By Kirsten Farmer, Partner and Jack Little, Associate

In a recent decision of the New South Wales Court of Appeal, the Court considered an appeal brought by a company (Sahab) from a decision of the Supreme Court to decline to inquire under s423(1)(b) of the Corporations Act 2001 (Cth) (Act) into the conduct of receivers and managers (Receivers) in their management of the assets of two trusts.

Background

Sahab was the trustee of two trusts for the Kanjian family, and had entered into an agreement with a company (Senses) to redevelop properties owned in its capacity as trustee for those trusts (Agreement).

On 19 December 2018, Senses had commenced proceedings in the Supreme Court against Sahab relating to that agreement (Proceedings).

On 25 February 2019, the Supreme Court made orders appointing the Receivers as receivers and managers of the property held on trust by Sahab, observing that the management of Sahab was critically impeded by a breakdown of the Kanjian family relationship.

The terms of appointment of the Receivers included orders that:

• the Receivers were authorised to defend the Proceedings; and
• the Receivers could not compromise the Proceedings without the consent of the beneficiaries of the two trusts and the director of Sahab, or prior leave of the Court.

Between February and August 2019, the Receivers continued to defend the Proceedings, which were determined in a judgment of Emmett AJA on 11 September 2019.

The receivership ended by consent in December 2019.

Sahab sought orders pursuant to section 423(1)(b) of the Act that the Supreme Court inquire into the Receivers’ conduct of the receivership.

On appeal, Sahab’s complaint focused on the conduct of the Receivers in the Proceedings.

The threshold required to enliven section 423(1)(b)

The Court of Appeal has clarified the threshold required to enliven the Court’s discretion under section 423(1)(b) of the Act.

At first instance, Rees J rejected the application for inquiry on the basis that “no prima facie case” had been made out, adopting language used by Young J in Burns Philip Investment Pty Ltd v Dickens (1993) 11ACLC 272 (which related to an application under section 536 of the Corporations Law).

On appeal, Kirk JA (with whom Macfarlan and Meagher JJA agreed) held that the language of “prima facie” is better avoided, as it would be “too inflexible and would set too high a threshold”. Rather, the Court has confirmed that what is required to enliven the discretion is that an applicant has demonstrated a “sufficient basis to consider that there is something which requires inquiry”.

The concept of sufficiency involves an assessment of “what is at stake and all of the circumstances”.

The strength and nature of the allegations, including whether they are spurious or vexatious, are factors relevant in determining whether the Court will exercise its discretion.

Was there a sufficient basis in this case?

Sahab’s grounds of appeal fell into two categories.

Firstly, Sahab argued that the primary judge erred in finding that the Receivers were obliged to defend the Proceedings. Sahab submitted that the Receivers should only have continued to defend the Proceedings if there were “stronger or better prospects of success than merely having an arguable defence”.

The Court of Appeal held that the primary judge did not err in finding that the Receivers were obliged to defend the Proceedings, noting the Receivers could not compromise the Proceedings without consent or leave of the Court, and equally they could not simply concede them. Recourse was available to the Receivers if they obtained advice that defending the Proceedings was untenable, as the terms of their appointment allowed them to approach the Court for leave to acquiesce to the relief sought.

Secondly, Sahab submitted that the Receivers had acted improperly or uncommercially in continuing to defend the Proceedings. Sahab’s primary complaint in this respect was that the Receivers had used the Proceedings for an improper purpose in seeking to use them as a means to renegotiate the Agreement.

During the course of the Proceedings, the Receivers formed the view that the Agreement suppressed the value of the properties concerned. The Proceedings gave the Receivers leverage to alter or end the Agreement and therefore improve the position of the trusts. On a number of occasions throughout the Proceedings, the Receivers sought advice as to their prospects of success.

The Court of Appeal held that there was no impropriety in maintaining the defence where the Receivers had received advice that the defence had reasonable prospect of success, and the Receivers had made a reasonable commercial decision to leverage the Proceedings to maximise the value of the properties over which they had been appointed.

Takeaways

An applicant need not establish a prima facie case that there has been some relevant misconduct by a receiver in order to enliven the Court’s discretion under section 423(1)(b), and the Court need not be satisfied that a complaint has foundation. However, there must be something sufficient in a complaint to warrant inquiry by the Court. Reasonable commercial decisions by a receiver are not sufficient to warrant inquiry.