The Applicable Principles of Law
95Counsel surveyed applicable authority. The starting point for discussion of relevant legal principles was: Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] QB 814 ("Newhart"). The facts of the case may be shortly stated. The defendant bank financed the plaintiff's property development. The development failed and the bank appointed a receiver to the plaintiffs' undertaking and property. But the plaintiffs sought to assert a claim for breach of contract against the bank arising out of the bank's withdrawal of financial support for the development. The plaintiffs issued a writ claiming damages for breach of contract, which the bank sought to have set aside on the basis that it had been issued without the receiver's consent.
96In Newhart the Court of Appeal accepted as a statement of general principle and the starting point for their reasoning that any action by directors should not be allowed, which would interfere with the proper discharge of the receiver's function in gathering available assets of the company to discharge the debts owing to a debenture holder: cf M Wheeler & Co Ltd v Warmer [1928] Ch 840. But the Court cautioned against putting the position too widely and emphasised that the principle does not mean that any actions by directors which interfere with the receivers must not be allowed: per Shaw LJ at 819B-C. On that subject Shaw LJ said the following (at 821):-
"If that means that nobody else can take any step in regard to the assets of the company which does not amount to dealing with, or disposing of, the assets, it would appear to me to be too wide and not supported by any authority which has been cited to us. What, of course, the directors cannot do, and to this extent their powers are inhibited, is to dispose of the assets within the debenture charge without the assent or concurrence of the receiver, for it is his function to deal with the assets in the first place so as to provide the means of paying off the debenture holders' claims. But where there is a right of action which the board (though not the receiver) would wish to pursue, it does not seem to me that the rights or function of the receiver are affected if the company is indemnified against any liability for costs (as here). I see no principle of law or expediency which precludes the directors of a company, as a duly constituted board (and it is not suggested here that they were not a duly constituted board when they took the step of instituting this action) from seeking to enforce the claim, however ill-founded it may be, provided only, of course, that nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders."
97The principle being stated in Newhart was that: if there is a right of action which the receiver would not wish to pursue, that the proper functions of the receiver may not necessarily be prejudiced by the board pursuing that right of action. If the board does decide to commence proceedings, however ill founded, if those proceedings do not threaten the interests of debenture holders as debenture holders, then they may be permitted to proceed. The Court of Appeal pointed out that there are other considerations in play: the receiver may choose to ignore some asset such as a right of action because it was unprofitable, but that does not foreclose the directors of the company pursuing that asset if it is in the company's best interests: per Shaw LJ at 819G-H.
98The next case to which counsel referred the Court is the decision of Hoffman J, as his Lordship then was, in Gomba Holdings (UK) Ltd v Homan [1986] 1 WLR 1301 ("Gomba"). The facts of that case may be shortly stated. The defendant bank as mortgagee appointed a receiver to the plaintiffs, a group of companies with a sole director. The sole director made an agreement with a third party, which he claimed would allow the group to pay off the bank's indebtedness and reclaim their mortgaged assets. Purporting to act in the plaintiff's names the director brought three motions for: (1) financial information about the receivership to conclude negotiations with the third party; (2) an order for redemption; and (3) a restraint on the receiver's disposal of mortgaged assets. Motions (2) and (3) failed before Hoffman J because of the receivers unrestricted rights of the sale mortgaged assets and problems with the plaintiffs establishing the need for the orders on balance of convenience. But Motion (1) failed not because the plaintiffs had no right to the information sought but because they had failed to establish a need for it and because the balance of convenience did not favour the making of the orders.
99Hoffman J then dealt with the question of the receivers' powers. Hoffman J considered (at 1306 E-H) Lord Atkinson's statement in Moss Steamship Co Ltd v Whinney [1912] AC256,263 that the receiver should have the power to carry on the day to day process of realisation and management of the company's property without interference from the board, because the receivers appointment "entirely supersedes the company in the conduct of its business [and] deprives it of power to ... dispose of the property put into the possession or under the control of the receiver". But in Gomba the plaintiffs were not seeking to press a chose in action against the bank. In the circumstances Hoffman J cautioned (at 1306H - 1307E) against reliance on Newhart in the following way:-
"Counsel for the plaintiffs relied strongly on the decision of the Court of Appeal in Newhart Developments Ltd v Co-op Commercial Bank [1978] 2 All ER 896, [1978] 1 QB 814 which decided that the residual powers of the board in receivership enabled it to authorise an action for damages against the debenture holder to be brought in the name of the company without the consent of the receiver. This was an exceptional case in which the receiver for obvious reasons did not consider that the debenture holder's interests would be served by pursuing the action. The alleged chose in action was therefore not an asset which, in Lord Atkinson's words, the receiver had 'taken into his possession or control'. He wanted to have nothing to do with it. The court decided that the board was therefore free to bring the action in the interests of unsecured creditors and shareholders. But counsel for the plaintiffs relied in particular on the following passage in the judgment of Shaw LJ ( [1978] 2 All ER 896 at 900, [1978] 1 QB 814 at 820):
'The receiver is entitled to ignore the claims of anybody outside the debenture holders. Not so the company; not so, therefore, the directors of the company. If there is an asset which appears to be of value, although the directors cannot deal with it in the sense of disposing of it, they are under a duty to exploit it so as to bring it to a realisation which may be fruitful for all concerned.'
It is easy to see what Shaw LJ meant in the context of the case before him, but counsel for the plaintiffs relies on the generality of this statement for a submission that the directors have a continuing duty to exploit the assets of the company and that the receivers are therefore obliged to provide whatever information is necessary to enable the directors to carry out that duty. I cannot accept that the Court of Appeal contemplated some kind of diarchy over all the company's assets. This would be contrary to principle and wholly impractical. In my judgment the board has during the currency of the receivership no powers over assets in the possession or control of the receiver."
100Hoffman J was pointing out that an important aspect of Newhart was that there the claimed chose of action was not an asset which the receiver had taken into his possession or control; rather that the receiver, wanted to have nothing to do with it.
101The next case to which the Court was referred was the Court of Appeal's decision in GE Capital Commercial Finance Limited v Sutton [2004] EWCA Civ 315 ("GE Capital"). The facts of that case are not of present significance, other than that the Court of Appeal was there considering an application for documents brought in the name of a company in receivership. The receivers took the point that the proceedings were not properly commenced.
102Their Lordships relevantly dealt with the powers of receivers (at [45] and [46]) and considered the statements of Shaw LJ in Newhart in the following way -
"[45]The relationship between the powers of receivers and the powers of directors, in the context of proceedings brought in the name of the company, were considered by this Court in Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] QB 814, [1978] 2 All ER 896. Shaw LJ pointed out, (ibid, at p 819E-F) that the power to bring proceedings in the name of the company conferred on receivers (in that case, by the terms of the debenture) was no more than an enabling power; the provision conferring that power "does not divest the directors of the company of their power, as the governing body of the company, of instituting proceedings in a situation where so doing does not in any way impinge prejudicially upon the position of the debenture holders by threatening or imperilling the assets which are subject to the charge". Shaw LJ went on to say this (ibid, at p 821B-D):
"What, of course, the directors cannot do, and to this extent their powers are inhibited, is to dispose of the assets within the debenture charge without the assent or concurrence of the receiver, for it is his function to deal with the assets in the first place so as to provide the means of paying off the debenture holders' claims. But where there is a right of action which the board (though not the receiver) would wish to pursue, it does not seem to me that the rights or function of the receiver are affected if the company is indemnified against any liability for costs (as here). I can see no principle of law or expediency which precludes the directors of a company, as a duly constituted board (and it is not suggested here that they were not a duly constituted board when they took the step of instituting this action) from seeking to enforce the claim, however ill-founded it may be, provided only, of course, that nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders."
It is clear, we think, that the reference, in the last sentence of that paragraph, to "the interests of the debenture holders" is to the interests of the debenture holders as such - that is to say, to their interests in the assets subject to the charge.
[46]It cannot be said, in the present case, that the institution of proceedings in the APL action goes in any way to threaten the interests of GE, as debenture holder, in the assets subject to the debenture. In so far as the BT documents are assets subject to the debenture, the order sought in the APL action is for the return of those documents to APL; not for the return of those documents to Mr Paul Sutton. And, if those documents are returned to APL, there can be no impediment which denies the APL receivers the right to examine and make use of those documents for the purposes for which they were sought in the letter of 25 February 2003; that is to say, for the purpose of:
". . . investigating matters relating to the indebtedness [of APL to GE] and, in particular, the provision of . . . security and guarantees by various parties, including Paul Sutton, . . . in consideration of GE's agreement to continue the facility . . ."
103The Court was also taken to a number of important Australian cases. They start with Street J's decision in Hawkesbury Developments Co Ltd v Landmark Finance Pty Ltd (1969) 92 WN (NSW) 199 (at 209) and (1969) 2 NSWR 782, at 790, which is authority for the propositions that upon the appointment of a receiver that the capacity of the company's own organs to function bears a direct inverse relationship to the validity and scope of the receivership (at 290; 790); and thus it will ordinarily be open to a company to challenge the validity of a debenture founding the appointment of a receiver (at 291; 791).
104The next important step is the decision of Owen J in Re Geneva Finance Ltd (1992) 7 WAR 496 ("Geneva"), in which his Honour refined a practical test derived from Shaw LJ's statements in Newhart. His Honour's statement of the test has since been commented upon with approval both by French J, as his Honour the Chief Justice of Australia then was, and by other judges. In Geneva Owen J discussed the decision in Newhart and then proceeds as follows: "In my opinion the reasoning implicit in Newhart indicates the direction which the enquiry should take. The task is to look at the effect which the exercise of the power will have on the receiver's functions rather than to concentrate on the identification and a delineation of the residual duties reposed in the directors."
105But when it comes to undertaking that task Owen J made clear in Geneva that the Court's task may involve determining matters of fact. His Honour said (at 511), "It is a question of fact to be decided in each case whether the purported exercise of power by the directors is detrimental to the functions of the receiver. If it is, the directors must defer to the receiver. If it is not, it does not offend the principle which Newhart enunciates."
106The importance of Geneva is that Owen J, considering arguments such as those advanced by the applicant on the strikeout motion, said the appropriate task is to look at the actual effect that the exercise of the power by the directors will have upon the receiver's function. Application of this test is of great assistance in deciding the result on this motion.
107These statements in Geneva has been subsequently considered with approval in other Australian cases. In Sun-Life Properties Pty Ltd v Chellaston Pty Ltd (1993) 10 ACSR 476 and again in Australian Securities and Investments Commission (ASIC) v Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) (2011) 244 CLR 1, French J considered with approval these passages of Owen J's reasoning.
108In Deangrove Pty Limited (Receivers and Managers Appointed) v Commonwealth Bank of Australia ("Deangrove") [2001] FCA 173 at [37] and [38]; (2001) ACSR 465 Sackville J considered with approval Owen J's analysis of the nature of the Court's task, including assessing the relevant detriment from the exercise of the power on the functions of the receiver, and that the exercise is a factual inquiry.
109In Deangrove the defendant bank had appointed receivers to the plaintiff company. The directors of the company commenced proceedings alleging misleading and deceptive conduct by the bank in the execution of the mortgage that founded the appointment of the receivers. The receivers had not indicated they would themselves pursue the misleading and deceptive conduct claim but rather had failed to reply to a letter seeking their approval to the commencement of the proceedings by directors in the name of the company. Sackville J permitted the proceedings to go forward and said (at [40]):-
"[40] In my view, the authorities clearly support the proposition that, where a company in receivership has a claim against the debenture holder and the receiver declines to pursue the claim, the directors are entitled to initiate and maintain proceedings in the name of the company, provided the directors offer the company a satisfactory indemnity against costs. The latter requirement is designed to ensure that the interests of the debenture holder, qua debenture holder, are not prejudiced: O'Donovan, Company Receivers and Administrators (2nd ed, 1992), at [8.30]. The entitlement of the directors reflects the fact that, as Street J observed in Hawkesbury Development, at 210, it borders on the absurd to contemplate that a receiver would institute proceedings in the name of the company challenging the very debenture to which he or she owes office. It is almost as absurd to contemplate the receiver instituting proceedings against the debenture holder or chargee claiming damages for misleading and deceptive conduct or breach of duty. In any event, an action conducted by the receiver against his or her appointor is likely to encounter a variety of practical difficulties: Kerr on Receivers (2nd Cum Supp to 17th ed, 1997), at 77."
Great Australian's Argument and Conclusion.
110This short survey of relevant authority assists in dealing with Mr Sirtes SC's argument on behalf of Great Australian in answer to the motion. Some of Great Australian's arguments were more persuasive than others.