Consideration
17 Whilst the power given to the Court by s 424 of the Act should be construed liberally (Deputy Commissioner of Taxation v Best & Less Woollongong (1992) 7 ACSR 245 at 247 (Best & Less)), the power to give directions is not unlimited. Certain limitations have been recognised. Thus, the section will not be invoked by the Court to judge the commercial prudence of a transaction entered into by a receiver appointed privately. Sanderson v Classic Care Insurances Pty Ltd (1985) 10 ACLR 115; Best & Less; Re One.Tel Networks Holdings Pty Ltd (2001) 40 ACSR 83 at [27] - [31] (One.Tel).
18 In One.Tel, Austin J declined to act under s 424 to declare that a receiver and manager would be justified in compromising disputes with the liquidator and entering into an agreement to settle the dispute. He said at [32]:
To give a direction that the plaintiff would be justified in making an agreement to compromise his disputes with the joint liquidators of the One.Tel companies would be to make or condone a commercial judgment, to that extent supplanting the controller's own primary function.
19 Austin J also said that it was a relevant consideration that there was no opponent to the application. The fact that the plaintiff's evidence was untested reinforced his reluctance to make the proposed order: One.Tel at [34].
20 Austin J explained one purpose of the Court making directions under s 424:
37 … The section does not permit the court to give directions as to the rights of persons who are not parties to the hearing of the application and indeed, there is some doubt as to whether directions of the court given under a section of this kind can bind anyone, even a party to the application (Best & Less, at 246). However, the significance of the direction is that it provides a measure of protection to the controller, who may call the decision in aid if the reasonableness of his conduct is put in question and may rely upon it in seeking relief under s 1318 of the Corporations Act.
21 In Re Ansett Australia Ltd (No. 3) [2002] FCA 90, (2002) 115 FCR 409 (Ansett) Goldberg J considered whether there were any circumstances in which the Court would make directions under s 447D(1) which might involve the assessment of the commercial prudence of a transaction. This section is the equivalent of s 424 but applicable to administrators of a company under administration. He said:
65 This review of the authorities satisfies me that the prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator's or administrator's unease. There must be an issue calling for the exercise of legal judgment.
66 The administrators may be correct in their submission that there is no rule of law and no fixed principle that a consideration of commercial issues is precluded, as the jurisdiction of the Court to give directions under provisions such as ss 447D and 479(3) of the Act is discretionary. The exercise of that discretion will vary depending upon the nature and novelty of the matters and issues which are brought before the Court. From time to time, the Court is necessarily drawn into a consideration of commercial issues where there is a matter giving rise not only to the need to make a business or commercial decision, but also to issues of propriety, power, reasonableness of conduct, contested issues of legal principle or procedure or challenges to the decision made by the liquidator or administrator. Such a situation arose, for example, in Re Codisco Pty Ltd; Sanderson v Classic Car Insurances Pty Ltd, and Re Addstone Pty Ltd (In liq). Nevertheless, there is the well-established principle to which I have referred, namely that a court will not give directions approving of a commercial or business decision made by a liquidator or administrator where the decision is within the power of the liquidator or administrator, and there is no challenge to it or other issue arising in relation to it such as propriety or reasonableness, or calling for the exercise of legal judgment.
22 These principles are equally applicable to s 424 of the Act.
23 Two examples may be given where the Court has given directions which in effect endorse a liquidator's commercial judgment. In Re Addstone Pty Ltd (In liq) (1997) 25 ACSR 357, a liquidator of two companies sought directions as to how he should continue to conduct two proceedings. They had been dismissed as having no prospect of success. Appeals had been instituted. The liquidator was concerned whether to continue the appeals and provide the necessary security for costs for the purpose. Persons associated with the companies asked the liquidator to continue the appeals. They told him that if he failed to pursue the appeals they would sue him for negligence and breach of duty. Mansfield J gave a direction that the liquidator would be acting appropriately in discontinuing the appeals. His Honour said at 363:
While the court may be reluctant to give directions when purely commercial considerations are relevant to the liquidator's decision, even in relation to the conduct of litigation, there will be circumstances where it is or may be appropriate to do so. One of those circumstances may be where the liquidator's proposed decision is the subject of criticism by a particular creditor or creditors as being unreasonable or mala fides.
24 In Handberg (in his capacity as liquidator of S & D International Pty Ltd) (in liq) v MIG Property Services Pty Ltd (2010) 79 ACSR 373, Warren CJ applied these observations of Mansfield J in an application by a liquidator for directions under s 511 of the Act that he was justified in entering into a compromise of litigation. Warren CJ said at [19] :
[T]he courts are restrained when approving the compromise of litigation pursuant to s 511, and that such approval will not be given absent a degree of personal risk attached to a particular liquidator that could negatively affect the winding up process. It is not the role of the court to make what are regarded as commercial decisions for liquidators absent special circumstance.
25 The proceedings were complex and the liquidator was the second liquidator to be appointed to the company. Further, the original administrators had been successfully challenged by one of the defendants. The controversies involved difficult interfamily disputes. The liquidator was, as her Honour found, rightly sensitive to the challenge over any step taken in the litigation. She held:
22 … the first plaintiff is not seeking commercial advice from the court. He has already made what he regards as the appropriate and reasonable commercial decision. It is contained in the settlement deed. Having made that decision, he now asks the court to protect him from the potentially unreasonable behaviour of other parties involved in these proceedings. He is seeking the protection which the court is able to provide him in light of the difficult and litigious circumstances in which he finds himself, and the risk that they pose to his continuing ability to effectively and equitably wind up the second plaintiff.
…
24 … The circumstances are unusual enough to warrant that protection being granted.
26 The question then in the present case is whether the plaintiffs are simply seeking the Courts imprimatur for the commercial decision to settle with Bruval, or whether there is something more in the nature of a real and practical threat that they will be challenged over their commercial judgment to compromise this claim.
27 Evidence of the possibility of challenge comes from the fact that various proceedings have been instituted seeking to invalidate the appointment of the plaintiffs, and alleging negligence and breach of duty in relation to the conduct of the receivership. However, the major moving force in much of that litigation are the liquidators of PSL. They were served with the present application and the affidavits in support. Their solicitor responded by letter dated 10 November 2010 as follows:
We refer to your letter dated 29 October 2010 in relation to the Receivers' application that they have acted reasonably in causing PSL to enter into the terms of settlement in connection with Federal Court Proceeding No. 377 of 2009 (Bruval Proceeding).
The Liquidators do not support or oppose the Receivers' application. The Liquidators have not actively participated in the Bruval Proceeding. They are not in a position to comment on the reasonableness or otherwise of the actions of the Receivers in entering into any settlement.
We confirm that our clients will not attend the hearing listed on 16 November 2010.
For the record the Liquidators maintain that the appointment of the Receivers was invalid.
The fact that the Liquidators have not responded to the Receivers' application is not to be construed as any acceptance of the validity of the Receivers' appointment.
The Liquidators expressly reserve their position on the validity of the Receivers' appointment.
28 This letter does not suggest that the plaintiffs are at risk of challenge from the liquidators in relation to the settlement with Bruval. Although, the liquidators assert that they are not in a position to comment on the reasonableness or otherwise of the plaintiffs' action in entering into the settlement, they were placed in a position to make an assessment of the affidavits which included the terms of settlement and the advice of the solicitors for the plaintiffs. The liquidators would be hard pressed to mount a credible challenge to the plaintiffs' action in the future in relation to this transaction. The evidence therefore does not establish that the plaintiffs are in need of any protection from the Court.
29 In support of the application for a direction that the entry into the settlement was justified, the plaintiffs also relied on their concern that they may not have the full records of PSL, and hence their decision to settle may not be based on complete information. In One.Tel, Austin J did not make the direction that the settlement was justified, but did make a narrower order that the liquidator was justified in relying on the limited information which he had obtained. As in One.Tel the circumstances of the present case do not justify the wider form of order. The narrower form of order was not sought. But, in any event, the evidence does not support the narrower form of order.
30 In his affidavit the first plaintiff explains that PSL did not keep its own separate books of account. The books of the companies in the Chimaera Group were intermingled. However, the plaintiffs entered into an agreement with the Chimaera Group concerning the custody of the hard drives which contained records of the Chimaera Group including PSL. After the agreement was concluded the plaintiffs sought further information from the directors of PSL and from other companies in the group. The response was cooperative and discussions are continuing. Whilst some requests are still outstanding the circumstances do not call for the intervention of the Court. The situation may be contrasted to that in One.Tel where:
39 … the plaintiff has been engaged for some time in a dispute with the joint liquidators as to the ownership of certain assets and as to access to documents and information. This has prevented the plaintiff from concluding his investigations as to the ownership of assets and their value, and as to his prospects of success in litigation, and as to the risk that the joint liquidators might succeed in challenging certain transactions as unfair preferences.
31 In these circumstances the case is governed by the approach that the Court should not give directions which involve the assessment of the commercial merits of the proposed agreement.
32 The foregoing discussion has dealt with the plaintiffs' concerns that they may have acted negligently or unreasonably as referred to in [64] of the first plaintiff's affidavit set out in [16] of these reasons. This has been treated as a concern that the plaintiffs may be sued later on the basis that the settlement was not reasonable in a commercial sense. The concern arose, it was argued, because of the hostile atmosphere in which the plaintiffs actions are being scruitinized.
33 It may be that [61] of the first plaintiff's affidavit set out in [16] of these reasons articulates a different concern, namely, a concern that the plaintiffs may be sued for entering into any agreement whilst a challenge to their appointment is on foot. If this were raised as the relevant concern, in order to give the directions sought, the Court would need to be satisfied that the plaintiffs had an arguable case that their appointment was valid. The present application has not been conducted on that basis. The plaintiffs have not contended that they needed protection from a challenge that they should not have entered into the settlement simply because the validity of their appointment was being questioned. Consequently, the application has not been considered on that basis.