It is quite a thing for the law to remove from owners the rights normally associated with ownership and to confer them on receivers.
Which is why, although receivers are allowed considerable discretion in the exercise of their duties, they are also subject to oversight by the courts.
So how much freedom of manoeuvre do they have, and when will the court intervene? We look at a recent decision1 in the Australian Federal Court and consider its relevance for New Zealand insolvency practitioners.
The case was taken by Mr and Mrs Oswal, the principal shareholders of Burrup Fertilisers Pty Ltd (Burrup), a fertiliser company in Western Australia. Burrup had significant loans with ANZ. These were secured by way of a general charge over the company’s assets and by way of share mortgages (together with supporting guarantees) over the Oswals’ shares in Burrup’s holding company.
The fallout from a complicated web of litigation led to ANZ appointing receivers over Burrup’s assets under its charge. The receivers decided to seek recovery by enforcing the share mortgages and selling Mr and Mrs Oswal’s shares in the holding company.
The Oswals claimed that the receivers had breached their duties in several respects, of which the most relevant for our purposes was that they had conducted Burrup’s business for an improper purpose.
They argued that the receivers had been appointed to realise ANZ’s security and were only entitled to conduct and disrupt Burrup’s business to the extent necessary to ensure repayment to ANZ. Anything beyond that mandate, and they were acting beyond and outside their powers.
In particular, they had held on to substantial cash reserves in the company without using the money to pay down Burrup’s debts to ANZ. By holding those reserves, they had not acted for a proper purpose and had breached their statutory and contractual duties.
The Court declined to second guess the receivers’ commercial judgement, made “in the context of complex legal and factual issues” and declined to order an enquiry into whether they had breached their duties.
It distinguished between the Burrup case and the conduct of a receiver in a previous case who had sold secured property but failed to retire as receiver or account to the company for the balance of the sale proceeds. Such conduct amounted to a breach of the receiver’s duty.
The position in New Zealand
The Receiverships Act 1993 contains numerous powers exercisable by a court in relation to its oversight of receivers’ conduct. These include the power to:
- order a receiver to comply with a duty
- remove a receiver from office or require the receiver to cease to act if the receiver fails to comply with such an order
- order that a receiver must act only in respect of specified assets
- prohibit a person from acting as a receiver for a period not exceeding five years, and
- make further orders to preserve the property in receivership.
Chapman Tripp comment
It is important to note that the Burrup receivers had seriously considered all the recovery options open to them and that they had:
- instructed a reputable accountancy firm to carry out due diligence in relation to the sale of Burrup’s assets, as one option for realising the ANZ security, and
- obtained legal advice showing that the sale of those assets would generate a significant tax liability.
The combined effect of these and other factors persuaded the Court that the receivers had undertaken due process to arrive at what were ultimately commercial judgements.
The decision in the Burrup case reiterates that the Courts are reluctant to second-guess receivers’ decisions where the receivers have carefully considered the recovery options available to them. But, to the extent that their conduct is questioned, receivers will need to explain their decision-making process to the Court.
Our thanks to Finn Howie for writing this Brief Counsel. For further information please contact the authors featured.