Out of control? Powers of inquiry in Court-appointed receiverships

Print Friendly, PDF & Email

By Mark Wenn, Partner and Alex Myers, Senior Associate

Courts sometimes place businesses or assets into the hands of a receiver or receiver and manager. This is most common where a dispute arises between stakeholders (such as company members, or unitholders in a trust), which results in an inability to agree on how the business should be run or the assets managed.

Animosity between stakeholders is common in cases where the Court appoints a receiver, particularly if the stakeholders are family members, or if they have been in some other longstanding relationship that has broken down. The underlying tension can (and often does) provide fertile ground for disputes to arise between some or all of the stakeholders, and the receivers appointed.

As officers of the Court, receivers are subject to the Court’s supervision and control, one aspect of which is the power under section 423 Corporations Act 2001 (Cth) (the Act) to order an inquiry into a controller’s conduct.[1] In the matter of Sahab Holdings Pty Ltd [2022] NSWSC 4, a decision of the Supreme Court of New South Wales, considered an application by a stakeholder seeking that the Court conduct an inquiry.

The decision contains useful lessons for both Court-appointed receivers and stakeholders, and also provides useful analysis as to when ordering an inquiry is and is not appropriate.

Background to dispute and Court’s appointment of receivers

Sahab Pty Ltd (Sahab) was a family investment company owned by the Kanjian family. The parents, Loris and Sonia, were an elderly couple living in a nursing home. The couple had four children, including Ken (the eldest).

Ken and Sonia were Sahab’s two longstanding directors, and also held one class A share each, which conferred voting rights. Ken held his share on trust for Loris. Each of the children (including Ken) also held one class B share, which did not confer any voting or dividend rights.

Sahab’s assets included three commercial properties, which it owned in its capacity as trustee of three separate trusts. Two of the three properties adjoined one another.

In May 2017, a dispute arose between Ken and his family. A key matter of contention was that Ken wished to redevelop the two adjoining properties (Development) into a childcare centre, while the rest of the family wished to sell them.

Due to the dispute, Ken could not cause Sahab to consent to a development application (Application) as required by an agreement for lease (Agreement) that Sahab had entered with Senses Pty Ltd for the development and construction of the childcare centre. Senses consequently commenced a proceeding (Senses Proceeding), while Ken’s other family members and an associated company commenced two other proceedings, alleging improper conduct on Ken’s part.

Sonia then lost mental capacity and became disqualified from acting as a director of Sahab, leaving Ken as the sole director. Loris filed an application seeking that receivers be appointed to Sahab. He contended that his relationship with Ken had broken down and alleged that he and Sonia had signed the Agreement under pressure from Ken, without being given a chance to read it.

The Court made the orders sought and appointed receivers (Receivers) to the assets Sahab held on trust, finding that the dispute was impeding effective management of Sahab, including its ability to defend or otherwise deal with the Senses Proceeding. The Receivers’ appointment orders:

  1. provided them with all the powers that section 420 of the Act conferred on receivers, subject to certain exceptions;
  2. required them to manage Sahab’s defence of the Senses Proceeding; and
  3. prohibited them from making a cross-claim against in the Senses Proceeding (other than against Senses) or from compromising the Senses proceeding without the written consent of the stakeholders, or leave of the Court.

Ultimately, Senses obtained a judgment that required Sahab to sign the Application. However, the local council rejected the Application when it was lodged, and Ken subsequently terminated the Agreement.

Sometime later, Ken commenced a proceeding seeking that the Court order an inquiry into the Receivers’ conduct during their appointment, pursuant to section 423 of the Act.

Legal principles

Section 423 of the Act states, relevantly:

423 Supervision of controller

(1) If:

[…]

(b) a person complains to the Court or to ASIC about an act or omission of a controller of property of a corporation in connection with performing or exercising any of the controller’s functions and powers;

the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so inquires, the Court may take such action as it thinks fit.

Section 423 of the Act operates in a “virtually identical”, fashion to the former section 536 of the Act, an equivalent provision in relation to liquidators.[2] As with section 536 of the Act, section 423 involves a two-step process.[3]

Step one requires the Court to be satisfied that the complainant has provided evidence to establish a prima facie case that there is some act or omission deserving of inquiry. In relation to this, the Court held that:

  1. the level of evidence needed to meet the prima facie standard will depend on the facts at hand;
  2. the Court must be given material suggesting that an inquiry would be in the public interest;
  3. the standard of proof required is not particularly high, but there must be more than assertions of wrongdoing on the controller’s party; and
  4. no findings as to the propriety of the controller’s conduct should be made during the first step of the process.

Once the Court has been satisfied there is a prima facie case, it must then consider whether to exercise its discretion to order an inquiry. In doing so, the Court:

  1. will consider factors including the merits and nature of the complainant’s contentions, any explanation in response, the availability of alternate remedies, how far the appointment has progressed, how much money is involved, the manner in which the inquiry is to be funded, what benefit will result from it, and the applicant’s legitimate interest in the outcome;
  2. will bear in mind that the inquiry process is not an appropriate mechanism for challenging controllers’ decisions made in good faith, or those relating to the exercise of the controller’s commercial judgment;
  3. will not expect perfection from controllers, given the nature of their role often involves making decisions “on the run”; and
  4. will exercise its discretion to not order an inquiry where the complainant is in reality seeking to vindicate individual rights – instead, the relevant conduct should be likely to affect creditors or shareholders generally, or particular classes of them.

Factors said to warrant inquiry in Sahab and Court’s decision

The following issues arose during the Receivers’ appointment:

  1. A tenant ceased paying rent due to an air conditioning malfunction. The Receivers obtained several quotes and ultimately replaced the air conditioner at a cost of around $12,000, following which the tenant recommenced paying rent on time or in advance;
  2. The Receivers obtained advice from consultants that some tenancies in the Development had numerous fire safety issues that required rectification. Based on that advice, the Receivers incurred expenses of around $15,000 to rectify the issues they considered most critical;
  3. Neither the Receivers nor their insurance brokers were able to obtain up to date certificates of currency or complete policy documents relating to insurance taken out by Woolworths, a tenant of the Development. The Receivers insured the Properties at a cost of roughly $20,000 based on advice from the brokers that they could not be satisfied sufficient or current insurance coverage was in place; and
  4. Two tenants whose leases had expired and who were occupying their tenancies on a month to month basis requested rent reductions, which the Receivers agreed to following commercial negotiations.

Ken contended that:

  1. the Receivers should not have replaced the air conditioning unit, but should instead have provided portable units;
  2. the Receivers’ expenditure on rectification of fire safety issues was unwarranted given the buildings at the Development were to be redeveloped, and as the leases for the tenancies were said to obligate the tenants to meet such expenses;
  3. it was unnecessary for the Receivers to arrange any insurance for the Properties as Woolworths had an obligation to do so under its lease; and
  4. no rent reductions should have been agreed to.

The Court declined to order an inquiry into the Receivers’ conduct, finding that Ken had not established a prima facie case in relation to any of the complaints. The Court held that:

  1. in respect of the air conditioning issues, the Receivers formed the (likely correct) view that the relevant lease required the landlord to replace the air conditioner – further, the Receivers only did so after consulting with Ken, obtaining multiple quotations, and exploring alternatives that they ultimately determined were unviable;
  2. regarding the fire safety issues, the Receivers’ reliance upon advice from properly qualified consultants and the taking of action to keep Development and its tenants safe was an appropriate and commercial decision made in good faith, founded on a reasonable understanding of Sahab’s contractual and statutory obligations;
  3. the Receivers also obtained advice from appropriately qualified consultants as to what if any insurance should be obtained – their decision to take out insurance was made based on the broker’s advice that the coverage in place was inadequate; and
  4. the decision to offer rent reductions was made following negotiations rather than simply acceding to the tenants’ requests, and was intended to ensure the tenants remained in occupation, which did in fact occur.

Finally, Ken sought an inquiry into the Receivers’ conduct of Sahab’s defence in the Senses Proceeding. He alleged that the Receivers had acted irresponsibly by causing Sahab to defend the Senses Proceeding and incur significant costs in doing so, in circumstances where they knew the prospects of the defence succeeding were poor, and that Sahab could not afford to conduct it. Ken also contended that the Receivers ought to have let the family members ventilate the dispute in other proceedings and that they acted without impartiality in conducting Sahab’s defence.

The Court was not satisfied an inquiry into the Receivers’ conduct of Sahab’s defence in the Senses Proceeding was appropriate (again on the basis that no prima facie case for an inquiry had been made out), finding that the Receivers:

  1. had engaged experienced solicitors and Counsel, who advised them that Sahab had an arguable defence;
  2. were entitled to and did rely upon that advice (in relation to which there was no obvious or manifest error) in conducting the defence; and
  3. were in practical terms required by the terms of their appointment orders to defend the proceeding in light of the diametrically opposed views of the family members, given that the appointment orders prevented the Receivers from compromising the proceeding without leave of the Court or agreement between the family members.

Conclusion and takeaway points

Court-appointed receivers have various duties, and usually occupy restricted and carefully defined roles. They are also subject to Court supervision and control, including via the Court’s powers to order an inquiry into the conduct of their appointment.

Unfortunately, disputes between aggrieved stakeholders and receivers are commonplace. A stakeholder may disagree with the receivers’ approach in a general sense, believe that the receivers should be addressing issues arising during the appointment differently, or contend that certain steps should not be taken/particular costs should not be incurred. However, mere disagreement or the fact that there may have been an alternative approach to resolving an issue is not enough to warrant the Court ordering an inquiry. This is particularly likely to be so if the receivers exercise their powers in good faith, consistently with the terms of their appointment, and in a commercially sound way.

Obtaining an order for an inquiry requires the aggrieved person to provide the evidence necessary to establish a prima facie case that there is some act or omission deserving of an inquiry, and it must also be shown that conducting an inquiry would be in the public interest.

The level of evidence required will differ in each case, and will likely be proportionate to the seriousness of the conduct alleged to be improper. Westpoint Corporation Pty Ltd (in liq) v Yeo (2018) 132 ACSR 106 is one example of where an application seeking that the Court conduct an inquiry (albeit in a liquidation context under the former section 536 of the Act) was partially successful.

Finally, receivers may obtain and rely upon advice as to how issues arising during their appointment should be dealt with, provided that those the receiver engages are suitably qualified and experienced. It will be very difficult for a stakeholder to demonstrate an inquiry into a receiver’s decisions is warranted where the decisions are made in good faith and in reliance upon appropriate advice, absent a manifest or obvious error in the advice provided.

[1] The definition of “Controller”, of property of a corporation in section 9 means a receiver or a receiver and manager of that property.

[2] Sahab at [108], citing Re S & D International Pty Ltd [2009] VSC 225 at [10].

[3] Sahab at [110].

For further information, please do not hesitate to contact us.

Get the latest news insights and articles straight to your inbox, simply enter your details.

    *
    *
    *
    *Required Fields

    Commercial Disputes

    Restoring confidence: Crown successfully challenges order that confidentiality clause be bypassed on case management grounds