Receivers are always placed in a difficult position when they are first appointed. That difficulty is only exacerbated when the receiver has been privately appointed and there is potentially an issue with the validity of that appointment.

Unsurprisingly, it is not rare for that difficulty to produce enough tension and friction to eventually ignite a legal dispute. Imagine a scenario where a receiver has been privately appointed by a creditor. This is a prudent receiver, who carefully checks whether he has been correctly appointed according to the creditor’s security interest. He has been, so he takes possession of the security and begins to sell parts of it. Whilst he does this, the company’s deteriorating finances finally catch up with it, and it is forced into liquidation. The liquidator then determines that the creditor’s security interest was the result of a voidable transaction (such as an uncommercial transaction), and has that transaction set aside.

In what position does the receiver now stand? Is he liable to the company for the property he sold? Is he entitled to any remuneration?

The English Position

There are not many cases which examine the outcome in this situation. One of the few cases is an old English case, Re Parks Garage (1929) 1 Ch 139. In that case, a bus company was experiencing financial difficulties and being pressed by its creditors. It therefore arranged for the sale of the goodwill of its business, but issued a debenture to certain creditors whilst the sale was being finalised. When the sale was finalised, the debenture was redeemed: a receiver was not appointed, but a payment was nonetheless made to the secured creditors. Shortly thereafter, the company entered liquidation and the liquidator argued that the payments were unfair preferences. The court held that the liquidator was not automatically entitled to claw back the money paid when the debenture was redeemed.

A similar result was reached in another English case, Mace Builders (Glasgow) Ltd v Lunn [1985] 3 WLR 465, which confirmed that the actions of the receiver did not become actionable simply because the security interest was void against the liquidator. Further, it was held that when the receiver realised the assets and applied the proceeds towards the repayment of the secured debt, he did so as the agent of the company. Therefore, that repayment was neither invalidated nor required to be repaid.

The issue of an agent’s personal liability was directly considered in a third English case, Re Morant [1924] 1 Ch 79. In that case, a bankrupt had given an unfair preference to two creditors via a payment to their agents. The bankruptcy trustee attempted to recover the payment from the agents. The court rejected this, holding that the agents must know that ‘the debtor is insolvent and is making the payment with a view to preferring the creditor’ in order to be personally liable. In this case, the agents did not, and therefore the payment could only be recovered from the actual creditors. It seems reasonable to suggest that a privately-appointed receiver would stand in an analogous position to the agents in Morant.

The Australian Position

The situation has not been given direct judicial consideration in Australia. It is not unreasonable, however, to expect that an Australian court would see the English precedents as persuasive. Nonetheless, Australian courts must also consider our own unique legislation.

Section 588FF of the Corporations Act 2001 (Cth.) (“the Act”) allows the court to make a wide range of orders when dealing with a voidable transaction. This would tend to support, rather than mitigate, reliance upon the English precedents. Indeed, at least two textbook writers have expressed the opinion that orders under section 588F of the Act are retrospective, meaning both the receiver and creditor may be held liable to the company in trespass if the security is found to be voidable (see M. Murray and J. Harris “Keay’s Insolvency” 7^th Ed, Lawbook Co 2011 at [18.100]; G. Hamilton “Invalidation of Securities upon Insolvency” Federation Press 2000 at p 143).

Section 588FJ(6) of the Act may also have application if the security interest was a circulating security interest. That section allows the liquidator to recover the payment to the secured creditor, less the creditor’s realisation costs. The section would therefore appear to overturn Mace Builders, at least in relation to circulating security interests.

What about Remuneration?

It is well established that a receiver is entitled to remuneration where the company receives an ‘incontrovertible benefit’ from their actions, regardless of the validity of their appointment: Monks v Poynice (1987) 8 NSWLR 662; Young v ACN 081 162 512 (2005) ACSR 629. Whether an ‘incontrovertible benefit’ has been given is naturally a question of fact and will depend on the circumstances. It would appear, however, that taking over management duties will suffice: Monks v Poynice (1987) 8 NSWLR 662. Therefore, if the receiver has also been appointed as a controller, it seems likely that they will be entitled to their remuneration, notwithstanding the possibility of the underlying security interest being avoided.

Conclusion

Returning to the hypothetical scenario originally posed, it would appear that our receiver would not face personal liability provided that he was not aware of the insolvency of the debtor or preference potentially being bestowed on the secured creditor. On the other hand, if he was aware of these things, then it is entirely possible (albeit not certain) that an Australian court would choose to follow In re Morant. Either way, it behoves a privately appointed receiver to consider these matters closely before acting; a failure to do so could very well end up risking more than the receiver bargained for.