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Allens Arthur Robinson

Paper: Recent developments in the law relating to receivers – June 2000

In brief: This paper is not intended to be an analysis of the duties or obligations of receivers. It is a waltz through some of the more recent and more interesting cases dealing with: the treatment of a receiver's costs following the voluntary administration of the company to which he was appointed and the entry of that company into a Deed of Company Arrangement (DOCA); the appointment of a receiver to a cause of action; the receiver's power of sale; and appointing a receiver under the Commercial Agents and Private Agents Act 1963 (the CAPA Act).

The treatment of receiver's costs following a voluntary administration and a deed of company arrangement

In the case of Lawrenson in the Supreme Court of Victoria late last year the Court considered whether a Court appointed receiver's costs should be paid (and if so, with any priority) in circumstances where the company to which he was appointed receiver had subsequently been placed into voluntary administration and executed a DOCA.

An interim receiver and manager was appointed to Lawrenson Light Metal Die Casting Pty Ltd (Lawrenson) by the Supreme Court of Victoria on 23 July 1999. The appointment was made pursuant to s1323(h)(ii) of the Corporations Law (the Law) following an application by the Australian Securities & Investments Commission (ASIC). Pursuant to s1323 the Court can make orders to protect the interests of others, including creditors, once ASIC establishes that it is carrying out an investigation in relation to an act or omission which may constitute a contravention of the Law. One of the orders which can be made under that section is for the appointment of an interim receiver or an interim receiver and manager. On 10 September 1999 ASIC and Lawrenson entered into a deed of settlement, Lawrenson's directors passed a resolution appointing an administrator pursuant to s436A(1) of the Law and the Court discharged the receiver's appointment.

Notwithstanding the termination of his appointment the receiver provided some further services to Lawrenson after 10 September 1999. The receiver then prepared an account for services rendered and expenses incurred totalling $120,897.04. On 22 September 1999 the administrator paid the receiver $60,000 as part payment. The administrator then prepared a report to creditors observing that there was some uncertainty as to the priority position of the balance of the receiver's fees. The receiver claimed that his fees should be treated in priority to the fees of any other creditor including secured creditors. On 5 September 1999 Lawrenson entered into a DOCA.

The first question considered by Gillard J was whether he had jurisdiction to make orders in relation to the payment of the receiver's fees, costs and expenses. The Law contains no specific provision in relation to the payment of Court appointed receivers' fees in contrast to s425 of the Law in relation to receivers appointed pursuant to an instrument. Rule 39.06 of the Rules of the Supreme Court of Victoria provides that 'the Court may provide for the remuneration of receivers'. Following a number of authorities the Court accepted that it did have jurisdiction to make orders of the kind sought .

There were four major issues for the Court to consider:

  1. the effect if any of the execution of the DOCA and the provisions of s444D of the Law on the receiver's entitlement to have his fees paid in priority to other creditors;
  2. the proper method of calculation of the costs and fees, ie the IPAA scale or the Supreme Court scale;
  3. the proper treatment of costs and expenses incurred after the termination of the receivership on 10 September 1999; and
  4. whether the receiver - manager performed services outside the scope of his receivership and if so whether there was an entitlement to remuneration for such services.
Effect of DOCA

The DOCA contained a provision agreeing that the receiver should be paid $60,000 as part payment of his fees which was done. This left an unpaid balance of $60,897.04 for work done prior to 10 September 1999 and $18,709.74 for work done after that time. The receiver was not a party to the DOCA. He attended the meeting of creditors but did not take part in it. The purpose of the DOCA was for the administrator to collect funds due to Lawrenson and to discharge its priority debts and claims 'in the order specified in s556 of the Corporations Law.' Section 556 makes no provision for any priority payment to a receiver-manager. Secured creditors appeared at the hearing and they argued that the receiver was a creditor and bound by s444D so that he was not entitled to any priority.

Following previous authority the Court accepted that a Court-appointed receiver was entitled to look to the assets of the company to meet his reasonable and proper remuneration costs and expenses. The Court-appointed receiver has a right to an indemnity in respect of all liabilities which he incurs and that indemnity ranks as a first charge over the company's assets. The right of indemnity is a lien over the company's assets which arises by operation of law. The lien gives a receiver priority over the claims of even secured creditors. This is because the object of the Court appointing a receiver manager pursuant to s1323 of the Law is to protect the company's assets for the benefit of creditors by placing an impartial person in charge of the company. The receiver is an officer of the Court and performs and acts in that capacity in carrying out his services however, the Court does not give him any indemnity other than an indemnity out of the company's assets.

In Gillard J's view the receiver's lien did not make him a creditor of the owner or person with an interest in the property of which the receiver assumed control. Those people did not owe the receiver any money. There was no relationship of debtor/creditor between them. Whilst the receiver was not strictly speaking a creditor, some holders of a lien in some circumstances have been treated as a creditor and even as a secured creditor by reason of statute. To determine whether the receiver here was a creditor Gillard J considered the purpose of Part 5.3A observing that:

'The whole scheme of Part 5.3A puts the fate of the company in the hands of its creditors, those who have dealt with it in the past, are owed money by it and who can by reason of their dealings and information supplied, make a decision as to its future.'

In his view the receiver/manager was not such a person because his right to be paid money from the company's assets did not arise from a debt owing to him by the company but it arose from his right in law to be reimbursed. In Gillard J's view for that reason, the receiver was not a creditor within the meaning of s444D(1) and there was no statutory provision which defined him as such. In case he was wrong in that view he suggested that the lien gave the receiver/manager priority over other creditors so that he should be treated as a secured creditor. In other words, s444D(2) rather than s444D(1) would apply.

Scale applicable

The Supreme Court of Victoria published a scale of rates appropriate for receivers/managers operative as at and after 1 July 1995 in Practice Note (1995) 2 VR 549. That Note provided that:

'The rates are not mandatory and the Court is not bound to allow remuneration at the published rates. In every case the fixing of remuneration is a matter requiring the exercise of the discretion of the Court and thus requiring consideration of (among other things) the complexity of the particular matter.'

The IPAA rate is at a significantly higher rate and was published on 1 December 1997. The receiver calculated his charges on that rate and sought to have them paid on that basis. Gillard J found that the Practice Note should apply unless the receiver could show that the scale was inappropriate. The affidavit evidence filed by the receiver provided very little evidence to suggest difficulty or complexity. The evidence seemed to be aimed at showing that the receiver did a good job rather than that there was any particular difficulty or complexity. For that reason a Court did not believe that the receiver had convinced him of any reason why he should receive a higher remuneration than that set out in the Practice Note and for that reason he only allowed remuneration at the court rate.

Work performed post receivership

From the evidence put before him Gillard J was not convinced that all of the work done after the receivership had been terminated was necessary for the purpose of finalising the receivership. He referred this issue to the Master so that proper evidence could be provided and the Master could determine the extent to which fees should be allowed for that work.

Nature of work during receivership

The Company argued that some of the items claimed by the receiver were in respect of work which he was not required to do in that capacity. Gillard J closely considered the evidence and formed the view that the relevant work was within the power and authority conferred on the receiver and manager. The Company argued that the court should refer the Bill to a Master for an item by item consideration. Gillard J was not prepared to put the receiver to the expense of going through that process. He observed that the receiver/manager had sworn an affidavit setting out in some detail what he had done and the charges which were to be made in relation to that work. There was no cross-examination on any of the affidavits so that no one had been asked to explain the basis on which the work fell within or outside the receivership. In the circumstances he felt that it was inappropriate to refer the matter to a Master and accepted that everything that the receiver/manager did up to and including 10 September 1999 was authorised and necessary in order for him to properly perform his role. Finally, it was argued that a company may have insufficient assets to meet the balance of their receiver/manager's claim. The Court did not believe that this was relevant finding that the receiver/manager was entitled to his remuneration and expenses out of the assets over which he had assumed control. He clearly had a lien over those assets and the company's financial viability or otherwise was no reason to refuse to enforce that lien.

Conclusion

The case is an important one for Court-appointed receivers. It confirms that they have a lien which arises by operation of law over the assets of the company to which they are appointed but that they are not a creditor of that company. For Victorian practitioners the case makes it clear that if they wish to charge at IPAA or rates other than as set out in the Practice Notes they must provide evidence of the difficulty or complexity of the receivership such as to justify the giving of a greater rate. For those who wish to challenge payments to a receiver on the basis that the work done falls outside of attaining the objectives for which the receiver was appointed, the case shows how important it is for them to challenge the evidence put forward orally or by affidavit by the receiver and his team. In this case the failure to cross examine those deponents was fatal to the opposition to the receiver's application on the basis that the work fell outside the receivership.

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The appointment of a receiver to a cause of action

In the Cadima case Austin J of the Supreme Court of NSW considered an interesting application by a director of a company in liquidation to appoint a receiver to a cause of action of the company so that the receiver could bring proceedings in the name of the company. The case confirms that the Court can appoint a receiver to a cause of action and sets out the factors which the Court will take into account in determining the appropriateness of doing so where a company is in liquidation.

Cadima Express Pty Limited (Cadima) was liable for group tax in relation to its employees. The ATO issued a statutory demand for arrears of over $500,000 on 18 April 1992. The ATO also commenced separate proceedings against Mr and Mrs Dickerson, directors of Cadima, in the District Court to recover penalties from them for Cadima's failure to pay the group tax. Various negotiations took place between the parties with a view to reaching a commercial resolution of the matter. These culminated in a letter from the ATO on 6 November 1996 offering a settlement conditional on the receipt of certain payments and including an offer by the ATO to adjourn the matter for 6 weeks on 7 November 1996. On 19 December 1996 the winding up application came back before the Court. The ATO alleged that by 19 December 1996 Cadima was in default of the arrangement set out in the 6 November 1996 letter in a number of respects. There was no appearance on behalf of Cadima and the ATO sought and obtained a winding up order. Cadima's non appearance was the result of its solicitor overlooking a notation of the hearing date in his diary.

In a Report as to solvency (the Report) produced by the liquidator of Cadima on 31 October 1997 the liquidator stated that he wished to commence proceedings against the Commissioner for the recovery of preference payments under s588FA or for the recovery of 4 dispositions under s468 of the Law. The Report also indicated that the liquidator had available to him an action against the directors under s588FH if the payments made by Cadima to the Commissioner had the effect of relieving some of the director's personal liability to pay. In reaching his conclusion that an action was available against the Commissioner the liquidator concluded that Cadima was insolvent at all relevant times. The liquidator filed a Statement of Claim on 1 October 1998 suing the ATO to recover payments made to it by Cadima for group tax totalling almost $700,000 as unfair preferences or voidable dispositions. The ATO cross-claimed against Mr and Mrs Dickerson asserting that they were obliged to indemnify the ATO in respect of any loss to the ATO flowing from any order that he repay monies to Cadima relying on s588FGA(2) and s588FGA(4). On 28 June 1999 the ATO settled with the liquidator and agreed to repay $560,000. The ATO's cross-claim against Mr and Mrs Dickerson remained on foot.

Mr Dickerson filed a Notice of Motion seeking to bring a representative action on behalf of Cadima against the ATO for breach of contract. He wished to allege that by the exchange of correspondence which culminated in the ATO's letter of 6 November 1996 a contract had been formed which precluded the ATO from taking the winding up action which it took on 19 December 1996. He sought the appointment of an official liquidator as receiver to pursue a cause of action on behalf of Cadima against the ATO basically for breach of that contract.

The ATO asserted that Mr Dickerson's application was motivated for a collateral purpose being to defeat the ATO's cross-claim against him.

The liquidator was opposed to the appointment of a receiver to pursue the claim. Following his investigations of Cadima he had formed the view that its only asset was the preference claims against the ATO. He did not believe that Cadima had good prospects of success in the proposed action and believed that Mr Dickerson's motivation was principally, if not entirely, because he saw them as the only possible defence available to him to the ATO's claim against him personally. Austin J inferred from this that the liquidator had given due and proper consideration to the merits of the suggested proceedings and decided that those merits did not justify putting the company's assets at risk by bringing in the proceedings.

The Court found that it had the jurisdiction to appoint a receiver to pursue a cause of action on behalf of another. If the orders were granted they would give the receiver control over the chose in action and empower the receiver to run the litigation in order to realise the property it represented for the benefit of the company. The fact that the company was in liquidation did not preclude the Court's power to appoint a receiver. The Court has an inherent power to permit proceedings to be taken in the name of a company which is being wound up at the instigation of a creditor or contributory before agreeing to proceedings being bought in the company's name however the Court needed to consider whether or not the proposed cause of action disclosed by the pleading together with whatever evidence was put forward in its support demonstrated an arguable case. The Court also believed that the liquidators attitude was a particularly relevant matter to it in exercising its decision on this question. Other factors the Court would take into account were the need to be satisfied that the company's assets were not put at risk in the proceedings, that the liquidator was not personally exposed to liability without proper protection and the risks which the litigation posed for the defendant in circumstances where the plaintiff was in liquidation. For those reasons the Court could require the person who proposed to conduct the litigation to give an indemnity to secure the company, the liquidator and possibly security for costs to protect the defendant. The Court may also make in order permitting the liquidator to be excused from the proceedings to protect the liquidator from personal liability in relation to those proceedings. According to Austin J the better view is that unless the liquidator is found to have been guilty of some misconduct where the liquidator is not a party to the proceedings there will be no legitimate basis on which a costs order could be made against the liquidator personally in any event.

Austin J had no difficulty in finding that the Court had the power to appoint a receiver to run the litigation where the Court had formed the view that it was appropriate to permit those proceedings to be commenced and prosecuted in the company's name by someone other than the liquidator. The principles to be considered were partly the same as those to be considered where an order was being made by the Court that a creditor or contributory take proceedings in the company's name, namely:

  1. that there was an arguable case or solid foundation to support the relief sought;
  2. that the assets of the company in liquidation, the liquidator's personal position and the position of the other party to the proposed proceedings would be adequately protected; and
  3. whether the appointment of a receiver is the best method of dealing with the issue rather than the third party applicant itself running the litigation.

Austin J was not convinced that there was an arguable case or solid foundation to support the proposed causes of action in this case. Whilst there had been an exchange of without prejudice correspondence Austin J did not believe that the effect of that correspondence did in fact create a binding contractual agreement precluding the ATO from proceeding with the winding up in the circumstances in which it did so. If a binding contractual agreement had been reached Cadima had not complied with its obligations under the terms of the correspondence so that even if such a binding contract had been formed it had effectively been terminated by Cadima's conduct. Austin J found that it was clear that the ATO was entitled to seek the winding up order which it did seek on 19 December 1996 without breaching any agreement recorded in the 6 November letter. For that reason he did not think that it was appropriate to appoint a receiver to run the litigation. If he had found that there was an arguable case there would have been a question as to whether or not Cadima's loss or damage was caused by the ATO's conduct in applying for the winding up order or by Cadima's own failure to seek to have the winding up terminated in light of the alleged facts. Although it was not necessary for him to do so Austin J went on to say that he doubted whether he could be satisfied that the case was an appropriate one for the appointment of a receiver because the liquidator had considered the matter and decided not to risk the company's assets by taking the proceedings and he was not satisfied that the assets being offered by Mr Dickerson as security for costs would necessarily have been sufficient. The fact that the liquidator did not think that the proceedings ought to be brought was a very compelling factor in Austin J's decision as he found that: 'the Court should not overrule a liquidator's judgement unless a good reason for doing so is establish'.

Conclusion

The case is quite an interesting analysis of the circumstances in which the Court would:

  • allow a creditor or contributory to run proceedings in the name of a company;
  • appoint a receiver to a cause of action of a company in liquidation to enable the receiver to run that litigation. The relevant circumstances are:
    • there must be an arguable case;
    • there must be adequate protection of the company's assets, of the liquidator's costs and potential security for the defendant's costs; and
    • appointing a receiver to run the proceedings must be the best method of dealing with the issue.

Whilst confirming that the Court had power to do so in an appropriate case no such orders were made here.

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A receiver's obligations when exercising a power of sale

Commonwealth Bank of Australia v Milder Elfman Szmerling Krycer Pty (unreported, Hansen J, Supreme Court of Victoria, 18 February 1998)

This case arose from the collapse of the legal practice carried on by a solicitor corporation known as Milder Elfman Szmerling Krycer Pty (MESK). The case was commenced by the bank, which was seeking repayment of certain debts, but also relates to counter-claims brought by MESK. The counterclaims alleged a breach of s 420A and are the focus of this paper.

MESK was in financial difficulties. There were divisions in the partnership and pressure from the bank to reduce debt. Ultimately, in the space of a single day, the company appointed an administrator, the bank appointed a receiver (the Receiver), and the Supreme Court of Victoria, on the application of the Law Institute, appointed a receiver under the Legal Profession Practice Act (Vic).

The administrator withdrew from active involvement in the company's affairs also immediately.

The Court appointed receiver assumed control of MESK's legal practice. For present purposes, the significance of his involvement was that he demanded that the Receiver close the practice or sell it as soon as possible.

The Receiver advertised the practice for sale within days of his appointment. Tenders were closed less than two weeks later and the practice was sold just over a month after the receivership commenced.

The plaintiffs alleged that the Receiver had been negligent in a number of ways. Most of the allegations were dismissed by Hansen J on the basis that they were not supported by any evidence. The more substantial claims were as follows.

Firstly, the plaintiffs alleged that the Receiver had failed to consult adequately with MESK with respect to the maintenance of the value of the practice. Hansen J held that there was no such duty to consult. In any event, his Honour noted that there had been discussions with MESK and that, in circumstances where the Court appointed receiver was pressing for an early sale, those discussions were more than adequate.

Secondly, the plaintiffs complained that the Receiver should have continued to operate MESK's practice in order to preserve goodwill. Hansen J held that where it was uneconomical to do so, the Receiver was not obliged to continue to run the business.

It was noted above that the Receiver advertised the practice for sale within days of his appointment. The plaintiffs' third complaint, a complaint which they aired even before the advertisement was published, was that including the name of MESK in the advertisement destroyed goodwill. Hansen J accepted that a good reputation was an essential ingredient of a legal practice. He also acknowledged that advertising the receivership would damage the practice's reputation. But in this case the damage had already been done, a receiver had been appointed, and it was important to publicise the sale of the practice, and sell it, before the goodwill deteriorated any more than was necessary. Hansen J held, in effect, that the advertisement was the lesser of two evils.

A fourth claim by the plaintiffs was that the Receiver was negligent in failing to obtain a valuation of MESK's assets, including its goodwill. Hansen J's decision on this appoint also turned on the urgency which was driving the receivership. In circumstances where a quick sale was required, the Receiver was not obliged to obtain a valuation or, for that matter, consult with a practice broker.

Conclusion

The decision in the MESK case should give receivers some comfort that s 420A does not require them to perform their duties in a pedantic manner. Hansen J's decision recognises that even though a receiver is subject to a statutory duty to take care, the exiguous circumstances which routinely accompany his or her appointment mean that the duty may need to be performed expediently, without taking all the usual steps leading up to a sale. Having said that, the significance of the appointment of the receiver under the Legal Profession Practice Act (Vic) must not be overlooked. This was not a case in which a self-interested appointor demanded that the receiver sacrifice the interests of the company. Rather, it was a receiver appointed by the Court in the public interest who created the pressure for a quick sale.

Diddams v Commonwealth Bank of Australia (unreported, Branson J, Federal Court of Australia, 17 July 1998)

This case concerned the sale of a nightclub known as Rogues and an associated restaurant known as Pete and Andy's Bar & Grill (the Business). The applicants included the company which owned the Business and one of the directors who had guaranteed some of the company's indebtedness (the Guarantor). The respondents were the Receiver (the Receiver) and the bank which appointed him.

The applicants alleged that the Receiver had failed to take all reasonable care to sell the Business for its market value or, alternatively, the best price obtainable in the circumstances.

Prior to the appointment of the Receiver, the trading performance of the Business had been deteriorating. One of the major difficulties facing the Business appears to have been the terms of the lease of the nightclub and restaurant premises. Without going into details, it is fair to say that those terms were not commercially viable. By the time the Business went into receivership the rental payments were in arrears and the owners of the Business were in dispute with the Lessor (the Lessor).

Shortly after assuming control of the Business, the Receiver commissioned a report from a valuer with expertise in the hotel industry. The valuer advised that a sound commercial lease was critical to the marketability of the Business. If such a lease could be obtained, the Business could be sold for between $150,000 and $200,000.

The course of events following the Receiver's appointment are complicated. In summary, it appears that the Guarantor and the Lessor were engaged in a serious game of brinkmanship. The Guarantor wanted to force the Lessor to renegotiate the terms of the lease by cutting off rental payments. The Lessor wanted the opportunity to buy the Business at a low price, re-possess the premises, and then sell the Business (with a new lease) for a profit.

Matters came to a head when, one night, the Lessor had the locks changed. From that point the Receiver had to choose between selling the Business's plant and equipment to the Lessor or obtaining a court order that would allow him to remove the plant and equipment from the premises so that it could be sold to someone else.

The Lessor offered to buy the plant and equipment for $100,000. Other potential purchasers had offered up to $250,000 for the Business. But these offers were only tentative and foundered when it became apparent that the Lessor was not prepared to offer a more reasonable lease.

The Receiver ultimately accepted the Lessor's offer for the plant and equipment. Before he did so, however, the Guarantor had said he was willing to purchase the Business for $310,000 (an amount which would have prevented him from having to pay under his guarantee). The Guarantor did not make a firm offer and the Receiver did not pursue one from him.

The Business was sold to the Lessor for about $100,000. The Lessor sold it just over a month later for $350,000.

The applicants' first complaint was that the Receiver did not advertise the sale of the Business. Branson J rejected this argument, accepting the valuer's evidence that it would not have been realistic to advertise the sale until a new lease was in place.

The applicants' second complaint was that the Receiver had failed to investigate adequately the offers to purchase the Business made by other parties. Branson J rejected this argument also. Her Honour found that the Receiver had acted appropriately by providing these parties with information about the Business and that, given the problems with the lease, it was not necessary for him to pursue them any further.

The applicants' third complaint was that the Receiver had negligently failed to negotiate with the Guarantor. This claim was, in a sense, successful. Branson J held that although:

  • the Guarantor never made a firm offer for the Business;
  • the Guarantor did not respond to an invitation to make such an offer; and
  • the Guarantor's expression of interest in purchasing the Business was made at the eleventh hour (and, arguably, was another move in his game of brinkmanship with the Lessor),

the Receiver was obliged to investigate the Guarantor's interest and give him a final opportunity to make an offer for the Business. The Receiver's failure to do so contravened s 420A.

The applicants' victory on this point, however, was a pyrrhic one. Branson J found that no damages flowed from the breach of duty. This was for the simple reason that even if the Guarantor had been given a further opportunity to buy the Business, he would have been unable to complete the purchase.

Conclusion

Diddams' case is a hard one for a receiver. The effect of Branson J's decision is, in a sense, that a receiver should leave no stone unturned in his or her search for the best price on a sale of charged property. This is an onerous duty and it is difficult to resist speculating as to whether Her Honour would have reached a different conclusion if she had thought that substantial damages would be payable.

Diddams' case is also a hard one for the lawyer or receiver who is trying to apply s 420A. Branson J does not discuss the differences between the market value standard and the best price standard in s 420A. But the judgment does refer to both standards as if they were applicable. When describing the Receiver's duty to pursue an offer from the Guarantor, her Honour refers to it as a duty to achieve the best price that was obtainable in the circumstances. This would suggest a conclusion that the market value standard did not apply, presumably because of the abnormal circumstances in which the Business was being sold. Later, however, Branson J finds that the Business was sold for greater than its market value. Significantly, in doing so Branson J accepts evidence that the lease problem would prevent the Business from being sold as a going concern to anyone other than the Lessor. The use of the term market value in this context is clearly inconsistent with the idea that the notion of market value does not apply to a fire sale.

Jeogla v ANZ Banking Corporation Limited [1999] NSWSC 563 (unreported) (11 June 1999)
Introduction

A court has for the first time examined the nature and extent of a receiver's obligations in exercising a power of sale under section 420A of the Law. Consequently, the decision is of importance to both mortgagees and the receivers they appoint to exercise any power of sale.

General Factual Outline

The case concerned the exercise by the ANZ Banking Corporation Limited (the Bank) as mortgagee, of its power of sale pursuant to a registered mortgage in respect of a rural property (the Property) and certain elite beef cattle (the Livestock) which together, with the plant and equipment, formed the operations of 'Jeogla Station' (Jeogla). For this purpose the Bank appointed a receiver and manager to Jeogla (the Receiver) who was charged with conducting the marketing and sale of the Property, the Livestock and the plant and equipment. In turn the Receiver appointed an appropriately qualified real estate agent to market and sell Jeogla (the Agent) as well as an expert to value the Livestock (the Stock Valuer).

The plaintiffs in the case were the mortgagors of Jeogla. Their claim against the Bank and the Receiver was that the Receiver had sold both the Property and the Livestock at less than their respective market values and thereby breached the obligations imposed upon him by section 420A of the Law. Section 420A entitled 'Controller's Duty of Care in Exercising Power of Sale' requires the controller (in this case the receiver): 'in exercising a power of sale in respect of property of a corporation' to 'take all reasonable care to sell the property for' not less than its market value.

Although the plaintiffs alleged that the Receiver breached section 420A with respect to his sale of both the Property and the Livestock, the Court ultimately dismissed their claim in respect of the Property; however, the Receiver was found to have breached the provision in respect of the sale of the Livestock. The principal issue in the case therefore, was the question of how the Receiver ought to have dealt with the marketing and sale of the Livestock.

Characteristics of the Livestock as an asset

The particular characteristics of the Livestock as an asset were crucial to both the submissions presented to the Court and indeed to the ultimate finding that the Receiver failed to market and sell the Livestock so as to ensure that the market value was attained. The Court accepted that the Livestock had an impeccable breeding background and reputation which gave it a unique position in both the domestic and international beef cattle markets. The plaintiffs presented evidence establishing that the Livestock's particular characteristics included:

  • that they were a product of Jeogla, a world famous Hereford breeding station which had pursued a genetic enhancement program over 100 years thereby producing superior quality beef cattle which commanded a premium price in both domestic and international beef cattle markets;
  • that the core breeding herd on Jeogla was a very valuable asset (due to the long established genetic enhancement program) in its own right which would command a premium price in the beef cattle breeding market;
  • that they were accredited by the Cattlecare On-farm Quality Assurance Training Program;
  • that they were accredited with ISO9002 Quality Assurance status, an internationally recognised and developed quality standard which had been achieved by only two other Australian cattle stations;
  • that they were V1V branded beef cattle, a very highly regarded brand in the beef cattle market.
Alternatives facing the Receiver in marketing and selling the Property and Livestock

The parties agreed that the Receiver had a number of different options with respect to the marketing and sale of the Property and the Livestock. Not all of these options would however ensure that the correct market price for both assets was ultimately attained. Herein lies the root of the Receiver's problems in respect of section 420A. In marketing and selling the Property and the Livestock the Receiver had the following options:

  • sell the Property and the Livestock separately with the Livestock being sold by dispersal sale;
  • sell the Property and the Livestock as a going concern with the purchaser of the Property being given a right of first refusal to purchase the Livestock at a defined and pre-determined price;
  • sell the Property and the Livestock as a going concern with the purchaser of the Property being given a right of first refusal to purchase the Livestock but at no defined and pre-determined price

Obviously there would be various advantages and disadvantages attached to each of these options and it is was plainly imperative that the Receiver fully understand what these were. Indeed Einstein J stated that a 'proper understanding' of the advantages and disadvantages of the respective options was 'at the heart of the issues litigated'.

The Receiver's marketing and sale of the Property and Livestock

The Receiver requested 3 rural property agents to prepare marketing submissions for the sale of Jeogla. All 3 agents recommended that the property and livestock be marketed and sold together so that the purchaser had an opportunity to buy the enterprise as a going concern. To this end, the Receiver accepted the Agent's recommendation that the successful purchaser of the land be given the right of first refusal for the livestock at pre-determined values, which were to be included in the information memorandum to be sent to prospective purchasers of the land. This recommendation by the Agent was based on his view that the Livestock were crucial to the eventual sale of the Property and were best marketed and sold that way rather than in their own right. That is, in the Agent's view, Jeogla was best marketed and sold as a going concern business, not by separately marketing and selling the Property and the Livestock as individual assets.

The Receiver gave evidence that selling the Property and the Livestock together as a going concern would achieve the market price for both assets. Indeed he appears to have blindly followed his 'general commercial experience' in relation to asset sales being, that the sale of assets together as a going concern would invariably result in the market value for all assets being achieved; this he said was true 'not just for livestock - any business'. The inclusion of the Livestock at a pre-determined price would enable prospective purchasers to bid with certainty for the entire package (ie the Property and the Livestock) irrespective of how that bid was ultimately apportioned between the two assets.

In essence, the Receiver's strategy was that any shortfall between the pre-determined price for the Livestock and the 'market value' of the Livestock as at the date of auction would be picked up by the purchaser effectively paying a premium on the Property component of the purchase. Conversely if the pre-determined price for the Livestock was over-valued vis-à-vis the 'market price' as at the date of the auction, the purchaser would receive a discount on the Property component of the purchase.

Ultimately, this marketing and sale strategy was based on 2 crucial errors. Firstly, the Stock Valuer appointed by the Receiver valued the Livestock by reference to their market value in a production sale market rather than from those prices likely to apply to a dispersal sale market, thereby seriously undervaluing the Livestock's true value. That is, the Stock Valuer calculated the Livestock's market value by reference to the wrong market. Secondly, the Receiver failed to appreciate that there was in fact more than one potential market for the Livestock to be marketed at and sold to. In evidence the Receiver, when questioned as to what types of valuations of the Livestock he had requested, continually referred to 'the market,' thereby implying that his understanding was that only one market for the Livestock existed.

The following exchange during cross-examination of the Receiver by Counsel for the plaintiffs emphasised the Receiver's limited knowledge of the Livestock or indeed the industry in which he was conducting the sale:

Q: Did you ever ask anyone to value this cattle herd on the basis that it be submitted to a dispersal sale?

A: No, I just asked for a valuation of the cattle.

Q: Did you ask anyone who provided you with such a value or appraisal whether they had considered what these animals might realise in a dispersal sale?

A: Well, I understand that the valuation provided by [the Stock Valuer] was the value of the livestock on a market basis, which would imply a sale...

Q: Quite?

A: Now, he-yes. Sorry - what's the right word - a sale by mechanism of the livestock. Whether you want to call it a dispersal sale or some other sort of sale he had in mind, he valued the cattle at the market price...

Q: Did you ever enquire of him as to what market he had in mind as the market in which the hypothetical sale was taking place?

A: Not specifically. The market is all the people that buy livestock

Q: And you asked neither of these people to direct his mind to advising you nor did you ask anyone else to advise you as to whether there might be more advantageous ways of realising the stock than selling them in connection with the sale of the land at the appraised price from [the Stock Valuer]?

A: No, I didn't think I needed to.

Accordingly, due to his limited understanding of the nature of the asset he was selling and the possible markets which might be interested in purchasing that asset, the Receiver did not at any stage consider commissioning an appraisal of what the Livestock's market value might be in a dispersal sale. In essence, the plaintiffs alleged that the Receiver breached section 420A, not because he did not attempt to obtain a valuation of the livestock's market price, but rather because the Stock Valuer's market price valuation and overall marketing strategy (adopted by the Receiver) was based on the wrong market. Herein lay the cause of the Receiver's breach of Section 420A.

Consequences of the Receiver's marketing and sale strategy

As a consequence of the strategy outlined above, only those persons interested in purchasing the property and the Livestock were attracted to the auction. Counsel for the plaintiffs described this scenario as effectively meaning that 'access to competitive bidding in relation to the animals was predicated on the proposition that any bidders were prepared to pay, in effect, a door fee of $5 million to get into the sale yard at all (my emphasis)'.

The Receiver does not appear to have considered how this strategy might have effected the likelihood of achieving the market price for the Livestock in any market, whether it be the dispersal sale market or the production sale market. Indeed the plaintiffs adduced expert evidence that:

  • it was not correct to say that 'buyers who might be interested in attending a dispersal sale of the herd were likely to be in the market for land';
  • that people judged the value of the land and the value of the cattle almost totally in isolation.

The ultimate effect of this strategy is evident from the following exchange during cross examination of the Agent:

Q: So this is right; that as you understood it as you came up towards the auction, the persons likely to appear at the auction were either those interested only in the land, and not interested in buying the cattle at all, or those interested in buying the land and the cattle?

A: Mmm...(which Einstein J interpreted as a 'yes')

One can see that this strategy resulted in the 'wrong' purchasers attending the auction for the purposes of realising the market value of the Livestock. The particular group of prospective purchasers who attended the auction were never going to introduce the competitive bidding for the Livestock that was necessary to ensure that its true market value was realised. Indeed it is plain that (with the benefit of hindsight) it was inevitable that this strategy would result in a breach by the Receiver of Section 420A.

Construction and Interpretation of Section 420A - the parties' submissions

It fell to the Court to consider both the construction and interpretation of Section 420A. Section 420A has two limbs expressed as a function of the controller's duty to exercise reasonable care to sell the property for:

  • if, when it is sold, it has a market value - not less than that market value; or
  • otherwise - the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.

The plaintiffs submissions have been outlined above. The Receiver submitted that Section 420A does not impose upon a mortgagee (or alternatively a Receiver) a duty to take reasonable care to ensure that the assets are not sold for less than market value. Rather, the Receiver asserted that as Section 420A did not stipulate a particular time frame in which the asset is to be sold, it might be sold by the mortgagee in 'forced' sale conditions at the price existent in the 'fire sale' market at the relevant time. The Bank submitted that it was unnecessary for the Court to distinguish between the Receiver's duties under either limb (a) or (b) of Section 420A because the Receiver took all reasonable care to sell the assets for the value specified in both limbs (a) & (b).

Before discussing Einstein J's interpretation of the Receiver's obligations under Section 420A it is useful to understand the obligations of a mortgagee exercising a power of sale vis-à-vis the mortgagor.

The position under the general law

Einstein J stated that it was clear that the mortgagee is not a trustee of the power of sale for the mortgagor. Further, His Honour stated that a Receiver appointed by a mortgagee to exercise the mortgagee's power of sale in respect of a security had as his 'primary purpose' the realisation of the charged assets for the mortgagee's benefit. However this did not mean that the Receiver had no responsibility to the interests of the mortgagor at all. The underlying reason for this proposition is that the Receiver is an agent of the mortgagor company, and therefore is accountable to the Mortgagor for the manner in which he exercises the power of sale.

In terms of the duties owed by the Receiver to the mortgagor when exercising the power of sale, those were founded on equitable rather than tortious principles. Thus there is not a duty upon the Receiver to take reasonable care (as the concept is recognised in negligence) in selling the mortgagor's assets - but rather a 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 the conduct of the receivership'. Accordingly under the general law the receiver's obligations do not specifically include a requirement that the Receiver attain any particular price for the assets sold.

Section 420A

In Einstein J's view Section 420A 'clearly imposes a higher standard of duty' to that previously imposed on a mortgagee/receiver by the general law. The obvious intention of the legislature is to render the mortgagee/receiver more accountable to the mortgagor than he is in equity.

With respect to the concept of 'market value' and 'best price reasonably obtainable' introduced by Section 420A, Einstein J found that what was required from the Receiver was an objective assessment of the 'market value' obtained from independent valuations and furthermore, advice as to the means by which the asset should be marketed and sold such that this 'market value' was ultimately fully realised. The Law does not define the term 'market value'. As to what exactly the 'market value' of a particular asset was His Honour resorted to the Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1996 (Cth) in explaining the concept of 'market value' as:

'intended to refer to the value of the property concerned if it were disposed of to an unrelated purchaser bidding in a market on an ordinary commercial basis for property of the kind disposed of, without any sort of discount or incentive for purchase being offered...[it] is not intended to include a situation where the property was being disposed of at a 'fire sale', at discounted prices because of some immediate need on the part of the owner to liquidate his or her assets'.

Ultimately this point was not decisive as the Receiver had not marketed or sold the Livestock to the correct market. This may be somewhat confusing, because it may be argued that in the market in which the Receiver chose to exercise the power of sale, the market price was in fact obtained. However it is clear from the decision that Section 420A extends to requiring a receiver to obtain the 'market price' in the market which most accurately reflects the true value of the asset concerned.

With respect to the construction of Section 420A and specifically the relationship between sub-paras (a) and (b), Einstein J found that it was only if the asset does not have a 'market value' (presumably because there is no 'market' for the asset concerned) that one needs to be concerned with sub-para (b). That is, if at the time the asset is sold, there is a market for that asset, the asset must not be sold for less than the market value prevailing in that market. If at the time the asset is sold there is no market for that asset then the Receiver is required to sell the asset for the 'best price reasonably attainable having regard to the circumstances existing when the property is sold'. In this case there was clearly a market for the Livestock and therefore no need to consider sub-para (b). For the reasons stated above, the Court found that the Receiver had not obtained at least the market value in respect of his sale of the Livestock.

Was the Receiver able to rely on the Stock Expert's valuation so as to absolve himself from liability?

The short answer to this question is no. Einstein J referred to the High Court's decision in Commercial & General Acceptance Ltd v Nixon & Anor in which it considered an identical provision to Section 420A contained in the Property Act (Qld) 1974. In that case deficient advertising by the mortgagee's agent led to a sale of the property for less than its market price. The High Court held that the mortgagee was liable and could not satisfy its responsibilities by delegating its duties to another. This principle was applied to the Receiver. In reaching this conclusion Einstein J accepted a long line of authority which is best summarised by the following statements:

  • 'A reasonable man, selling his own property by auction, and wishing to obtain the market value, would not allow the auctioneers a free hand to advertise in whatever manner they thought fit; he would make reasonable endeavours to ensure that the advertising proposed was adequate. It is not unduly burdensome to require a mortgagee to exercise similar care';
  • 'I think that the reasonable care which has to be taken is to make sure, to assure oneself, that the price at which the estate is proposed to be sold is the best price which can reasonably be obtained'(my emphasis);
  • 'The power is exercised primarily on behalf of and for the benefit of the mortgagee by his agent in whose selection the mortgagor has no say. The agent acts in accordance with the instructions of the mortgagee and has no independent discretion to exercise except in so far as the mortgagee may choose to leave arrangements for the sale in the hands of the agent. It is not unfair or unreasonable in this situation that the mortgagee should have the responsibility for the taking of reasonable care to ensure that the market value is obtained, including the responsibility for adequate advertising of the sale. He should satisfy himself that the property has been advertised in accordance with his instructions - that, after all, is what a prudent vendor would do in the circumstances'.

Conclusion

In effect the wash-up is this: a Receiver is quite entitled, and arguably required (and indeed would be perhaps foolish not), to enlist the assistance of experts in determining the market value of assets and the best way to market those assets so as to ensure that their market value is obtained upon their sale. However, the Receiver remains ultimately responsible to the mortgagor for ensuring that, at a minimum, the market price is obtained. Whilst tasks necessary and conducive to obtaining the market price for the asset may be delegated by the receiver, ultimate responsibility may not be.

On which market is the Receiver required to realise the asset's market value one asks? On the basis of Einstein J's decision in this case, the answer would appear to be; in that market which reflects the true value of the particular asset by reference to its particular characteristics.

So where does this leave a receiver? Arguably in the unenviable position of being required to second-guess the expert's opinion where there is nothing on the face of it to suggest a mistake on the expert's part. In my view, the only safeguards for a receiver are to:

  • consciously develop a thorough understanding of the nature of the asset being sold and the most appropriate market for it to be marketed and sold to. At the heart of it, this was the Receiver's crucial mistake in this case.
  • not blindly follow his/her general commercial experience, which presumably is gleaned from a range of asset sales in a range of industries, none of which may provide the Receiver with the in-depth knowledge required for the particular asset and industry which he/she is faced with.
  • enlist the support of experts who have a proven record in relation to both the assets and the industry being dealt with;
  • ensure that marketing/selling agents actually complete the tasks the Receiver has agreed they are to complete; and
  • generally adopt a much more 'hands on' approach to the marketing and sale of assets.

This is a very important development which both receivers and banks should be familiar with.

Mariconte v Batiste [2000] NSWSC 288 (ureported, Supreme Court of NSW, Austin J, 10 April 2000)

This case concerned an application for judicial directions by a court appointed receiver (the Receiver ).

The Receiver had been appointed to sell the building known as The Newcastle Tattersalls Club (the Club).

The principal antagonists in the case had both been involved in the redevelopment of the Club. That project and their relationship had encountered difficulties. It appeared that Mr Mariconte wanted to complete the renovation of the Club. Ms Batiste, on the other hand, wanted control of the Club so that she could expand the neighbouring hotel, which she owned, and enhance its value.

The Club was auctioned on 8 December 1999. The highest bid was made by Ms Batiste. The second highest bid was made by Mr Mariconte. The Receiver entered into a contract to sell the Club to Ms Batiste. Her deposit cheque, however, was dishonoured and the sale fell through. Thereafter, the Receiver entered into negotiations with Mr Mariconte. At the same time Mr Mariconte and Ms Batiste commenced various legal proceedings against each other and the Receiver.

Ultimately, the Receiver found himself in what Austin J described as the unenviable position of having to choose between an offer of $935,000 from Mr Mariconte and one of $1.3 million from Ms Batiste in circumstances where she had recently defaulted on a contract and there were doubts about her ability to fund the purchase. In these circumstances, the Receiver took the prudent step of applying for judicial directions. Prior to the hearing of that application Mr Mariconte commenced bankruptcy proceedings against Ms Batiste.

During the hearing, the Receiver made it clear that he preferred to accept the offer, albeit lower, of Mr Mariconte. Austin J disagreed with the Receiver's preference because he did not accept the Receiver's five objections to accepting Ms Batiste's offer. Those objections and Austin J's conclusions in relation to them were as follows:

  • Ms Batiste was offering a 5% deposit rather than a 10% deposit. Austin J found that, given that the 5% offer was explained by a requirement of Ms Batiste's financier, it would not have been reasonable for the Receiver to reject her offer on this basis.
  • There was a shortfall of $220,000 in Ms Batiste's funding arrangements. Austin J ruled that it would be reasonable for the Receiver to require some further assurance that the shortfall would be made good but not reasonable for him to dismiss Miss Batiste's offer out of hand simply because of the shortfall. His Honour suggested that the Receiver give Ms Batiste an ultimatum to address the shortfall issue.
  • A bankruptcy notice addressed to Ms Batiste was pending. That notice expired on 14 April 2000. Austin J delivered his reasons on 10 April. In the circumstances, his Honour concluded that if the notice was not satisfied or set aside in time, the Receiver would be entitled to reject Ms Batiste's offer.
  • Mr Mariconte offered settlement within 35 days. Ms Batiste wanted 42 days to settle the purchase. Austin J did not consider it reasonable for the Receiver to reject Ms Batiste's offer simply because of this 7 day difference.
  • The Receiver queried the ability and willingness of Ms Batiste's financier to finance the purchase of the Club. In light of oral and documentary evidence from the financier, however, Austin J ruled that the Receiver was not entitled to reject Ms Batiste's offer on this basis alone.

Conclusion

To a casual observer, the circumstances of Ms Batiste's offer, especially the dishonouring of her earlier deposit cheque, would justify deep suspicion on the part of the Receiver. Given that suspicion, it is not surprising that the Receiver was attracted to the certainty offered by Mr Mariconte's offer.

Austin J's decision is a warning, however, that a receiver must be most particular when considering the rejection of a higher but questionable offer to purchase mortgaged property.

The decision also illustrates the different way in which a judge might approach a problem confronted by a receiver. Austin J emphasised that he was ruling on the propriety of the Receiver's conduct, not its wisdom. The distinction between wisdom and propriety drawn by Austin J is not entirely clear. In the circumstances of this case, however, Austin J appears to be counselling receivers that it may not be enough to act on a commercial hunch. Overt steps must be taken to demonstrate that the receiver has done all he or she reasonably could to achieve the best price on sale.

Inkorn Pty Limited v Herbert [2000] WASC 24 (unreported, Supreme Court of Western Australia in Chambers, 11 February 2000, Sanderson M)

This recent Western Australian decision is a reminder that s 420A of the Corporations Law is not the be all and end all of a receiver's or mortgagee in possession's duties when exercising the power of sale.

Section 420A requires receivers, mortgagees in possession, and other persons falling within the definition of controller to take all reasonable care when exercising the power of sale to achieve the property's market value or the best price obtainable in the circumstances.

The defendant was a receiver who had exercised his power to sell property of the plaintiff. The plaintiff commenced proceedings against the receiver alleging that the receiver had breached his duty to take reasonable care to sell the property for its market value or for the highest price available. The defendant applied to have these claims struck out.

The plaintiff's case was based on the proposition that the receiver owed him a duty to take reasonable care. The plaintiff's cause of action arose before s 420A of the Corporations Law became applicable. Accordingly, to establish this proposition the plaintiff had to rely on the receiver's obligations under the common law or in equity. In so doing, the plaintiff referred to a number of English authorities which held that a receiver owed a mortgagor a common law or equitable duty to take care to achieve a proper price when exercising the power of sale.

The defendant argued that the English authorities relied upon by the plaintiff did not represent the law in Australia. The Australian authorities, contrary to the English position, established that a receiver would not be liable provided he or she did not recklessly sacrifice the mortgagor's interests.

Master Sanderson agreed with the defendant and struck out the relevant parts of the plaintiff's claim.

Conclusion

This decision reaffirms the differences between Australian and English law and makes it clear that s420A in the Corporations Law has not effected a collateral change in the general law in this country.

Medforth v Blake [1999] 3 ALL ER 97 - Developments in England

The survival of the general law relating to receivers and the like raises the possibility of developments outside the realm of s 420A. An English Court of Appeal decision handed down last year illustrates the potential for change.

The issue was whether a receiver and manager of a pig-farm, appointed by a mortgagee, owed any duty to the mortgagor, over and above a duty of good faith, as to the manner in which he conducted the pig farming business.

The receiver had exercised his power to carry on the mortgagor's pig farming business for about 4 years. At the end of that time the receiver was discharged and the mortgagor resumed control of the farm. The mortgagor was dissatisfied with the manner in which the receiver had conducted the business. The mortgagor's principal complaint was that the receiver had failed to take advantage of freely available discounts on pig feed. Pig feed was the business' most significant cost of sale.

The trial judge found that the receiver, when he exercised his power to manage the business, owed to the mortgagor, over and above a duty of good faith, an equitable duty of care. The receiver appealed.

Sir Richard Scott V-C, with whom the other judges agreed, dismissed the appeal. The Vice-Chancellor held that:

  • the receiver owed the mortgagor an equitable duty of care;
  • that duty applied to the receiver's management of the business as much as it would have applied to his exercise of the power to sell the business; and
  • the content of the receiver's duty of care would depend upon the particular facts of a particular case but in any event was identical to the common law duty of care.

Conclusion

This decision is significant because it clearly affirms that a duty to take reasonable care to achieve a proper price arises from a receiver's equitable duty of good faith. Furthermore, it departs from previous authority in holding that this duty extends beyond sale to the management of a business.

In looking to equity rather than the common law for the source of a receiver's obligations, Medforth v Blake is in line with Australian authority. The difference, however, is that:

  • the Australian cases establish that the duty of good faith requires that the receiver not recklessly sacrifice the mortgagor's interests; whereas
  • Medforth v Blake establish that the duty of good faith requires that the receiver take reasonable care to achieve a proper price.

Despite this divergence, the possibility remains that Australian courts will look to Medforth v Blake as the new benchmark for receiver's duties under the general law (see J O'Donovan 'Receivers' Duties in Carrying on the Business: Good Faith or Due Diligence' (1999) 17 C&SLJ 528 at 530). If they do, the implications for receivers and mortgagees in possession could be significant.

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Appointment of a receiver under the CAPA Act

Young J of the Supreme Court of NSW was recently asked to appoint a receiver under the little used s39B of the CAPA Act.

Section 39B of the CAPA Act provides that:

'where the Court on the application made by a creditor of the Licensee or by the Minister is satisfied that ... any defalcation has been or may have been committed in relation to any trust account or trust fund of any Licensee ... the Court may appoint a receiver of all or any property which is held by the Licensee.'

The Credit Connection Pty Limited (CC) was a licensed commercial agent carrying on a debt collection business. On 16 April 1999 a document called 'Deed to Appoint Mercantile Agent' (the Deed) was created. CC then began to collect moneys from debtors of Reuters Australia Pty Limited (Reuters) on Reuters' behalf. The Deed was signed by Mr Naumoski on behalf of CC and by Mr Cannon purportedly on behalf of Reuters. At the date the document came into existence Mr Cannon was a credit controller employed by Reuters. He was terminated by Reuters shortly before 24 August 1999.

According to Reuters until Mr Cannon left its employment Reuters was not aware of any contract with CC. A draft of the Deed was apparently found after Mr Cannon left Reuters and the actual Deed was not discovered until after 31 August 1999. On 1 September 1999 Reuters withdrew any instructions for CC to collect its moneys. On or about 24 August 1999, the same day in which Mr Cannon's employment with CC effectively ceased, Mr Cannon gave a list of Reuter's creditors to CC. That list included people that had always paid their debts on time. Under the Deed Reuters was to pay CC a commission of 10% of the amount of each debt CC was instructed by Reuters to collect on behalf of Reuters. The commission was said to be due and payable by Reuters to CC on the earlier of the recovery of debt or any part by CC from the third party or seven days after the date an account was rendered by CC to Reuters (clause 3).

The Deed also provided that CC would be entitled to its 10% commission if Reuters subsequently withdrew its instructions to CC to collect the debt (clause 2(b)).

CC collected about half million dollars on Reuters behalf. Reuters then sued CC in the District Court (the Debt Recovery Proceedings) to recover that money and CC asserted that it was entitled to a set off for payment of commission. CC asserted that the 10% commission it was entitled to on Reuters withdrawal of instructions (on 1 September 1999) amounted to $500,000. That was based on all of the debts included in the list Mr Cannon gave to CC on 24 August 1999. Reuters suggested (although it did not have evidence one way or the other at the time of the proceedings before Young J), that there was a serious conspiracy between Mr Cannon and CC. It suspected that there was never a bona fide agreement between the parties and that there was something very suspect about Mr Cannon giving CC the list just prior to his leaving Reuters. Young J did not have to determine those questions on a formal basis in the application before him and noted that those were matters for determination in the Debt Recovery Proceedings already commenced.

Reuters issued the Summons in the proceedings before Young J on 18 February 2000 and on 28 February 2000 by consent Young J ordered that Mr McGrath of KPMG be appointed receiver of certain of CC's property to investigate and provide a confidential report to the Court (with the authorised representatives of both parties to be provided a copy). Mr McGrath reported that CC had received payments for Reuters of almost $500,000 which originally went into CC's trust account. CC had one account and did not operate individual trust accounts in favour of its individual clients. Mr McGrath found that CC had made 14 withdrawals from the trust fund totalling almost $500,000 in the period between 9 September 1999 and 7 February 2000.

Under s31 of the Act CC's obligation was to pay all moneys received on Reuters behalf into a trust account and only to disburse such funds to the client or at the client's direction. CC was also required to keep accounts of all money received so as to disclose the true position and enable a convenient and property audit of the account.

In September 1999 Reuters demanded the return of its moneys. CC's solicitors informed Reuters that the debt collection of in excess of $500,000 had been made and that apart from about $40,000 which had been paid into the solicitors office account prior to 31 August 1999 the balance remained in trust. It was clear from Mr McGrath's report that the money said by CC's solicitors to be in the trust account was not in fact there and that withdrawals continued after the letter had been sent.

Young J considered the following issues:

  1. whether Reuters was a creditor of CC within the meaning of s39B of the Act;
  2. whether there may have been a defalcation in relation to CC's trust fund;
  3. whether he should require an undertaking as to damages of Reuters before making an order appointing a receiver;
  4. whether a receiver should be appointed; and
  5. if so, what orders should be made.
Was Reuters a creditor?

Young J noted that the CAPA Act did not defined the term 'creditor'. CC argued that Reuters was not a creditor because it had a set off of fees under the Agreement. A set off does not operate automatically in New South Wales but only operates within the procedure of each Court or as a matter of equity. If a person has a claim against a defendant who has a set off that does not prevent the first person from being a creditor as a matter of law. For that reason, Young J found that Reuters was 'a creditor' within s39B. He found that any person who on reasonable grounds claimed to be a creditor ought to be considered a creditor.

Was there a defalcation?

Section 39A defines 'defalcation' as meaning 'any larceny, embezzlement, a failing to account, fraudulent misappropriation or other act punishable by imprisonment, of or in relation to any money or other property'.

Young J noted that all he needed to find was that a defalcation may have been committed. On the balance of probabilities he was satisfied that a defalcation may have occurred. CC argued that the Deed entitled it to payments of commission. Young J noted that in relation to a number of cases dealing with lawyers the Courts had been extremely wary of permitting prior agreements to operate as sufficient authority to enable solicitors to withdraw funds from trust accounts. In these cases the Courts usually looked for actual authority to withdraw particular sums. Having said that he accepted that in other circumstances sufficiently clear provisions in advance could entitle the withdrawal of funds, however, as he put it 'one approaches, that sort of agreement with ... suspicion'.

Young J also noted that under clause 3(ii) of the Deed CC was only entitled to withdraw funds to pay commission arising from a withdraw of instructions after giving 7 days notice and he noted that no such notice had been provided before withdrawals had been made from the account. He also noted that the assurances given by CC's solicitors in writing in relation to the money being safe in the trust account were made at a time when the money was not safe in a trust account and he assumed that those letters had been written on instructions. Finally he noted that no one from CC gave evidence and inferred from that that nothing CC could say would assist its case. He therefore had no problem in finding that there may have been a defalcation.

Undertaking as to damages

Young J noted that when the Court gave interlocutory relief it normally required an undertaking as to damages. He felt that here the Court was not really dealing with an interlocutory application assessing whether there was an arguable case and where the balance of convenience lay. In dealing with s39B the Court was required to be satisfied of a fact, namely, that there may have been a defalcation, and if satisfied of that fact, had a discretion to appoint a receiver. He noted that in cases in which a public body with a duty to protect consumers had applied for relief, the Court would take a different view of undertakings as to damages than it would when a private person did so. Whilst the application by Reuters was not an application by a public officer, the order sought was really not only for the private benefit of Reuters but also in the interests of the public generally. In those circumstances, Young J did not feel that it was appropriate that he should require an undertaking as to damages from Reuters.

Should a receiver be appointed?

In all the circumstances, Young felt that it was appropriate that a receiver be appointed in this case. In making that decision he made specific reference to the fact that he acknowledged the expense that would cause and the affect it would be likely to have on the business of CC. He also bore in mind the interest of protecting the public. He applied an earlier decision he had made where he said 'the section was a remedial section, a section which was meant to protect the general public against defaulting licensees.' He therefore appointed Mr McGrath as a receiver.

CC immediately sought a stay either for 28 days or alternatively for 7 days so that it could seek a preliminary consideration of the issues by the Court of Appeal. Counsel for CC argued that Young J had fallen into error. He asserted that:

  1. the matter was in fact interlocutory and ought not to have been treated as a final order;
  2. the application was essentially one by a private company and Young J had put too much emphasis on the public interest; and
  3. in the absence of an undertaking as to damages, CC would have no way of taking action against Reuters for loss of business if it were ultimately successful in the Debt Recovery Proceedings.

Whilst Young J accepted that the appeal was arguable, he also observed that his judgment had been a discretionary one. CC offered to undertake to the Court not to dispose of assets and that Mr McGrath should remain as receiver on the limited basis on which he was originally appointed. On that basis, Young J agreed to grant a stay of his orders for 7 days to enable CC to approach the Court of Appeal.

Conclusion

The case is an interesting one, because it appears to be only the second case ever delivered on s39B of the CAPA Act. Whilst it is uncommon for a receiver to be appointed under that Act, this case suggests that where there are concerns about the activities of a licensed commercial agent, the threshhold for having the Court appoint a receiver might be lower than in other circumstances. In appointing a receiver by this route, the need for the applicant to given an undertaking to damages would also appear to be obviated at least in an appropriate case.

Finale

As this paper covers recent cases dealing with a number of issues, there are a range of messages for readers to take away. I think the keys ones are:

  • where there are multiple appointments or administrations following a receivership, practitioners should speak to each other so everyone is clear on how the issue of fees will be dealt with. The Lawrenson decision makes it clear that, at least, the fees of Court appointed receivers are pretty secure if charged at an appropriate rate;
  • receivers can be appointed to a cause of action;
  • receivers should take extreme caution when exercising a power of sale; and
  • in an appropriate case, appointing a receiver under the Commercial Agents and Private Inquiry Agent Act could be the best way of proceeding.

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