When a secured creditor appoints an insolvency practitioner as the receiver of a company that has also been wound up in insolvency by the Court, a question can often arise as to whether the Official Liquidation provisions of the Corporations Act 2001 (Cth) (“the Act“) place any restrictions on the receiver’s ability to then realise the property of the insolvent company.

After a company has been wound up, section 471B of the Act stays all legal proceedings (and bars the commencement of proceedings) in relation to the property of the insolvent company. This is so unless the Court expressly grants leave for the proceeding to be commenced, which usually means a separate application with its own costs and evidentiary burden to meet.

This surely means that a receiver cannot, without leave, commence a proceeding to recover a debt due to the insolvent company to which he or she has been appointed? This would surely constitute a proceeding in relation to the property of the insolvent company. If the receiver tried to do this, the proceeding would be statute barred and struck out as invalid, right?

In MSI (Holdings) Pty. Limited (receiver appointed) (in liquidation) v. Mainstreet International Group Limited [2013] QCA 27 the Queensland Court of Appeal considered this, and other, issues and said “no”.  The case concerned an appeal from a decision of the District Court of Queensland which had struck out a proceeding commenced by receivers of a company in liquidation to recover a debt due to it because the receivers had not first obtained leave to commence the proceeding under section 471B.

The Court found that, provided certain conditions were present, section 471C of the Act would circumvent the operation of section 471B removing any possible requirement for leave to be obtained before a proceeding could be commenced in relation to the property of the company in liquidation. In short, the District Court was wrong and the Receivers didn’t need leave! Why?

The facts of the case were these: –

1. MSI (Holdings) Pty. Limited (“MSI”) was owed a loan debt (“the Debt”) by Mainstreet International Group Limited (“Mainstreet”) pursuant to an oral loan agreement, the Debt was disputed by Mainstreet;
2. Receivers were appointed to MSI (“the Receivers”) by a secured creditor, by virtue of the security documentation and deed of appointment of the receivers, the Receivers had power to commence proceedings in MSI’s name and the Debt was property covered by the secured creditors charge;
3. MSI was wound up in insolvency by the Supreme Court of Victoria in an unrelated proceeding;
4. The Receivers then commenced a proceeding in MSI’s name against Mainstreet in the District Court of Queensland seeking to recover the Debt. They did not obtain leave to do so under section 471B. Mainstreet did not file a defence and default judgment was entered;
5. Mainstreet filed an application in District Court to set aside the default judgment on the basis that, amongst other issues, the Debt was totally in dispute and no leave had been obtained to commence the proceeding.  The Judge agreed with Mainstreet and determined that the proceeding was invalid as no leave under section 471B had been obtained and ordered that the proceeding be struck out; and
6. MSI lodged an Appeal against the decision of the District Court in the Queensland Court of Appeal arguing that section 471C circumvented the requirement to obtain leave in section 471B.

Section 471C states:

Section 471C – Secured creditor’s rights not affected

Nothing in section 471A or 471B affects a secured creditor’s right to realise or otherwise deal with the security interest.

On the Appeal, the Receivers argued that the District Court proceedings were brought in the exercise of the secured creditor’s right to realise its security interest and was covered by section 471C. If 471C applied, 471B did not and no leave was ever required.

Mainstreet argued that 471C only relieved a person from their obligation to obtain leave before commencing a proceeding in circumstances where the debt the subject of the security interest being realised was ‘uncontested’ and not in dispute. If the debt was in dispute, 471C did not apply and 471B required leave to be obtained before proceedings were commenced. The Debt in this case was wholly in dispute.

The Court rejected Mainstreet’s arguments and found that the District Court proceeding was in fact not proceedings that required leave under 471B having regard to the operation of section 471C.  The Court said at paragraphs [21] to [22]:

Section 471C is concerned with the right of a secured creditor with respect to a security interest….Plainly, the charge created by the Deed in favour of the Chargor was a security interest…Just as plainly, at the time of the commencement of the District Court proceeding, Central Coast, as Chargor under the Deed, was a secured creditor of MSI: there was a debt owed by MSI to Central Coast under the Loan Agreement which was secured by the charge.

Then at paragraph [23]:

In my view, the commencement and continuation of the District Court proceeding is apt to be characterised as a realisation of Central Coast’s security interest for the purposes of s 471C.  Any debt owed by Mainstreet to MSI was charged property for the purposes of the Deed.

Then specifically addressing the issue of the Debt being contested, at paragraph [27]:

Legal proceedings to recover a charged debt which, by the course of pleadings, require the making of a judicial determination of whether or not the debt exists are no less a process of realisation of the security interest than are legal proceedings in which the existence of the debt is not contested.

What does it all mean? Basically, the bar on proceedings against companies in liquidation and their property in section 471B of the Corporations Act is not intended to interfere with the rights of secured creditors to realise their security interests in the property of those insolvent companies, section 471C says so.  A Receiver whose powers extend to commencing proceedings in the name of the company in receivership to recover debts due to it can do so without first obtaining the Court’s leave.

If you would like further information on the powers of Receivers in dealing with secured debts, please contact ERA Legal.