Godfrey and Vouris v Scottish Pacific Business Finance Pty Ltd

[2004] NSWSC 1015

Reported Decision: 51 ACSR 272
(2005) 23 ACLC 77

Supreme Court

CITATION:	Godfrey & Vouris and Anor v Scottish Pacific Business Finance Pty Ltd & Ors [2004] NSWSC 1015
HEARING DATE(S):	27 August, 2004
JUDGMENT DATE:	1 November 2004
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Amended Originating Process dismissed.
CATCHWORDS:	CORPORATIONS - SECURITIES - RECEIVER AND MANAGER - APPOINTMENT - Whether a secured creditor may properly appoint a receiver to a debtor's property in order that the creditor may realise its own property.
LEGISLATION CITED:	Corporations Act 2001 (Cth) - s.443D, s.443E, s.443F
CASES CITED:	- Canberra Advance Bank Ltd v Benny (1992) 88 FCR 427 - Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295 - Potters Oils Ltd, In re [1986] 1 WLR 201 - White & Carter (Councils) Ltd v McGregor [1962] AC 413
PARTIES :	- Murray Roderick Godfrey and John Vouris as Liquidators of Austair Manufacturing Pty Ltd - First Plaintiffs - Austair Manufacturing Pty Ltd (Receivers Appointed) (In Liquidation) - Second Plaintiff - Scottish Pacific Business Finance Pty Ltd - First Defendant - Anthony Milton Sims and Neil Geoffrey Singleton as Receivers and Managers of Austair Manufacturing Pty Ltd (Receivers Appointed) (In Liquidation) - Second Defendants
FILE NUMBER(S):	SC 1461/04
COUNSEL:	M. Ashhurst - Plaintiffs F. Gleeson - Defendants
SOLICITORS:	MBP Legal - Plaintiffs Piper Alderman - Defendants

1    This case raises a somewhat novel question: can a secured creditor properly appoint a receiver to a debtor’s property so that the creditor can realise its own property?

2    The Second Plaintiff (“Austair”) carried on the business of manufacturing air conditioners. On 15 January 2001, Austair entered into a Factoring Agreement with the First Defendant (“SP”) whereby Austair factored its book debts to SP. By a Deed of Charge dated the same day Austair gave SP a fixed and floating charge to secure Austair’s obligations under the Factoring Agreement. The Charge has been duly registered.

3    On 8 September 2003, the First Plaintiffs (“the Administrators”) were appointed joint administrators of Austair. The Administrators arranged for work in progress to be completed and invoices for the work were sent to the customers. The Administrators also arranged for the sale of Austair’s business for $100,000. Completion of the sale was effected on 29 September 2003.

4 A dispute arose between the Administrators and SP as to whether the Administrators were entitled to deduct their fees and disbursements from the proceeds of the sales which they had achieved. The Administrators claimed a lien over the proceeds of these sales under s.443D and s.443F Corporations Act 2001 (Cth).

5    Those sections are in the following terms:

“443D The administrator of a company under administration is entitled to be indemnified out of the company's property for:

(a) debts for which the administrator is liable under Subdivision A or a remittance provision as defined in subsection 443BA(3); and

(b) his or her remuneration as fixed under section 449E.

443F
(1) To secure a right of indemnity under section 443D, the administrator has a lien on the company's property.

(2) A lien under subsection (1) has priority over a charge only in so far as the right of indemnity under section 443D has priority over debts secured by the charge.”

6 SP pointed out that the lien created under s.443F(1) is only available under s.443D to secure a right of indemnity “out of the company’s property”, and the proceeds of sale were not Austair’s property because they were the proceeds of book debts and all Austair’s book debts, past and future, including those arising from work in progress billed by the Administrators, had been assigned outright to SP under the Factoring Agreement.

7    In this assertion, SP was correct, as the Administrators concede. Clause 1 of the Factoring Agreement provides:

“ 1. You Sell Trading Debts We Specify

1.1 You transfer to us completely and unconditionally all trading debts owed to you that we specify to you. You do so in return for us paying you $1.00 (which you acknowledge you have received), entering into this agreement with you, and for other valuable consideration.

1.2 We may specify both existing and future debts by type or general description. We may, from time to time, vary our specification.

1.3 Debts in existence when specified become ours immediately. Debts which do not exist when specified become ours immediately they come into existence.”

8    There is no dispute that SP gave notice to Austair pursuant to Clause 1.2 that all present and future trading debts were to be assigned to SP under Clause 1.

9    SP wished to collect the debts arising from post-administration sales, which were its property, but the Administrators refused to deliver to SP the invoices relating to those debts. Without the invoices SP did not know the identity of the debtors or the particulars of the debts.

10    On 2 October 2003, a creditors’ meeting of Austair resolved to wind the company up and approved the Administrators’ remuneration at $43,350. On the same day, SP appointed the Third Defendants as receivers and managers of Austair’s property under the Deed of Charge dated 15 January 2001. There is no dispute that as at 2 October 2003 Austair owed money to SP under the Factoring Agreement and that that money was “secured money” as defined under the Charge.

11    SP freely concedes that the appointment of the receivers and managers was made in order that the receivers might take possession of the books and records of Austair, including the invoices for the post-administration sales, so that SP could, with the benefit of those invoices, collect the debts arising from those sales which are now, of course, the property of SP. Collection of those debts would have reduced the “secured money” under the Charge.

12    The Administrators say that the appointment of the receivers and managers was made for an improper purpose, so that the costs of the appointment and the receivers’ and managers’ fees and disbursements should not be paid out of the assets of Austair. If those costs and disbursements are to be paid out of the assets of Austair, the Administrators will suffer a shortfall in the fees to which they are entitled in the sum of approximately $12,000.

13    The Administrators say that the appointment of the receivers and managers was improper because it was not made for the purpose of realising assets of Austair secured under SP’s Charge: the assets to be realised by means of the appointment were the post-administration debts which were already the property of SP.

14    The Administrators are correct in saying that the post-administration debts are not the subject of the Charge. As would be the case in any event, the definition of “charged debts” in the Deed of Charge specifically excludes the debts assigned to SP.

15    By their Amended Originating Process the Administrators seek the following declarations:

“2. A declaration that the costs incurred by the appointment of the Second Defendants jointly and severally as receivers and managers of Austair Manufacturing Pty Limited by the First Defendant (other than those costs incurred as a result of the Second Defendants jointly and severally being appointed receivers and managers over the books and records of the Second Plaintiff by the First Defendant except as stated in 1 above) are costs that are to be borne by the First Defendant without indemnity from the assets of the Second Plaintiff or from any amounts received by the First Defendant pursuant to a Domestic Factoring Agreement between the First Defendant and Second Plaintiff dated 15 January 2001.

3. A declaration that any legal costs incurred by the Firs Defendant in relation to the appointment of the Second Defendants jointly and severally as receivers and managers of the Second Plaintiff are not costs which can be recovered from assets of the Second Plaintiff.”

16    Mr Ashhurst, who appears for the Administrators, concedes that events of default, as defined in the Charge, had occurred as at the date on which the receivers were appointed so that SP would have been entitled to appoint the receivers to Austair if there had been a proper purpose in doing so. However, Mr Ashhurst says that the only proper purpose for which a receiver could have been appointed was to realise property which was secured by the Charge. He says that it might have been within the scope of that purpose to appoint a receiver to preserve books and records of Austair, but only if such preservation was in aid of realising property secured by the Charge.

17    In the present case, says Mr Ashhurst, SP’s purpose in appointing the receivers was not, and could not possibly have been, to realise property secured by the Charge because the only relevant property secured was the books and records of the company, including the invoices, relating to the post-administration debts. Those pieces of paper were, for all practical purposes, worthless: they did not in themselves entitle the holder to payment of the subject debts and their only value was as scrap paper.

18    Further, Mr Ashhurst says, there is no evidence of a threat by the Administrators to destroy or remove Austair’s books and records, so that it could never have properly been the purpose of SP to appoint the receivers to preserve and protect those books and records.

19 SP’s only purpose in appointing the receivers, says Mr Ashhurst, was to circumvent a lien over the invoices for the post-administration debts which has been claimed by the Administrators under s.443F Corporations Act. It does not matter, says Mr Ashhurst, that the Administrators’ lien over the invoices was improperly claimed. In this regard, he concedes that SP’s Charge over the invoices was, by Clause 2.3(a)(ii) of the Charge, a fixed charge and that, by s.443F(2) and s.443E(1)(b), an administrator’s lien had no priority over a fixed charge.

20    However, Mr Ashhurst says, what is critical is that the power to appoint a receiver can be exercised only for the purpose of collecting or realising property secured by the Charge. As SP’s purpose was not to achieve that end, it follows that the costs and expenses of the appointment of receivers and their fees should not be payable out of Austair’s assets.

21    In support of these submissions, Mr Ashhurst relies strongly on the decision of the Privy Council in Downsview Nominees Ltd v First City Corporation Ltd (1992) [1993] AC 295. In that case a trading company gave a first ranking security to a bank and a second ranking security to First City Corporation (“FCC”). On default, FCC appointed receivers and managers to the company. The company was trading at a loss and the receivers and managers removed the company’s managing director and sought to realise the company’s assets. The managing director procured an associate, Downsview, to acquire the bank’s first ranking security and procured Downsview’s director, Mr Russell, to be appointed receiver and manager of the company over the heads of the receivers appointed by FCC. Mr Russell’s appointment as receiver and manager was not for the purpose of seeking payment of Downsview’s debt but was for the purpose of permitting the company to continue trading at a loss in circumstances verging on fraud. FCC suffered a shortfall in repayment of its debt and sued Downsview, alleging that it had exercised its power to appoint Mr Russell as receiver and manager in bad faith. FCC succeeded at first instance and, ultimately, in the Privy Council.

22    Mr Ashhurst relies heavily on the following passage at p.314 in the judgment, which was delivered by Lord Templeman:

“The duties owed by a receiver and manager do not compel him to adopt any particular course of action, by selling the whole or part of the mortgaged property or by carrying on the business of the company or by exercising any other powers and discretions vested in him. But since a mortgage is only security for a debt, a receiver and manager commits a breach of his duty if he abuses his powers by exercising them otherwise than 'for the special purpose of enabling the assets comprised in the debenture holders' security to be preserved and realised' for the benefit of the debenture holder. In the present case the evidence of Mr Russell himself and the clear emphatic findings of Gault J, which have already been cited, show that Mr Russell accepted appointment and acted as receiver and manager
‘not for the purpose of enforcing the security under the Westpac debenture but for the purpose of preventing the enforcement by the plaintiffs of the FCC debenture.’ ”

23    I do not think that this passage is authority for Mr Ashhurst’s proposition that a receiver may only be appointed for the purpose of realising the assets of the debtor which are secured by the Charge. That is not what the passage, read as a whole, says. Properly understood, all that Lord Templeman is saying is that Downsview was not exercising the powers conferred by the security in order to enforce the security. His Lordship was not saying that, regardless of what a security provides as to the circumstances in which, and the purposes for which, the creditor’s powers thereunder may be exercised, the power to appoint a receiver and manager is confined by the general law to “the special purpose of enabling the assets comprised in the … security to be preserved and realised”.

24    It must be remembered that a mortgage, charge or other security is a contract between the debtor and the creditor and the terms of that contract will dictate the circumstances in which, and the purposes for which, the powers of the secured creditor may be exercised. If a circumstance entitling the appointment of a receiver and manager arises, the secured creditor is entitled to appoint a receiver and manager for a purpose stipulated in the security document if it conceives it to be in its interest to do so. Of course, if the secured creditor exercises the power ostensibly for the purpose stipulated but in truth for an ulterior purpose, then it will be acting in bad faith and may be liable for any losses suffered by the mortgagor, a guarantor or a subsequent encumbrancer: see e.g. In re Potters Oils Ltd [1986] 1 WLR 201, at 205-206; Downsview (supra).

25    However, if the creditor in fact exercises the power to appoint a receiver and manager in the circumstances, and for the purposes, stipulated in the contract then the debtor cannot be heard to say that it was unreasonable for the creditor to exercise that contractual right: see e.g. Canberra Advance Bank Ltd v Benny (1992) 88 FCR 427, at 433-434; White & Carter (Councils) Ltd v McGregor [1962] AC 413, at 429-430.

26    In the present case, the Charge expressly gave SP the right to appoint a receiver and manager to Austair in the circumstances which had occurred and for the purposes for which the appointment was made.

27    By Clause 2.1 of the Charge, Austair charged the mortgaged property to secure, inter alia, the performance by Austair of its obligations under the Factoring Agreement. Clause 2 of the Factoring Agreement required Austair to deliver promptly to SP all documents, including invoices, relating to debts transferred to SP under the Factoring Agreement. The purpose of that provision was, clearly enough, to enable SP to collect efficiently and effectively the debts transferred to it and thereby to reduce the debt owing to it by Austair under the Factoring Agreement. By Clause 2.3(a)(ii) of the Charge, a fixed charge over the invoices relating to the transferred debts was created.

28    The invoices relating to the post-administration debts were documents which Austair and its administrators were obliged to deliver to SP in accordance with Clause 2 of the Factoring Agreement. The administrators refused to perform Austair’s obligations under Clause 2, wrongly claiming to exercise a lien. SP’s appointment of the receivers and managers was, therefore, pursuant to an express power conferred on it by the Charge to appoint receivers and managers for the purpose of securing performance of Austair’s obligations under Clause 2 of the Factoring Agreement.

29    Because SP’s appointment of the receivers and managers was in exercise of an express power given to it under the security and was in fact for a purpose expressly authorised by the security, no question of bad faith or unreasonableness arises.

30    To return to the question posed at the beginning of this judgment: can a secured creditor properly appoint a receiver to a debtor’s property so that the creditor can realise its own property? The answer is: yes, if the terms of the security so provide.

31    For these reasons, the Amended Originating Process will be dismissed. I will hear argument as to costs.

– oOo –

Last Modified: 11/01/2004