Receivers and Controllers

Chapter 16

Chapter Summary

Act contains provisions that relate to

1Basic terms

1.1‘Receiver’

‘Receiver’ is not defined in s 9; but is defined in s 416 (for the purposes of Part 5.2) as including ‘receiver and

manager’.

Nowadaysa receiver of a company has the power ‘to carry on any business of the corporation’ (s 420 (2)(h)).

A receiver of property of a company is also a manager if the receiver manages, or has under the terms of the

receiver’s appointment power to manage the affairs of the company: s 90.

1.2‘Controller’

A ‘controller’, in relation to property of a corporation is a receiver, or receiver andmanager, of that property, or anyone else who (whether or not as agent for the corporation) is in possession, or hascontrol, of that property for the purpose of enforcing a charge: s 9.

1.3‘Managing controller’

A ‘managing controller’, in relation to property of a corporation, is a receiver andmanager of that property; or any other controller of that property who has functions or powers in connection withmanaging the property: s 9.

2APPOINTMENT OF RECEIVER

A receiver of company property may be appointed:

by the order of the court (The Federal Court and Supreme Courts)
more typically, by a banker or other financier under a clause in the mortgage, debenture or other charge.

2.1Disqualifications for appointment as receiver

The following persons are disqualified from being appointed as a receiver of property of acorporation:

an auditor or officer of the corporation
an officer of a body corporate that is a mortgagee of property of the corporation
any person who is not a registeredliquidator, an officer of a related corporation, or (unless ASIC otherwise directs in writing) a person who in the past12 months been an officer or a promoter of the corporation or a related corporation: s 418(1)

InLOW V PERFORMANCE FINANCE LTD (2004) 22 ACLC 1047; (2004) 22 ACSR 1047;(2004) 28 WAR 512; [2004] WASC 80, the court gave leave for a person who was otherwise disqualified, to be a receiver of related companies. This was thought appropriate because they had already spent a great deal of time investigating the affairs of companies with the group, and applied retrospectively.

The court can make an order declaring whether:

an appointment of a receiver after 23 June 1993 was valid: ss 418A (1) and (2); and
entry into possession or assuming control of property after 23 June 1993, was valid and authorized under the terms of a chargeon company property: ss 418A (1) and (2).

2.2Liability of receiver or controller

Any person who enters into possession or assumes control of anyproperty of a corporation for the purpose of enforcing any charge is liable for debts they incur in the course of the receivership, including debts for services rendered, goods purchased, or property hired, leased, used or occupied: s 419(1). It is irrelevant whether the receiver is an agent of the company.

InAGL VICTORIA PTY LTD V LOCKWOOD (2003) 22 ACLC 237, [2003] VSC 453, the receiver asked that the supply of electricity be continued. This was a debt for the purposes of section 419.

InSIPAD HOLDING DDPO V POPOVIC (1995) 19 ACSR 108, (1995) 14 ACLC 303, the receiver was not held liable for contracts of employment entered into before the receiver was appointed. In this case, liability for services rendered bythe employees was incurred when the company entered into the contracts.

InMCEVOY V INCAT TASMANIA PTY LTD (2003) 130 FCR 503, (2003) 46 ACSR 392, (2003)21 ACLC 1463, [2003] FCA 810 the court held that s 419 did oblige the receiver to pay annual leave, long serviceleave and sick leave entitlements to employees to whom such entitlements were accruing but which had notfallen due during the period of receivership. However if the controller chooses to use or occupy property for which an ongoing sum is payable, then thecontroller is liable for so much of the amounts payable under theagreement as is attributable to the period commencing seven days after appointment and ending on cessation of receivership.

It is, however, possible for a controller to issue a notice within sevendays after the date of appointment and for the controller to not have any liability for the rent or other outgoingsfor the period when the notice is in force. Such a notice, while excusing a controller from liability, does notaffect any liability of the corporation under the agreement: s 419A (4).

3POWERS OF RECEIVER OR CONTROLLER

Powers arise from the Corporations Act and the security instrument under which the receiver is appointed.

3.1Statutory powers generally

The receiver has the general power to do, in Australia andelsewhere, all things necessary or convenient to attain the objectives for which the receiver isappointed, including all things that are in connection with or incidental to the attainment of the objective:s 420(1).

Subject to the court order and the instrument under which a receiver wasappointed, a receiver will generally have wide powers to manage the company’s property: s 420(4). Specific powers are listed in s 420(2).

HAWKE V DANIEL EFRAT CONSULTING SERVICES PTY LTD (1999) 17 ACLC 733, [1999] is an example where the court held that a receiver had the power to enter into an agreement to obtain external funding to pursue legal action. This agreement included a term assigning the benefit of the cause of action to FAI. The court said that the power of sale in the debenture would not allow, but section 420(2) would allow, the receiver to disposeof the cause of action in circumstances which would otherwise offend the rules against maintenance and champerty.

InASIC V AUSTRALIAN INVESTORS FORUM PTY LTD (2003) 44 ACSR 503, (2003) 21 ACLC

1133, [2003] NSWSC 130, specific listing in a debenture of only some of the powers in section 420(2) was held to expressly limit the receiver’s powers to those listed – ie, excluding the statutory powers not listed in the charge.

3.2Carrying on business during a winding up

Section 420C(1) enables a receiver of property of a corporation that is being wound up to, with the writtenapproval of the liquidator or the court, carry on the corporation’s business either generally or asotherwise as specified in the approval. This includes anything incidental to carrying on that business: s 420C(2).

The powers under s 420C(1) do not affect powersfrom other sources. However, the receiver will be personally liable for debts incurred in carrying on the business (s 419(1)) and so is unlikely to do so during the winding up unless thereceiver has indemnification.

InPERPETUAL TRUSTEES AUSTRALIA LTD V BANK OF WESTERN AUSTRALIA LTD (2004)

22 ACLC 1263, (2004) 50 ACSR 34, [2004] QSC 213, the court stated that s 420C(1) is merely facilitative and s 420C(2)does not affect a power that the receiver has otherwise than under that provision.

4PROTECTION OF RIGHTS OF PRIOR SECURED CREDITORS

The receiver’s powers do not affect the rightsthat other persons may have in relation to that property: s 420(3).

However, under s 420B the court can authorise amanaging controller to dispose of the property of a corporation that is subject to a prior charge, if consent of the prior secured creditorhas been sought and not obtained and the sale of the property will not unreasonably prejudice the rights of the priorcreditor: s 420B(2).

5DUTIES OF RECEIVER

5.1General Law

InEXPO INTERNATIONAL PTY LTD V CHANT [1979] 2 NSWLR 820; (1979) 4 ACLC 679,[1980] CLC 40-608, the court validated a sale of company property by the receivers. The court found that the receivers had acted in good faith; nonetheless the receivers were liable to compensate the prior chargee for any loss suffered as a result of discounts provided. held that The court followed the High Court decision of Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676, which held that a mortgagee selling under circumstances which show a reckless disregard of the interests of themortgagor is responsible to the same extent and on the same principles as an accounting party who isliable for wilful default.

5.2General duties under s 420A of the Corporations Act

Under s 420A, a controller must take allreasonable care to sell the property for not less than market value (if it has one; if it doesn’t – for the best price that is reasonably obtainable).

SKINNER V JEOGLA PTY LTD (2001) 37 ACSR 106, (2001) 19 ACLC 1163, [2001] NSWCA15 is an example of where a receiver was held liable to pay damages for failure to sell breeding-quality cattle at market value. (They were sold for slaughter instead, for a lesser price).

Failure totake all reasonable steps to advertise or notify theavailability of a property to potential buyers and to ascertain the market value of the property before selling also breached this duty in KYUSS EXPRESS PTY LTD V SELLERS (2001) 37 ACSR 62, [2001] VSC 10.

Section 420A has effectively imposed a higher obligation than under the general law, because the general law duty is merely to act in good faith and to not recklessly sacrifice the interests of the mortgagor: INKHORN PTY LTD V HERBERT [2000] WASCA 333.

Section 420A does not displace other obligations under the Corporations Act or general law. There is a private right to sue a negligent receiver under the general law. A charger has a right to sue a negligent receiver for negligent failure to consider tax implications when selling under the general law; but such a receiver will not breach the s 420A duty if the market price is obtained for the property: ULTIMATE PROPERTY GROUP PTY LTD V LORD (2004) 57 ATR 218, (2004) 22 ACLC 423,[2004] NSWSC 114. The court also commented, in dicta, that where section 420A has been breached, there is a private right of action for a breach of s 420A.

Section 420A(2)makes it clear that s 420A(1)does not limit sections 180, 181, 182, 183 or 184.

5.3Specific duties in relation to bank accounts and financial records

A controller must open and maintain an account with an Australian ADI: s 421(1)(a) to (c).

The controller must also keep such records as correctly record and explain all transactions: s 421(1)(d).

A receiver must report to ASIC if:

it appears that an officer, member or promoter may have been guilty of an offence: s 422(1);
a person connected with the corporation has misappropriated any money orproperty of the corporation or may have been guilty of any negligence, default, breach of duty or breach of trust inrelation to the corporation: s 422(1).

In this context, promoter extends to ‘a person who tookpart in the formation, promotion, administration, management or winding up of the corporation’: s 422(1).

A controller who makes a report under ss 421A or 422, or a comment under s 429(2)(c) has qualified privilege (s 426) and the report is exempt from public inspection: s 1274(2)(a)(iii).

A managing controller of property of a corporation must prepare a report about the corporation’s affairs: s 421A.

It must be made up to a day not later than 30 days before the day when it isprepared: s 421A(1), and prepared and lodged within two months of the control date: s 421A(2).

5.4Payment of debts in order of priority

A receiver must pay debts in the order stipulated in s 433(3):

first, any amount that in a winding up is payable in priorityto unsecured creditors under s 562 (i.e. insurance proceeds for third parties);
second, the reasonable fees andexpenses of an auditor incurred from when ASIC had, under s 329(6), refused the consent of that auditor to resign untilthe relevant date; that is, the date of the appointment of a receiver: s 433(9);
third, subject to the payment of auditors’expenses incurred after the relevant date but before the date when the property came into the receiver’s hands (sees 433(6) and (7)), any debt or amount that in a winding up is payable in priority to other debts under s 556(1)(e),(g) or (h) or s 560.

Only then can the controller satisfy the claim under the document by which the controller was appointed.

5.5Notifications

The person who obtains an order for theappointment of a receiver or who appoints a receiver under a power contained in an instrument must lodge a notice within seven days, and also publish that appointment in the

Australian Government Gazette: s 427(1)(a).

A receiver for a debenture holder who has taken possession of any assets of a company has an obligation to also

notify the Commissioner of Taxation within 14 days: Income Tax Assessment Act 1936, s 215.

Within 14 days after becoming a controller, the controller must lodge a notice of their address. Change of address must also be notified.

A person who ceases to be a controller of property of a corporation must, within seven days after so ceasing, lodgenotice of this; and within 21 days , publish this in the Australian Government Gazette: s 427(4).

Once controller is appointed, the public documents and negotiable instruments of thecompany must disclose this afterthe name of the corporation where it first appears: ss 428(1) and (2). Failure to do so constitutes an offence of strict liability under s 6.1 of the Criminal Code: s 428(3).

Officers must submit a report to a controllerin respect of the affairs of thecompany as at the ‘control day’; that is, the day when the receiver or receiver and manager was appointed or otherwisewhen a controller took possession or control of the property of a corporation: s 9. Thisreport must be completed within 14 days after the corporation receives notice of the appointment of a controller, or such longer time as may be allowed by the controller:s 429(2).

A controller can also require promoters and current and past employees and officers to submit a report: s 430(1).

A controller is entitled to inspect any books of the corporation that relate to the property, at any reasonable time. A person must not fail to allow the controller to inspect suchbooks at such a time: s 431.

A controller is required to lodge an account within one month after every six months thata controller performs that duty and within one month after the controller ceases to be a controller: s 432(1). This account must show the controller’s receipts and payments during the periods ofsix months or less to which the report relates: s 432(1A). Where the report is a final report, the report must show the aggregates of the controller’sreceipts and payments since the control day: s 432(1A)(b). It must also show the amount owing under the instrument or charge (if any) and thecontroller’s estimate of the property of the corporation that is subject to the instrument or charge (if any): s 432(1A)(c).

ASIC can require that these accounts be audited: s 432(2), potentially at the company’s expense: s 432(3). Where ASIC thinks fit, it maydeclare that, for the purposes of s 419(1), those costs are taken to be a debt incurred by the controller, thereby making the controller liable to meet the costs of the audit: s 432(4).

6LIABILITY OF MORTGAGEE FOR ACTS OF THE RECEIVER

This issue can arise if the instrument of security or charge provides that acts of thereceiver are acts of the company.

The court noted in STATE BANK OF NEW SOUTH WALES V CHIA (2000) 50 NSWLR 587, [2000] NSWSC 552 that in some cases, particularly where a mortgagee is heavily involved in directing the receiver, the mortgagee may beliable for the actions of the receiver.

7SUPERVISORY ROLE OF THE COURT

Where a controller has caused loss to the corporation because of any act of misfeasance, neglect or omission, thecourt can require the controller to make good that loss: s 423(2).

The court can require the controller to answer questions about the performance or exerciseof any of the controller’s functions or powers as controller or examine a person to provide such information. The courtcan also direct an investigation of the controller’s books: s 423(3).

The controller of property of a corporation may apply to the court for directions in relation to any matter arising inconnection with the performance or exercise of any of the controller’s functions and powers as controller: s 424(1).

A receiver of property of a corporation who is appointed under a power contained in an instrument can make anapplication to the court for directions: s 424(2).

The court has wide power to fix the remuneration of any receiver: s 425.

The court has jurisdiction under s 434A and s 434B to remove a controller from office where satisfied that:

a controller of property of a corporation has been guilty of misconduct in connectionwith performing or exercising any of the controller’s functions and powers: s 434A;
the objectives for which the controller was appointed have been met:s 434B(2).

This jurisdiction does not affect a charge on propertyof a corporation or otherwise limit the power of the court to remove, or otherwise deal with, a controller such as thejurisdiction under s 423 of the Act: s 434C.

Chapter 16