As is well known, if a Company is in default of its obligations to a secured creditor the usual response is for the secured creditor to appoint a receiver to the Company over its assets.

The powers a receiver has are set down in both the security documents (once usually called a fixed and floating charge but now called a circulating and non-circulating security interest in the Company’s property) and the Corporations Act 2001 (Cth).

The security documents usually confer upon the receiver broad powers over and with respect to the Company’s assets and its affairs. The Corporations Act similarly confers broad powers on the receiver.

It is not practical to comment in this article on the types of powers often included in security documents drafted by a secured creditor as the drafting varies from secured creditor to secured creditor – it is enough to note that the powers are often expressed in the widest terms. The breadth of the powers are confirmed by Section 420(1) of the Corporations Act which provides that a receiver has power to do all things necessary or convenient to be done for, in connection with or incidental to attaining the objectives for which the receiver was appointed.

A secured creditor is in a much stronger position to recover money than an ordinary unsecured creditor.

One of the strengths enjoyed by secured creditors is that a receiver appointed by the secured creditor will, to all intents and purposes, only look to recover money for the benefit of the secured creditor appointing the receiver. In fulfilling their duties, receivers have no obligations to consider the effect of their actions upon ordinary unsecured creditors. Thus it is the case for instance that a receiver is fully entitled to sell the business of the Company, even if in doing so the receiver only obtains enough money to pay the secured creditor. Neither the Company nor ordinary creditors can complain even if continuing to trade the business would have recovered enough money to pay the debts owed to the secured creditor and the money owed to unsecured creditors.

Directors are often of the view, given the breadth of the powers receivers have, that once a receiver is appointed the directors powers to cause the Company to act or to defend its position are lost. This is not so.

The Supreme Court of New South Wales in the matter of V and M Davidovic Pty Limited (receiver and manager appointed) [2012] NSWSC 1598 affirmed that under the law directors are not generally prevented from taking steps they reasonably believe are in the Company’s interests provided those steps do not prejudice the proper administration of the receivership.

In Davidovic the Company was served with an application to the Court for the appointment of a liquidator to the Company at a time after the receivers had been appointed to the Company.

The Court held that it was undoubtedly the case that the receivers would have had the power to decide whether to argue against the appointment of a liquidator but the Court noted that in that case the receivers had not indicated they intended to take any course of action with respect to the application i.e. they neither opposed it nor agreed to it.

The Court confirmed that the directors did have the power to oppose the making of the winding up order (although in the event the Court did order the Company to be wound up) and confirmed the power of the directors to instruct lawyers to appear on the Company’s behalf to oppose the application.

Contrary to popular belief the appointment of the receiver is not necessarily the end of a Company’s commercial life. The Courts have long held and have recently confirmed that the directors do continue to have power to act in the best interests of the Company as long as so doing does not interfere with the proper administration of the receivership.

The extent of this power will depend upon the particular circumstances in which the receiver was appointed, the drafting of the security interest pursuant to which the receiver was appointed and events that have occurred during the receivership.

Directors should be alive to these issues and should contact us to discuss options that may be open to them in what may otherwise look like a hopeless situation!