Secured Creditor Update – Contingent Claims
It is established practice that once a secured lender has been paid out in full and/or that all of the assets of the borrower have been realised that the receiver and manager should retire as soon as practicable.
However, a recent case has shown that there may be circumstances which require a receiver and manager to retain their appointment after a secured lender has been paid in full and/or there are no further assets to realise.
In Bowesco v. Cronin (2008) WASC 296 (“Bowesco”) a company and its director and shareholder (“the plaintiff’s) lodged an application for the removal of a receiver and manager where the secured lender had been paid out in full.
Contents
Facts
In summary the facts of the case were as follows: -
- The receivers had paid the debt owing to the secured lender in full;
- The receivers retained the sum of approximately$900,000;
- The receivers had been invited to retire but had declined to do so.
The decision not to retire by the receivers related to a sale that occurred during the receivership that gave rise to a capital gains liability. The receivers received advice that their liability to the Commissioner of Taxation was in excess of $1 million.
The receiver is personally liable for this amount due to Section 254(1) of the Income Tax Assessment Act 1936, which provides that every agent and trustee shall be responsible for taxation amounts that come about as a result of his or her agency and the agent or trustee is entitled to retain such monies as are necessary to discharge the taxation amounts and are personally liable for the taxation amounts that should have been retained.
Decision
The Court held the following:
1. “a receiver and manager’s decision as to whether or not to retire is not an act or omission for the purposes of Section 423(1)(b). It is not open to the plaintiff’s to rely on that subsection”.
The application brought under Section 423(1) (b) of the Corporations Act 2001 argued that as a result of the receiver’s decision not to retire, this constituted an “omission” in relation to the performance and exercise of the receiver’s functions and powers.
In considering Section 423(1)(b), the Court considered that the non-retiring of the receiver was not an omission of the receiver in the performing or exercising of his functions and powers. An omission of a receiver would be the failure to perform an act, for example if a receiver did not take legal action against a particular creditor. The decision by the receiver to not retire is not the same. The Court held that this was not a section that could be relied on in the circumstances.
2. “In the absence of a contractual right to terminate the receivership, a receiver may have no power to terminate his or her appointment. Resignation might leave him or her open to suit by the security-holder.”
However as a result of the receivers not being satisfied that no liability has arisen, especially a personal liability it would follow that the receivers are within their rights to remain appointed and hold onto the necessary funds in order to discharge any potential liability that may arise as a result of the receivership.
In addition to the above, the receivers have also been put on notice of potential litigation that may be commenced in relation to their conduct of the receivership.
The Court held that the receivers were entitled to take all steps necessary to protect their position.
Given the above, it was reasonable that the receivers decided not to retire and terminate the receivership whilst these issues remain unresolved.
Implications
This case enables a receivership to continue and for a receiver to retain their appointment even after the discharge in full of the secured lender’s debt. Whilst there must be some reasonable basis for continuing with the appointment, the threat of litigation is one that would be very common.
A receiver is therefore, entitled to retain sufficient surplus funds in order to protect their position, particularly where personal liability may result.
Mortgagor’s should take note of this case as threats of litigation from stakeholders against a receiver may dissipate any surplus’ that may otherwise be available and returned from the receivership process.
For further information please contact:
Blair Pleash
Partner, Sydney
Phone: +61 2 9263 2600
Email: bpleash@hallchadwick.com.au
