Receivers were appointed to a slipway business by Investec Bank.
The receivers sold a 50% shareholding in another company owned by the debtor to the debtors former partner for $1 and also asssigned to him debts of $671k for $500k.
The debtor sued alleged breach of s 420A(1) of the Corporations Act 2001 which provides:
In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:
(a) if, when it is sold, it has a market value not less than that market value; or
(b) otherwise the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.
The Receivers obtained advice from Investec’s lawyers, Gadens, throughout the receiverships and they did not engage independent lawyers. Investec and the Receivers cross claimed against each other and Gadens.
The trial judge concluded that the Receivers had not breached their duties.
In relation to the shares, the judge held that a number of factors adversely affected their market value, including:
- uncertainty about the existence of executed sub-leases over the slipway land;
- a registered fixed and floating charge granted by th company to a financier;
- provisions in the company’s constitution which conferred a right of first refusal on existing shareholders.
In relation to the assigned debt, the judge concluded that the uncertainty about the sum of the debt and debtors ability to pay it adversely affected its market value.
In relation to the applicability of 420A(1) it did not apply to Investec because it was not a ‘controller’ for the purposes of that section.
The Court of Appeal
In endorsing the trial judge’s determination the Court of Appeal made the following observations and findings.
A power of sale is given to the mortgagee entirely for its own benefit, the purpose of the power being to enable the mortgagee to realise the property to satisfy its claim and to return whatever balance may remain to the mortgagor.
The instrument of appointment of a receiver will typically provide that the receiver is the agent of the chargor. It has long been recognised that this agency is created for the benefit of the chargee, to protect the chargee from liability as a chargee in possession or as principal.
The receiver’s primary duty is to the creditor not the debtor. The receiver’s primary concern must be to realise the charged property with a view to repaying the debt.
Section 420A imposes a more rigorous statutory duty upon a receiver in relation to a power of sale, than the old common law duty of good faith and was clearly intended to provide corporate mortgagors with additional protection. Nonetheless, there is no basis for a suggestion that s 420A was intended to overturn the receiver’s primary duty to a secured creditor.
The relevant question for the purposes of s 420A is whether the controller has failed to do what a reasonable and prudent person would do.
Market value is:
What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell.
It is not necessary for the court to decide what actually was the market value of the property in order to find that s 420A(1)(a) has been breached — all that the court needs to decide is that the process that was followed was not one where all reasonable care was taken to sell the property for its market value, whatever that market value might be.
However unless the complainant can demonstrate that the property was sold for under the market price, the complainant would be considered to have suffered an injury without damage.
The statutory duty does not deviate from the old common law principle that:
- a mortgagee is not bound to wait for its money merely because the mortgagor stands to profit from the delay.
- a mortgagee is not bound to spend money or take risks. However if a further outlay is in the circumstances reasonable, and apparently necessary and prudent to conserve the mortgagor’s interest, and to prevent his residual property being sacrificed, and if, having regard to what a cautious man would consider the total selling value of the property, it is manifestly safe, the mortgagee is not justified in refusing to make or incur it merely because [the mortgagee] can get enough for himself without it. It must, however, be safe; if it is not, the mortgagee would be taking risks for the benefit of the mortgagor which he is not called upon to do.
Although it may be prudent for a receiver to obtain independent valuations of the property and advice as to the appropriate method of sale, that is not a rule of law but a receiver ought to take reasonable steps to ascertain the value of the property before selling it.
A receiver may breach s 420A(1)(a) of the Act if he fails to address the correct market when selling the property.
In engaging real estate agents, a failure of a receiver or mortgagee to engage an appropriately located agent will mean that reasonable care had not been taken by the mortgagee to ensure that market value was obtained.
Ordinarily a controller should take all reasonable steps to advertise or notify the availability of a property to potential buyers.But, in the end, the circumstances of that case may not require that.
In relation to the debtors argument that the receiver ought to have pursued proceedings to declare a charge invalid the Court of Appeal held:
Even if such a proceeding had considerable legal merit, it does not necessarily follow that, in order to comply with their duty under s 420A(1) of the Act, the Receivers were required to pursue such a proceeding. This is because such a proceeding would have been costly and there was no guarantee of success.
s 420A(1)(a) of the Act does not require a receiver to expend funds to improve assets that are the subject of a security or to delay their sale pending improvements in market conditions. Rather, a receiver may sell assets in their current condition in the prevailing market conditions, provided that the receiver takes reasonable care to sell the assets for not less than their market value. In the particular circumstances of the present case, the Receivers acted reasonably in not embarking on litigation to test the validity of the Lewis Charge and in not deferring negotiations for the sale of the Sold Assets in order to embark on litigation.
We agree with the submissions of the Receivers, which accord with ordinary commercial experience and common sense:
Legal and commercial uncertainty about matters that are fundamental to the management or viability of a business and the possibility of litigation over these matters inevitably affect the value of shares in that business.
There is a crucial difference between the sale of land — which has a distinct and well-established market in respect of which local knowledge by a real estate agent is very important — and the sale of shares in a private company which is beset with multiple problems for which local knowledge would not provide any material assistance.
Accordingly Receivers not advertising the Sold Assets or selling them by public auction did not constitute a failure to take all reasonable care to sell the Sold Assets for not less than their market value.