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Brief Counsel

High Court gives useful steer to receivers

18 April 2011

Claims alleging breaches of duty by receivers rarely come to court, so a recent and detailed High Court decision is welcome - particularly for the guidance it gives practitioners on:

  • the duty to verify the validity of their appointment

  • the duty to achieve the best price reasonably obtainable, and

  • the ability to retain funds at the conclusion of a receivership to meet anticipated litigation costs. 

Justice Panckhurst’s decision in Taylor & Ors v Bank of New Zealand & Ors1 (click here to view the judgment) will also be of some comfort to receivers for confirming that, in deciding whether a receiver’s actions fall short of the standard required, the Court ought to “allow some margin for business and risk assessment by the receiver”. 

In other words, the receiver will not be liable unless “plainly on the wrong side of the line”.  Clearly, there is some judicial sympathy for receivers, and recognition that receivers can be required to make difficult judgement calls under pressure. 

Verifying appointment

The receivers in the Taylor case did not seek a formal opinion on the validity of their appointment.  Instead they relied on the bank to have appointed them appropriately and in accordance with the general security agreement (GSA).  Only the appointment documents were given to the receivers’ solicitors, who apparently advised the receivers by telephone that “everything was in order”. 

The Judge described those steps by the receivers as inadequate.  One of the first duties of receivers is to verify the validity of their appointment.  The Judge said the receivers’ solicitors needed to have seen the GSA, the notice of demand and sufficient related documentation in order to verify that an available event of default had occurred. 

Although the plaintiff director argued that the appointment was in breach of the contract between the company and the bank, the Judge found in the bank’s favour.  The bank’s interpretation of the relevant clause was preferred and, in any event, the director’s co-operation with the receivers prevented him from later alleging that the appointment process had been inadequate. 

So the risk that the receivers took, in not verifying the validity of their appointment, did not ultimately harm them in this case. 

Duty to obtain best price for the assets

The business in question imported and distributed hair products from an Italian supplier.  Rather than continuing to trade the business, the receivers sold the company’s assets, not as a going concern, but as inventory and fixed assets.  There was no advertising process. 

The sale was to a minority shareholder and a manager of the company, who in the early days of the receivership “out-manoeuvred” the receivers by obtaining the Italian supplier’s agreement to deal only with them in the future.  Mr Taylor, who was the director and majority shareholder, objected to that sale process, which he saw as a “hostile takeover” of the business by his former co-shareholder.

The Judge accepted that the receivers’ decision not to trade was reasonable.  It would merely have continued the losses being experienced by the company.  In any event, case law (not mentioned in the judgment) holds that a receiver’s decision to stop trading is not capable of criticism by the company and other creditors.2  It is a matter on which the receiver need only consider the appointing creditor’s interests.  The decision need only be made in good faith.

The Judge was critical of the receivers’ failure to contact the main supplier within a day or two of appointment, but ultimately did not see that as a breach by the receivers. 

The receivers’ decision not to advertise or test the market in any other way was not a breach because it was clear that the supplier would not deal with anyone other than the actual purchasers.  If that had not been the case, it may be that the lack of advertising might have been a breach.

In analysing whether the receivers had received the best available price, the Judge focused on the valuation evidence.  Evidence of value given by Mr Taylor (the disgruntled plaintiff and shareholder) was discounted completely.  There being no other valuation evidence produced, the plaintiffs’ claim had to fail. 

Receivers’ ability to hold funds after resignation

Ultimately, interests associated with the plaintiff director and shareholder acquired the bank’s debt and terminated the receivers’ appointment.  The receivers by then held about $40,000 which they refused to hand over.  The receivers retained the funds to meet their impending litigation costs.  Mr Taylor had already notified his intention to sue them for breach of duty.  The Court agreed they were entitled to retain the funds for their litigation costs. 

Although no strict rule seems to have been laid down, the Court indicated that “mere apprehension of the possibility of litigation” is not enough to enable receivers to hold onto funds.  Where litigation is actually pending, the receivers will be entitled to do so.  Quite where the dividing line is between those two extremes remains unclear.

The Judge was a little concerned about section 20(b) of the Receiverships Act which prevents the receiver obtaining an indemnity from the grantor’s assets “in respect of any liability incurred by the receiver arising from a breach of the duty imposed by section 19 of this Act”.  The Judge thought that the receivers could therefore not continue to hold funds if the litigation had been limited to a claim for a breach of section 19.

With respect, that ought not to be correct.  Receivers can clearly not seek an indemnity for liability that flows from an actual breach of section 19 (the duty to obtain the best price reasonably obtainable at the time of sale).  However, where there is no such breach, the receivers ought to be entitled to an indemnity from the company’s assets for the costs of defending a claim alleging such a breach. 

Summary

  • Receivers ought to take thorough advice on the validity of their appointment.
  • In assessing the reasonableness of a sales process, the Court will have regard to the practical restrictions and difficulties faced by the receivers.  There is no absolute rule that advertising is always required.
  • Whether the best price reasonably obtainable at the time of sale was achieved will depend in large part on valuation evidence.  Obtaining valuations before sale, particularly where there is to be no advertising, is therefore a prudent course for a receiver.
  • Receivers can continue to hold funds after their appointment ceases, where there is actual litigation against them, and probably also where litigation is threatened, imminent or likely. 

The case is not going to the Court of Appeal.

For further information, please contact the lawyers featured.

Footnote

  1. Medforth v Blake  [1999] 3 All ER 97. 

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