the property by a redemption or which wilfully and recklessly sacrificed the interests of the mortgagor was not a power exercised in good faith. The High Court again applied Lord Herschell's test in Pendleberry v Colonial Mutual Life Assurance Society Limited. In that case, their Honours held that the failure of a mortgagee to place proper or sufficient advertising of a sale was so manifest as to amount to recklessness and hence a failure to act in good faith.

As a result of these two High Court decisions, the duties and obligations imparted upon mortgagees and therefore receivers when selling assets were clearly grounded in good faith⁸⁴. Since then, however, what exactly the duty to act in good faith requires has been the subject of differing opinion. In this regard, it is pertinent to examine the development and divergence of authority between English and Australia law.

The English principles as to what constitutes good faith are stringent in the sense that English law requires the receiver to take reasonable care to obtain a proper price. The classic formulation of this approach is that of Lord Justice Salmon in Cuckmere Brick Co v Mutual Finance Ltd⁸⁵. In that case, Lord Justice Salmon stated:

Approaching the matter first of all on principle, it is to be observed that if the sale yields a surplus over the amount owed under the mortgage, the mortgagee holds this surplus in trust for the mortgagor. If the sale shows a deficiency, the mortgagor has to make it good out of his own pocket. The mortgagor is vitally affected by the result of the sale but its preparation and conduct is left entirely in the hands of the mortgagee. The proximity between them could scarcely be closer. Surely they are "neighbours". Given that the power of sale is for the benefit of the mortgagee and that he is entitled to choose the moment to sell which suits him, it would be strange indeed if he were under no legal obligation to take reasonable care to obtain what I call the true market value at the date of sale⁸⁶.

This statement prompted some consideration as to whether a receiver might be liable in negligence to a mortgagor for a failure to achieve the true market value at the date of sale⁸⁷. This question, however, was authoritatively decided in the negative in Parker – Tweedale v Dunbar Bank Plc (No. 1)⁸⁸ where it was held that the duty of care owed by a mortgagee to a mortgagor arises under the rules of equity and not the tort of negligence. This position was confirmed in Downsview Nominees Limited v First City Corporation Limited⁸⁹. Although confirming that the duty is grounded in equity rather than negligence, the English requirements as to good faith when selling mortgaged property remain that the receiver is under an obligation to take reasonable care to obtain the true market value of the asset at the date of sale⁹⁰.

The more stringent English formulation of the good faith requirement of taking reasonable care to obtain the true market value of the asset at the date of sale has been rejected in Australia. Whilst at times considering the English formulation, Australian courts have not followed it⁹¹. A most often cited Australian decision in this regard is that of Needham J in Expo International Pty Ltd v Chant⁹² (Expo). This decision is generally regarded as enunciating the correct formulation of the Australian general law duties of a receiver⁹³.

In Expo, Needham J reviewed whether a receiver could be held liable for loss caused by negligence and determined that the Australian authorities do not support such an approach⁹⁴. Having decided that the good faith requirement is grounded in equity, His Honour considered the scope of the general law duty imparted on a receiver and concluded:

[The] duties [owed by a receiver to the mortgagor] include the duty to exercise his powers in good faith (including a duty not to sacrifice the mortgagor's interests recklessly); to act strictly within, and in accordance with the conditions of his appointment; to account to the mortgagor after the mortgagee's security has been discharged, not only for the surplus assets, but also for his conduct of the receivership. ... There is no justification in logic for suggesting that a receiver becomes saddled with more onerous duties, such as, for example, a duty to obtain the "true market value" of the property at the time of sale, or a duty not to act negligently in connection with the sale⁹⁵.

His Honour considered himself bound to follow the expressions of principle contained in Pendleberry v Colonial Mutual Life Assurance Society Limited⁹⁶ and therefore concluded that his task was to:

ascertain whether the [receiver] wilfully or recklessly sacrificed the interests of the [mortgagor] ...If the [receiver] acted bona fide, and certainly, if it took reasonable precautions to obtain a proper price, the [mortgagor] must fail, even if the price obtained was below market value; and even if, by waiting, or by spending more money on the property, a better price could have been obtained⁹⁷.

The general law duty in Australia, therefore, is far less stringent than the English duty as it merely requires a receiver to exercise his powers in good faith which includes a duty not to sacrifice the mortgagor's interests recklessly. There is no general law duty imparted on a receiver in Australia to ensure that, when exercising a power of sale, the true market value is obtained.

Having determined the extent and scope of the general law duty imparted upon a receiver, it is necessary to examine to whom that duty is owed or who, in other words, may seek relief against the receiver in the event that the receiver fails to comply with his/her general law duties. The receiver's duties to persons or entities other than the mortgagor was considered in Downsview Limited v First City Corporation Limited⁹⁸. In that case, Lord Templeman considered that the argument that a mortgagee owes no duties to subsequent encumbrances was a fallacy. His Lordship stated:

The owner of property entering into a mortgage does not by entering into that mortgage cease to be the owner of that property any further than is necessary to give effect to the security he has created. The mortgagor can mortgage the property again and again. A second or subsequent mortgage is a complete security on the mortgagor's interests subject only to the rights of prior encumbrances. If a first mortgagee commits a breach of his duties to the mortgagor, the damage inflicted by that breach of duty will be suffered by the second mortgagee, subsequent encumbrancers and the mortgagor depending on the extent of the damage and the amount of each security⁹⁹.

Having decided that a mortgagee owes a duty to any subsequent encumbrancer, and ultimately the mortgagor, Lord Templeman considered whether the position of a receiver was any different. His Lordship concluded that because the receiver is dealing with the security and exercising the power of sale for the purpose of securing repayment of the debt owing to the mortgagee rather than merely selling or dealing with the interests of the mortgagor, his/her position is akin to that of a mortgagee exercising a power of sale¹⁰⁰. Accordingly, the receiver must act in good faith so as not to wilfully compromise the interests of any other persons or entities interested in the mortgaged property.

As for the position of a guarantor, it follows that the guarantor, as a person or entity interested in the mortgaged property through the guarantor's rights of subrogation, is owed the same duty of good faith by the receiver¹⁰¹.

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A receiver's duty when selling property of an individual or a partnership – Property Law Act 1974 (Qld)¹⁰²

In circumstances where a mortgagee exercises power of sale in respect of property of a corporation, the mortgagee's duty, as controller, is clearly stated in s420A of the Corporations Act 2001. The duties contained in s420A also apply to a sale by any receiver appointed in respect of property of a corporation¹⁰³. That duty is to take all reasonable care to sell the property for not less than the market value, if it has one, otherwise the best price reasonably obtainable, having regard to the circumstances existing when the property is sold.

Where the borrower is an individual or a partnership who has granted security over partnership assets, a mortgagee may, following default, elect to exercise power of sale. This power of sale is normally conferred by the instrument of mortgage itself. In addition the power of sale is conferred by statute. In Queensland s83(1) of the Property Law Act 1974 provides that a mortgagee, where the mortgage is made by instrument, shall have the powers listed in that subsection as if those powers had been conferred by and contained in the instrument of mortgage, including the power to sell the mortgaged property. The relevant statutory power of sale conferred on a mortgagee (and chargee) in New South Wales is contained in s109(1) of the Conveyancing Act 1919.

The mortgagee's duty in exercising the power of sale under the relevant statute or instrument of mortgage itself is contained in s85(1) of the Property Law Act 1974 (Qld)¹⁰⁴. Section 85(1) provides:

It is the duty of a mortgagee, in the exercise at the commencement of this Act of a power of sale conferred by the instrument of mortgage or by this or any other Act, to take reasonable care to ensure that the property is sold at the market value.

Section 85(3) of the Act provides that any mortgagee who commits a breach of this duty is exposed to an action for damages by a person damnified by the breach, for example the mortgagor. Section 85(5) provides that an agreement or stipulation is void to the extent that it purports to relieve, or might have the effect of relieving, a mortgagee from the duty imposed by that section.

As noted above, in addition to conferring a power of sale upon the mortgagee, most well drawn mortgage documents will also permit the mortgagee, following default by the mortgagor, to appoint a receiver to the mortgagor. The mortgage document will normally also provide that any receiver appointed will be the agent of the mortgagor and that the mortgagor alone will be responsible for the receiver's acts and defaults.

If the relevant mortgage instrument contains these provisions, and the mortgagee elects to appoint a receiver to the individual or partnership borrower following default, to what extent will the statutory duty imposed by s85 to take reasonable care to ensure the property is sold at the market value be applicable where the mortgagor alleges the mortgaged property has been sold by the receiver at under value?

This issue was considered by the Court of Appeal in Queensland in Muirhead v Commonwealth Bank of Australia¹⁰⁵ . Briefly, the facts in Muirhead were that the Commonwealth Bank of Australia (the Bank) lent $4,025 million to the Muirheads on the security of first party mortgages over two properties and stock and equipment. Following default the Bank appointed a Receiver to receive and manage the mortgaged properties. The mortgages contained an express provision that any receiver appointed by the Bank shall be the agent of the mortgagor and the mortgagor alone shall be responsible for his or her acts and defaults. The properties were subsequently sold by the Receiver who accounted to the Bank for the proceeds. The Bank then obtained summary judgment for the balance of the principal and interest owing.

Before the Court of Appeal the Muirheads sought to overturn the summary judgment on three main grounds, one of which is relevant for present purposes

The Muirheads third ground of appeal was in relation to the Receiver's duty when selling property of individuals. The Muirheads claimed no amount was due to the Bank as the Bank was liable for the Receiver's alleged negligence in selling the properties at undervalue, with the Bank's knowledge and acquiescence. In particular it was alleged that the sale of the properties for $4.35 million was significantly below expressions of interest previously received. The Muirheads also alleged the properties were not advertised properly and a number of other allegations were made as to the management of the property prior to sale.

The leading judgment of the Court was delivered by McPherson JA. In determining this third ground of appeal the Judge identified two key questions. First, whether the sale by the Receiver was nevertheless a sale by the Bank as mortgagee and therefore subject to the statutory duty imposed by s85(1) of the Act. Secondly, whether a provision in a mortgage document making the Receiver solely the mortgagor's agent was one purporting to relieve, or which might have the effect of relieving the Bank as mortgagee from the duty imposed by s85(1) of the Act, and therefore contrary to s85(5).

In deciding these issues McPherson JA noted that s92(2) of the Act provides that a receiver appointed under the powers conferred by the Act is deemed to be the agent of the mortgagor, and the mortgagor shall be solely responsible for the receiver's acts or defaults unless the instrument of mortgage otherwise provides.

To the extent that s92(2) may appear to be inconsistent with s85(1) and (5) of the Act, McPherson JA considered that the effect of s92(2) was, in the particular case of a receiver who sells, to displace the non-delegable duty imposed by s85(1). In Muirhead, the appointment of the Receiver was not made under the Act but under the powers conferred by the bills of mortgage. McPherson JA considered, in the absence of a contrary provision, that there was no reason why a receiver appointed in these circumstances should not be treated like a receiver appointed under the Act. That is, it was appropriate to impose sole responsibility on the mortgagor for the acts of the receiver appointed by the mortgagee, where there was express provision in the mortgage documents to this effect.

Accordingly, the duty imposed by s85(1) of the Act was not capable of prevailing over the express provisions of the bills of mortgage. On this basis the trial judge was correct in holding that no triable defence or issue was disclosed on the application for summary judgment.

Whilst agreeing with McPherson JA's reasoning in respect of the Bank's statutory duty as mortgagee under s85 Macrossan CJ added that the duty imposed by s85(1) to take reasonable care that a secured property is sold at market value is only applicable where the power of sale is exercised by the mortgagee or mortgagee's agent. This flowed from the wording of s85(1). Accordingly, where as a result of the contractual arrangement in the mortgage, any sale made by a receiver is a sale by the mortgagor's agent, the right to pursue a remedy under the statute in damages against the mortgagee was not available.

Davies JA stated his own reasoning for rejecting the Muirhead's arguments that the Bank was in breach of its duties under s 85. He noted the remedy in damages in s85(3) for breach of duty imposed by s85(1) was against the mortgagee exercising power of sale rather than a receiver selling. Accordingly the question was whether the mortgage provisions specifying that the receiver was selling as mortgagor's agent (rather than selling for or on behalf of the Bank) should be given effect. He found the sale was not by a mortgagee and s85(1) was not applicable.

Although the approach of the three judges differed, the judgment upheld the validity and effectiveness of mortgage provisions making any receiver, appointed by a mortgagee, an agent of the mortgagor and the mortgagor solely responsible for the receiver's acts and defaults.

Accordingly, where a mortgagor is an individual or partnership the duty imposed by s85(1) of the Act will be applicable to any sale by a mortgagee exercising power of sale but will not be applicable where a receiver sells and the mortgage document contains a provision that the receiver is the agent of the mortgagor.

This result is contrary to the position regulated by s420A Corporations Act 2001 which in the case of a corporate mortgagor, clearly applies to a sale by either a mortgagee exercising power of sale or a receiver.

Recent cases

The decision in Muirhead was followed by Wilson J in Australian & New Zealand Banking Ltd v Julian¹⁰⁷. A partnership conducted a child care business with loan facilities secured by a registered mortgage over the land upon which the child care facility was operated and a mortgage debenture over the undertaking and assets of a company which held the licence for the centre. There was a default under the partnership loan facility and the mortgagee appointed a receiver. The receiver sold the land and business as a going concern for $200,000.

One of the partners alleged the sale was at an under value to the extent of $130,000. The defendants claimed that amount against the plaintiff mortgagee and receivers for breach of fiduciary duty and/or breach of duty of care. The partners alleged the receivers were acting as the agents of the mortgagee.

The first defendant sought an adjournment of the summary judgment application on the grounds that the plaintiff had not satisfied a request for copies of certain documents, particularly in relation to the plaintiff's dealings with the receiver. The plaintiff resisted the application for an adjournment on the basis that, as the mortgage document provided, the receivers were the agents of the mortgagors. Consequently, the plaintiff was not responsible for the receiver's conduct and the first defendant was merely fishing, hoping to establish a claim.

In citing Muirhead, Wilson J held that pursuant to the mortgage document the receiver was the agent of the mortgagor and the mortgagor was solely responsible for the receiver's acts or defaults. Wilson J rejected the submission by counsel for the first defendant that the decision in Muirhead was distinguishable because there was an allegation of interference by the plaintiff bank in consequence of which the receivers became its agent. The first defendant had lead no evidence of this interference.

The decision in Muirhead was recently followed by de Jersey CJ in National Australia Bank Ltd v Troiani¹⁰⁸ , albeit in relation to a sale by receivers and managers of property of a corporation. The respondents to the applicant bank's summary judgment application contended that the bank breached a duty under s85 of the Property Law Act (Qld) and s420A of the Corporations Law 2001 to take reasonable care to sell the secured property at market value. The relevant sales were effected by the receivers. The relevant debenture provided that the receivers and managers were deemed the agents of the company, with the company "solely responsible" for their acts, and any defaults. In citing Muirhead, de Jersey CJ found the applicant bank bore no consequent liability for any alleged breach of s85 of the Property Law Act by the receivers and managers in selling the secured property.

Counsel for the respondents argued that the receivers might, on a full investigation, be seen to have been acting as agents for the applicant bank as well. However, de Jersey CJ found that there was insufficient evidence to justify the argument that some sort of dual or concurrent agency existed.

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Summary

A convenient way in which to summarise the significant aspects of a non-corporate receivership, is to compare and contrast that type of receivership with the more common corporate receivership.

Non-corporate receivership

1. The debtor is a sole proprietor or a partnership.
2. A receivership commonly results from a dispute and the receiver will often be court appointed.
3. If the receiver is court appointed, he is not usually the agent of the debtor. However a receiver appointment pursuant to a security document or conveyancing legislation will usually be the agent of the debtor.
4. Secured creditors are often secured to a fixed or identifiable asset.
5. A non-corporate receiver is not required to be a registered liquidator.
6. The receiver normally has limited powers with a view to liquidating the business undertakings. The powers of the receiver are limited by the court appointing him or her or the legislation pursuant to which he or she is appointed.
7. The Bankruptcy Act contains alternatives to the appointment of a receiver, for example bankruptcy or Part X arrangements.
8. The reporting and other requirements of the Corporations Act 2001 are not applicable to a non-corporate receiver. However if appointed by the court, the receiver will be accountable to the Court.

Corporate receivership

1. The debtor is a corporation.
2. The receiver is more commonly appointed out of court. The appointment arises as a result of the insolvency of a debtor and takes place pursuant to the procedure contained in the security document.
3. Receivers privately appointed over corporate entities are usually deemed to be the agent of the debtor.
4. Secured creditors are more often debenture holders with a floating charge secured over all the assets of the debtor.
5. A receiver of a corporate entity must be a registered liquidator.
6. Receivers appointed over corporate entities are normally given wide powers to manage and carry on the business.
7. The whole range of formal insolvency procedures under the Corporations Act 2001 are available as alternatives to a receivership in respect of a corporate entity.
8. The Corporations Act 2001 regulates the powers and obligations of a corporate receiver including formal reporting requirements.

Notwithstanding the above generalisations, each receivership will have its own unique requirements.

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Footnotes

1. Hopkins v Worcester and Birmingham Canal Proprietors (1868) LR 6 Eq 437; 37 LJ Ch 729
2. Re Manchester and Milford Railway Co; Ex parte Cambrian Railway Co (1880) 14 Ch D 645 at 653; 49 LJ Ch 365; 42 LT 714
3. See s80(2) of the Consumer Credit Code (Qld); Section 5 of the Consumer Credit (New South Wales) Act 1995 provides that the Consumer Credit Code (Queensland) applies as a law in New South Wales
4. See s80(6) of the Consumer Credit Code (Qld)
5. Section 92(2) Property Law Act 1974 (Qld); s115(2) Conveyancing Act 1919 (NSW)
6. Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 at 832
7. Section 92(3) Property Law Act 1974 (Qld); s115(3) Conveyancing Act 1919 (NSW)
8. Section 92(4) Property Law Act 1974 (Qld); s115(4) Conveyancing Act 1919 (NSW)
9. Section 92(5) Property Law Act 1974 (Qld); s115(5) Conveyancing Act 1919 (NSW)
10. Section 92(6) Property Law Act 1974 (Qld); s115(6) Conveyancing Act 1919 (NSW)
11. Section 92(7) Property Law Act 1974 (Qld); s115(7) Conveyancing Act 1919 (NSW)
12. Section 92(8) Property Law Act 1974 (Qld); s115(8) Conveyancing Act 1919 (NSW)
13. Rule 266 of the UCPR
14. Rule 272 UCPR; Section 67 of the Supreme Court Act 1970 (NSW)
15. AG v Day (1817) 56 ER 325 at page 329
16. McMahon v North Kent Ironworks Co [1891] 2 Ch 148
17. National Australia Bank Limited v Bond Brewing Holdings Limited [1991] 1 VR 386
18. Kearns v Leaf (1864) 1 Hem and M 681; 71 ER 299
19. Cook v Andrews [1897] 1 Ch 266
20. Aloridge Pty Ltd v West Australian Gem Explorers Pty Ltd (1995) 15 ACSR 645
21. Hammam v Lamney (1926) 43 WN (NSW) 68
22. Re Dawson; Clarke v Dawson (1906) 75 LJ Ch 201
23. Young v Buckett (1882) 51 LJ Ch 504. Compare Sobell v Boston [1975] 2 ALL ER 282 per Goff J (receiver not appointed where it was contemplated that the surviving partners would carry on the business)
24. National Australia Bank Limited v Bond Brewing Holdings Limited [1991] 1 VR 386 at 554 sub nom Bond Brewing Holdings Limited v National Australia Bank Limited (1990) 1 ACSR 445 at 470; Ballabil Holdings Pty Ltd v Hospital Products Limited (1985) 1 NSWLR 155 at 159
25. Marshall v Charteris [1920] 1 Ch 520
26. Leney & Sons Limited v Callingham [1908] 1 KB 79
27. Re Hopkins; Dowd v Hawtin (1881) 19 Ch D 61
28. Bowen v Phillips [1897] 1 Ch 174.
29. Browell v Reed (1842) 66 ER 1102
30. Re Yenidje Tabacco Co Limited [1916-17] ALL ER Rep 1050
31. Re Shephard; Atkins v Shephard (1889) 43 Ch D131
32. Holmes v Bell (1840) 48 ER 1195
33. Palmer v Wright (1846) 50 ER 572
34. Skinners' Co v Irish Society (1836) 40 ER 338
35. Niemann v Niemann (1889) 43 Ch D198
36. J Walls Limited v Legge [1923] 2 KB 240
37. (Unreported, Supreme Court of NSW, 7 March 2000, per Young J) annotated in the Allen Allen & Hemsley Annual Review of Insolvency and Reconstruction Law 2000 at page 90
38. (2000) 35 ASCR 34; annotated in the Allen Allen & Hemsley Annual Review of Insolvency and Reconstruction Law 2000 at page 94
39. Gregory v Welch (1871) 2 VR (E) 129
40. Floydd v Cheney [1970] Ch 602
41. Section 39 Partnership Act 1892 (NSW); s42 Partnership Act 1891 (QLD)
42. Carabine v Carabine 1949 SC 429
43. Thompson v Anderson (1870) LR 9EQ 523 at 533; Barclay v Barclay [1978] ACLD 90; Floydd v Cheney [1970] Ch 402; Murray v
    King (1984) 55 ALR 559
44. (1928) 28 SR (NSW) 308 at 387
45. (1995) 12 WAR 489
46. Unreported, NSW SC, 28 March and 30 April 2001, per Barrett J
47. Tate v Barry (1928) 28 SR (NSW) 308 especially at 387 per L