BETWEEN : LANEPOINT ENTERPRISES PTY LTD (RECEIVERS & MANAGERS APPOINTED) (ACN 110 693 251)

Corporations law - Receivers - Application to remove receivers on basis receivership concluded - Whether removal forcible under corporations law - Whether receivership actually completed

Corporations Act 2001 (Cth), s 423(1)(b), s 434A, s 434B, s 1321

Income Tax Assessment Act 1936 (Cth), s 254

First Defendant : Mr B O'Donnell QC & Mr J A Thomson

Second Defendant : Mr B O'Donnell QC & Mr J A Thomson

First Defendant : Mr B O'Donnell QC & Mr J A Thomson

Second Defendant : Mr B O'Donnell QC & Mr J A Thomson

1 MASTER SANDERSON: This was the return of two originating process. At the commencement of the hearing, I was advised that no issues were outstanding in relation to Lanepoint Enterprises Pty Ltd, COR 133 of 2008. These reasons, then, only concern Bowesco Pty Ltd.

2 By originating process filed 24 September 2008, the plaintiffs sought the following orders:

1. the defendants forthwith be discharged as receivers and managers and controllers of the company;
2. the defendants forthwith release all moneys and assets held by them on behalf of the company to the company;
3. the defendants do pay the plaintiffs' costs of and incidental to this application.

3 The relevant facts can be shortly stated. The defendants were appointed receivers to the first plaintiff (Bowesco) by Suncorp Metway Ltd on 3 April 2006 pursuant to a mortgage and a charge. It is common ground that the amount owing by Bowesco to Suncorp Metway Ltd under the securities has been repaid. At present, the receivers hold an amount of approximately $900,000. They have been invited to retire but have declined to do so. The second plaintiff is the director and shareholder of Bowesco.

4 The application is said to have been brought under s 423(1)(b), s 434A and s 1321 of the Corporations Act 2001 (Cth). Before dealing with these sections and their relevance to this application, it is worth repeating that the defendants were appointed pursuant to a contractual right held by Suncorp Metway Ltd. That being so, one might have thought that Suncorp Metway Ltd would have been included as a party to these proceedings. After all, if an order were to be made against the defendants requiring their resignation as receivers or removing them as receivers, that would have an effect upon Suncorp Metway Ltd. In fact, given that it was the decision of Suncorp Metway Ltd to appoint receivers in the first place, logic suggests that any relief ought to have been directed against that company. As will become apparent, the failure to join Suncorp Metway Ltd is but one of a number of reasons why the orders sought by the plaintiffs ought not be made.

5 Turning then to the provisions of the Corporations Act, s 423(1)(b) allows the court on a complaint by a person about an act or omission of a controller of a corporation in connection with the performance or exercising of any of the controller's functions or powers to make any order it thinks fit. It was the plaintiffs' submission that the receivership was at an end and that the defendants should retire. As they had not retired, this was an 'omission' by the receivers in connection with performing or exercising their functions or powers.

6 It was submitted on behalf of the defendants that s 423(1)(b), by its plain terms, is concerned with the manner of performance or exercise of a controller's functions or powers. Here, the complaint was that the receivers should cease performing or exercising their functions or powers, rather than a complaint about the particular manner in which the receivers are performing or exercising their functions or powers. Furthermore, it was submitted that there was no complaint about a particular act or omission on the part of the receivers.

7 Neither party was able to advance any authority to support their respective positions.

8 In my view, the proper interpretation of the subsection is that it relates to the actual doing of some act by the receiver (controller) with respect to his functions or powers. In other words, the subsection is focused on a particular act. It is true that the subsection refers to 'omission', but that must mean the failure to do a particular act. For instance, a complaint could be made about a decision of a receiver to take legal action against a particular creditor. Equally, a complaint could be made about the failure of a receiver to take legal action. In both instances, there is a specific decision which affects the property of the company. A decision as to whether to retire or not is not in the same class. In my view, it is not open to the plaintiffs to rely on this subsection.

9 Section 434A of the Corporations Act allows the court to remove a controller for misconduct. Here, the alleged misconduct is the failure of the receivers to resign. It is not alleged against the defendants that they have done anything in the course of the receivership which is improper. On behalf of the defendants it was argued that this section was concerned with the manner in which the receiver (controller) has exercised or performed his functions or powers, rather than a failure to cease exercising functions or powers. On that basis, it was said that the section did not provide a statutory basis for the plaintiffs' application.

10 Both with respect to s 423(1)(b) and s 434A, counsel for the plaintiffs relied upon the decision of Needham J in Expo International Pty Ltd v Chant [1979] 2 NSWLR 820. The facts in the Chant decision are complicated and it is not necessary to detail them to draw out the point counsel for the plaintiffs sought to make. In the Chant case, a bank had appointed Chant and another as receivers of Expo International Pty Ltd. The appointment had been made pursuant to a mortgage which contained the following clause:

At any time after the moneys hereby secured become payable the Bank by notice in writing signed by any officer of the Bank may appoint any qualified person to be a Receiver or Receiver and Manager (hereinafter called 'Receiver') of the mortgaged premises or any part thereof and may remove any Receiver and appoint another Receiver in his place and may fix the remuneration of any such Receiver and determine the conditions upon which he shall hold office ...

11 Needham J discussed at some length the duties of a receiver arising upon his appointment. His Honour went on to say:

Those duties include the duty to exercise his powers in good faith (including a duty not to sacrifice the mortgagor's interests recklessly); to act strictly within, and in accordance with, the conditions of his appointment; to account to the mortgagor after the mortgagee's security has been discharged, not only for the surplus assets, but also for his conduct of the receivership. The latter duty, in my opinion, involves the duty to terminate the receivership by handing over the surplus assets to the mortgagor as soon as the interests of the mortgagee have been satisfied. I think the receiver would be acting outside his powers, or mala fide, if he failed to terminate the receivership because of some extraneous or collateral consideration (834).

12 The difficulty with this formulation of principle is that it may not be within the power of the receivers to terminate their appointment. This case provides an example of that position. The security documents give Suncorp Metway Ltd the power to appoint receivers. As was required by the security documents, the appointment was made in writing. A copy appears as annexure JPC1 to the affidavit of John Patrick Cronin sworn 28 October 2008. By par 2 of the appointment, it is specified that the receivers shall be the agents of the mortgagor. That is consistent with the security documents and is the usual position. Clause 3 is in the following terms:

The Mortgagee reserves the right at any time to:

(a) revoke the Receivers' appointment;

(b) impose conditions or restrictions on the terms of appointment of the Receivers; or

(c) appoint an additional or a replacement receiver or receiver and manager in place of the Receivers.

13 Nowhere in the appointment is it reserved to the receivers the right to retire. So the defendants have no contractual or statutory right to resign by giving notice. Of course, they could resign and it is most unlikely that any court would order specific performance of their obligations. But if they were to take that course, they would leave themselves open to a suit by the appointor - in this case, Suncorp Metway Ltd.

14 During the course of his submissions, counsel for the defendants suggested that the proper approach when a company maintains that the receivership is complete is for the company to issue proceedings against the party holding the security. Effectively, the company would be seeking a declaration that the mortgage has been redeemed. If that order was obtained, it could, if necessary, be allied with a mandatory injunction requiring the security holder to terminate the receivership. In my view, that is the proper course to adopt. Of course, that is not to suggest that the court does not have the power to remove a receiver. Clearly, it does. But the statutory provisions appear to be directed at a receiver who has not performed his functions properly. In O'Donovan, Company Receivers & Administrators, vol 1 at 15.50, the learned author laments the absence of what he refers to as a 'simple device' which might be used to bring a receivership to a conclusion. Whatever the merits or otherwise of the learned author's views, it is clear from the authorities cited in the text that the attempted use of statutory provisions is inappropriate. They are not designed to bring about the termination of a receivership simply because the company is of the view that all the work the receiver needs to undertake has been completed.

15 This view of the operation of the Act is reinforced by reference to s 434B. That section allows a court to remove a 'redundant controller'. Pursuant to s 434B(2), such an order can only be made where the objectives of the controller's appointment have been achieved. That is really what is being submitted in this case. But under s 434B(4), it is only a liquidator who may apply for an order removing a redundant controller. It would be strange indeed if other sections of the Corporations Act could be used to remove a redundant controller when s 434B deals specifically with that circumstance and limits an application to a liquidator. The implication must be that it is not open to a corporation or a director or anyone else to apply to remove a receiver simply on the grounds that he is redundant.

16 Finally, reference is made to s 1321. That section deals with appeals from decisions of receivers. Counsel for the plaintiffs did not deal specifically with this section either in his written or oral submissions. Presumably it is said that in declining to resign, the receivers have made a decision and that decision can be reviewed under the section. I very much doubt that a decision not to resign is a reviewable decision under that section. As was submitted by the defendants, the section is concerned with decisions of the receiver in the course of the receivership. It is not a mechanism allowing the court to remove receivers.

17 Accordingly, I am not satisfied that there is statutory power available to allow the making of orders as sought by the plaintiffs. That would be sufficient to warrant the application being dismissed. However, considerable argument was addressed to the question of whether or not, on the facts of the case, there were outstanding matters which made the receivers' decision not to resign not only reasonable, but proper and appropriate. Lest I be wrong in relation to the statutory provisions, I will deal with the arguments put by the parties.

18 During the course of the receivership, the receivers sold a liquor store owned by the plaintiffs for an amount in excess of the store's initial cost, thus attracting a capital gains tax liability. In November 2006, the receivers received advice from Ernst & Young that their estimated personal liability to the Commissioner of Taxation for capital gains tax was $1,135,609 as a result of dealing with the assets which were the subject of the receivership. The basis for the receivers' personal liability is s 254(1) of the Income Tax Assessment Act 1936 (Cth), which provides that every agent and trustee shall be answerable as taxpayer for the amount of tax in respect of gains of a capital nature derived by him in his representative capacity or derived by virtue of his agency; that such an agent or trustee shall be required to retain sufficient money to pay the tax from receipts; and such an agent or trustee shall be personally liable for that tax to the extent of receipts which should have been retained.

19 The receivers lodged a tax return as receivers of Bowesco for the period from their appointment to 30 June 2006. They expected they would receive an assessment as estimated by Ernst & Young. However, the second plaintiff as a director of Bowesco also caused Bowesco to prepare and lodge a tax return for the 2006 financial year. The receivers did not participate in the preparation of this return. The Commissioner issued a nil assessment to Bowesco for the 2006 financial year. The Commissioner has not issued any assessment to the receivers.

20 The receivers have corresponded with the Commissioner about their own position and whether the nil assessment for Bowesco is based upon a correct disclosure of material to the Commissioner. The receivers wrote to the Commissioner on 4 March 2008, 24 August 2008 and 26 September 2008.

21 After the correspondence dated 4 March 2008, the Commissioner issued a notice to the receivers stating that their liability was $249.25. The notice requested that the receivers inform him (the Commissioner) if they were aware of any outstanding tax related liability not included in the notice. The receivers responded with their concerns about the possibility of an outstanding capital gains tax liability in their letters dated 24 August 2008 and 26 September 2008. There has been no substantive response from the Commissioner.

22 The receivers say that they are concerned about their tax position. They wish to clarify with the Commissioner that they will have a nil liability. They say that this is a matter which is outstanding and yet to be resolved. Hence they say it is inappropriate for the receivership to terminate.

23 The plaintiffs, for their part, say that the tax position is quite clear. They say that based upon the return lodged by Bowesco, there is no tax payable on the sale of the liquor store. Effectively what is said is that there were offsetting deductions available to Bowesco which reduced Bowesco's tax liability to nil. Based upon that assessment, there can be no liability on the part of the receivers and outstanding taxation issues do not provide a reason for them not to resign.

24 The interaction between s 254 of the Income Tax Assessment Act (the section that applies to receivers) and the operation of the Act generally, is not entirely clear. The way that s 254 is worded suggests that the obligations and liabilities of receivers stand apart from any liability the company may have. Evidence filed on behalf of the plaintiffs suggests that this is not the way the section works in practice. It was submitted that if the company's liability for tax is nil, then the receivers' liability for tax is nil. All the receivers are doing is holding on to funds as agent for the company with the intent that when an assessment is made, any funds held by the receiver will be paid to the Commissioner to discharge the company's tax liability.

25 The plaintiffs' arguments in relation to the tax issue are logically compelling. But it is difficult to see why the Commissioner would not issue an assessment to the receivers. The wording of the section seems to require that he do so. In my view, this is an issue that the receivers are entitled to pursue. Potentially, they could have a very large personal liability. It is not frivolous or vexatious of them to take all steps they can to ensure that this issue is put to rest before they retire as receivers. On that basis, then, I am not satisfied that purely on a factual basis there are no matters outstanding in relation to the receivership.

26 The other matter to which the receivers refer are threats of prospective litigation. There have been threats made against the receivers of Bowesco by those who stand behind the company that litigation would be commenced against the receivers in relation to the conduct of their receivership. The history of this is recorded in the reasons of French J (as his Honour then was) in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd [2006] FCA 1493 [34] - [35]. French J accepted that the receivers have a realistic apprehension that the directors of Bowesco might institute proceedings against them in respect of the conduct of the receivership. His Honour recorded that, even if meritless, the proceedings would involve the receivers incurring substantial legal costs which might not be recoverable against the companies or other parties. His Honour further accepted that a provision of $650,000 against the costs the receivers might incur in resisting such proceedings was reasonable.

27 Since French J's decision, Bowesco and various related entities have executed a deed of release dated 19 May 2008 in favour of the receivers concerning the Bowesco receivership. However, Bowesco is trustee of the Dyson Family Trust. The primary beneficiaries are the children of one Norman Carey. The beneficiaries of the trust (other than Mr Carey) have not provided a release to the receivers. The receivers remain concerned that the beneficiaries might commence proceedings against the receivers even if the trustee does not. The receivers have requested that the beneficiaries also provide a release. To date, that has not been provided.

28 In my view, this is not a fanciful concern. As was submitted by the defendants, there is some authority supporting the view that a beneficiary of a trust may, in some circumstances, commence proceedings where the trustee does not: see Ramage v Waclaw (1988) 12 NSWLR 84. What the receivers are requesting is not unreasonable. They are entitled, given the threats made against them, to take all steps necessary to protect their position. Unless and until they are satisfied that safeguards have been put in place, they are acting reasonably in refusing to resign.

29 For all these reasons, I am satisfied that the plaintiffs' application should be dismissed. I will hear the parties as to the form of orders and as to costs.