The First Issue
35 As a general proposition, the appointment of receivers and managers to a company in the exercise of a private power of appointment does not extinguish or displace the power of the directors. A receiver acts as the agent of the corporation, but is duty-bound to the appointor: Oswal v Burrup Fertilisers Pty Ltd (2013) 295 ALR 708; [2013] FCAFC 9 (Oswal), Dowsett, Foster and Nicholas JJ at [61]. The extent to which the powers of the directors are circumscribed upon the appointment of a receiver and manager depends upon identification of the property in and business that is the subject of the appointment, the extent of the power conferred upon the appointee in order to perform his or her functions and whether the exercise of particular powers by the directors is likely to or does impede the performance of functions or the exercise of those powers by the receiver. Many cases have considered where the line is to be drawn in particular cases. The answer, as these reasons show, is always a question of fact.
36 A sub-issue that divides the parties is whether PAG has security over the various causes of action that the applicants press in this proceeding? That question is not framed so as to include Naplend for the reason that the Naplend receivers concede that they will not pursue the penalty claims or the breach claims and therefore no question of interference with the performance of their functions or the exercise of their powers arises. Mr Maiden KC for the respondents submits that the answer is unmistakably clear: upon a proper construction of the PAG security, PAG does not have security over real estate (because of the definition of Excluded Property), but it does have security over all other assets including each chose in action that is pleaded by the applicants. In contrast, Mr Gronow KC for the applicants submits that properly understood the breach claims relate to the manner in which the real estate was marketed and sold and therefore concern assets which are not the subject of the PAG security. In his written case, Mr Gronow drew a distinction between the breach claims and the penalty claims, and appeared to accept that the penalty claims were the subject of the PAG security. However, as developed in oral submissions his position altered. It was put to me, without elaboration, that each is within the carve out of Excluded Property.
37 I am unable to accept the submission of Mr Gronow. Dealing first with the breach claims, in my view the objective textual meaning of clause 3.1 of the PAG security is clear and unambiguous. The PPSA security and the fixed and floating charge over the property of the applicants does not extend to any legal or beneficial interest in any real estate. Whilst the manner in which the Naplend receivers marketed and sold real estate the subject of the Naplend securities is pleaded as a factual basis for the contention that, in doing so, various statutory duties were breached, it does not follow that each cause of action is Excluded Property. The exclusion is limited to the legal or beneficial interest of the applicants in real estate. That is a property interest in land. In contrast, the claims for breach of duty are in personam as against individuals for breach of duties said to be owed to the applicants arising from the manner in which the real estate was sold. The legal or beneficial interests of the applicants in the real estate, whilst a necessary fact to found the claims of breach, does not convert those claims into ones about those interests. They are separate choses in action that are independent property of the applicants, quite separate from the interests in real property. A chose in action is of itself intangible personal property as explained by Kitto J in National Trustees Executors and Agency Co of Australasia Ltd v Federal Commissioner of Taxation (Cain's Case) (1954) 91 CLR 540 at 584:
The argument for the executor on this part of the case seems to involve and depend upon two propositions: first, that all personal property known to the law must consist either of choses in possession or of choses in action, and, secondly, that choses in action comprise only rights enforceable by action in the courts. But the term chose in action "furnishes an instance of the subject-matter of property having outgrown its nomenclature": Goodeve, Personal Property, 9th ed. (1949), p. 195; and the second proposition needs to be recast in more flexible terms if the first is to be accepted. The expression now comprises a heterogeneous group of rights which, as Goodeve observes, (loc. cit.) have only one common characteristic, viz. that they do not confer the present possession of a tangible object. Sir William Holdsworth considered the history of the subject in his History of English Law, 2nd ed. (1937), vol. vii, pp. 515 et seq., and showed that although "the original meaning of a chose in action - a right to be asserted by an action - has never been wholly lost sight of" (p. 517), the meaning of the term has become progressively extended to accommodate many forms of personal property which were not within the original conception. The topic has been developed by Sir Howard Elphinstone, Mr. Cyprian Williams and Mr. Charles Sweet in learned articles in the Law Quarterly Review, vol. 9, p. 311; vol. 10, pp. 143, 303; vol. 11, pp. 223, 238. (at p584).
38 Real estate may be possessed: a chose in action may not be: Colonial Bank v Whinney (1885) 30 Ch D 261 at 285-286, Fry LJ.
39 For these reasons, the breach claims are within the PAG securities. As to the penalty claims, each rests on the contention that the default interest rate in the loan contracts is "in the nature of a security for and in terrorem of the satisfaction of the primary stipulation": Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30, French CJ, Gummow, Crennan, Kiefel and Bell JJ at [10]. The claims are confined to the terms of the contracts and inquiry is limited to whether the stipulated amount "is in the nature of a punishment for non-observance of a contractual stipulation": Legione v Hateley (1983) 152 CLR 406, Mason and Deane JJ at 445. They are claims that arise from contracts. They are not claims to legal or beneficial interests in real estate and accordingly are subject to the PAG security.
40 Thus resolution of this issue turns on whether the appointment of the PAG receivers displaced the power of Mr Mawhinney as a director of the applicants to cause this proceeding to be initiated. In Oswal the Full Court comprehensively analysed the authorities at [54]-[77]. At [62] the Court endorsed as succinct and accurate the judgment of Street J in Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1969) 2 NSWR 782 at 790:
Receivership and management may well dominate exclusively a company's affairs in its dealings and relations with the outside world. But it does not permeate the company's internal domestic structure. That structure continues to exist notwithstanding that the directors no longer have authority to exercise their ordinary business-management functions. A valid receivership and management will ordinarily supersede, but not destroy, the company's own organs through which it conducts its affairs. The capacity of those organs to function bears a direct inverse relationship to the validity and scope of the receivership and management.
41 Delineation of the "inverse relationship" is a question of fact. Whether the commencement and prosecution of this proceeding amounts to an impermissible interference with the exercise of powers or the performance of functions by the PAG receivers, as explained by Owen J in Re Geneva Finance Ltd; Quigley v Cook (1992) 7 WAR 496 at 510 (Re Geneva Finance), turns upon an analysis of "the effect which the exercise of the power will have on the receiver's functions rather than to concentrate on the identification and delineation of the residual duties reposed in the directors". That statement was referenced with approval by the Full Court in Oswal at [72].
42 In the various authorities dealing with the commencement and maintenance of legal proceedings when a company is in receivership, there are references to claims that a receiver has "abandoned" or "declines to or does not wish to pursue" as permissible examples of exercise of the power of the directors to bring and prosecute claims that are within the scope of the assets charged in favour of a secured creditor. Some cases have considered the power of the directors to cause proceedings to be commenced against the appointing debenture holder. Others have dealt with the ability of a director to exercise his or her power to access company records. Upon analysis it is clear in my view that the factual inquiry must focus upon actual or likely prejudice to the interests of PAG and the PAG receivers in realisation of the assets that are subject to the PAG security. Prejudice in that sense must include consideration of potential interference with the legitimate exercise of the powers conferred upon the receivers in order to perform their primary realisation function. I now explain why I have reached that view.
43 In Newhart Developments Ltd v Co-Operative Commercial Bank Ltd [1978] QB 814 (Newhart), the Court of Appeal, Stephenson and Shaw LJJ, decided that a corporate borrower could bring an action for breach of contract against a lender despite the appointment by it of receivers. The leading judgment was delivered by Shaw LJ (with whom Stephenson LJ agreed) who rejected as too broad the reasoning of the primary judge that: "Any action which would interfere with the receiver must be something which should not be allowed" at 819 and continued that:
One has got to see what the function of the receiver is. It is not, of course, to wind up the company. It is perhaps interesting to note in passing that when a liquidator is appointed, certainly in a winding up by the court, the powers of the directors immediately cease by statutory provision. There is no such provision in relation to the appointment of a receiver, whose duty it is to protect the interests of the mortgagee or debenture holders, as the case may be. In so far as it is requisite and necessary for him, in the course of his dealing with the assets of the company, bringing them in and realising them, and so on, to bring actions as well, he is empowered to do so by the debenture trust deed in the name of the company. That makes it possible for him to institute such proceedings without exposing himself to the risk of a liability for costs if those proceedings should fail. But the provisions in the debenture trust deed giving him that power is an enabling provision which invests him with the capacity to bring an action in the name of the company. It 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.
44 In later passages and as I read the judgment, Shaw LJ examples proceedings that do not "impinge prejudicially" upon the functions and powers of a receiver. Thus at 819:
If in the exercise of his discretion he chooses to ignore some asset such as a right of action, or decides that it would be unprofitable from the point of view of the debenture holders to pursue it, there is nothing in any authority which has been cited to us which suggests that it is not then open to the directors of the company to pursue that right of action if they think it would be in the interests of the company.
45 At 821 his Lordship did not consider that prosecution of a right of action is to be equated with the disposition of assets subject to the debenture charge and, provided that the company is indemnified as to costs:
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.
46 Sir Nicholas Browne-Wilkinson VC in Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53 at 63 expressed "substantial doubts" that Newhart was correctly decided as failing to address the difficulty "which arises if two different sets of people, the directors and the receivers, who may have widely differing views and interests, both have power to bring proceedings on the same cause of action". See also Robinson T & Walton P, Kerr & Hunter on Receivers and Administrators (20th Ed, 2018, Sweet & Maxwell) at [23-25]-[23-28] and Lightman G & Moss G on The Law of Administrators and Receivers of Companies (6th Ed, 2017, Sweet & Maxwell) at [2-034]-[2-036].
47 Despite those doubts, Newhart has been consistently referred to with approval in Australia. The primary cases are Bank of New Zealand v Essington Developments Pty Ltd (1991) 5 ACSR 86 (Essington Developments), McLelland J at 89; Re Geneva Finance at 510-511; Sun-Life Properties Pty Ltd v Chellaston Pty Ltd (1993) 10 ACSR 476 at, French J at 481; Deangrove Pty Ltd v Commonwealth Bank of Australia (2001) 108 FCR 77; [2001] FCA173 (Deangrove) Sackville J at [31]-[34], and most relevantly for my purposes by the Full Court in Oswal at [64]-[65].
48 I note that in Essington Developments McLelland J, when deciding an application by receivers for directions as to their entitlement to represent the company to which they were appointed in a winding up proceeding and to consent to the application in the exercise of the power to defend a proceeding under the Corporations Law (as set out in s 82 of the Corporations Act 1989 (Cth), at 89 reasoned that:
It follows that if a receiver having power under s 420(2)(u) to defend in the corporation's name a winding up application exercises that power, the authority of the directors to do so is suspended, although, in my view, the mere existence of the power does not affect the authority of the directors prior to the actual exercise of the power by the receiver: cf Newhart Developments Ltd v Co-operative Commercial Bank Ltd
(Citation omitted.)
49 That passage was cited by Sackville J with express approval and emphasis on the "mere existence" qualification in Deangrove at [39] and who then concluded at [40] that:
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.
50 The present case is not one commenced by the applicants against PAG as the appointor, but there is nothing in the authorities which I have referenced which confines the permissible scope of proceedings to claims of that character. Rather, as relevantly concluded by the Full Court in Oswal at [76]:
The board of directors of a corporation in receivership has residual powers:
(a) …
(b) To cause proceedings to be taken in the corporation's name to enforce rights which are not comprised in the receiver's appointment or which he does not wish to pursue, including proceedings against the debenture holder and proceedings challenging the validity of the debenture or charge pursuant to which the receiver was appointed. The available causes of action against the debenture holder or in respect of the charge may be more extensive (as it was in Newhart Developments) but directors will not be permitted to pursue actions which prejudice the legitimate interests of the receiver or his appointor or which would impede the receiver in the proper exercise of his functions.
51 Mr Maiden KC submits that I should find that the penalty claims and the breach claims are assets available to the PAG receivers to prosecute, the receivers have not within the meaning of the authorities "ignored", "abandoned" or "declined to pursue" those claims and that in consequence the prosecution of the claims is detrimental to the performance of the receivers' functions. I do not agree. Nor do I accept the submission of Mr Gronow for the applicants that I should infer that the PAG receivers have abandoned, ignored or have declined to pursue the claims.
52 What is clear on the evidence is that the PAG receivers have been on notice of this proceeding since 20 May 2022. No application has been made by the receivers to intervene in the proceeding. No advice has been provided to the Court to the effect that the receivers consider that this proceeding adversely affects the interests of PAG as secured creditor or the exercise of powers or performance of functions by them. The receivers have not said in any of the correspondence that I have summarised that the prosecution of the proceeding will stultify their activities. The receivers are without funds: a consequence no doubt brought about by the extent of the Naplend security and the exclusion of real estate from the PAG security. The finding of fact that I make is that unless the PAG receivers are put in funds, they are not able to prosecute or intervene in the proceeding and nor are they able to assess its prospects of success. They maintain that the claims are within the PAG security and that all rights which may flow therefrom are maintained. Presently, and to adopt that well-understood expression, they are "fence sitting" on whether the proceeding does or does not prejudice their interests.
53 If the proceeding is successful, or is otherwise compromised on favourable terms, then the PAG receivers will be entitled to claim the proceeds if the claims of PAG as a secured creditor remain unsatisfied: Newhart Developments at 820. It will remain open to the PAG receivers, in the event that they are put in funds or otherwise determine that it is appropriate to do so, to intervene in this proceeding and to take it over in the exercise of their powers. Until that is done, the "mere existence of those powers" does not in the particular circumstances of this case affect the authority of Mr Mawhinney as the director: Essington Developments at 89.
54 In my view, provided that a sufficient indemnity is secured for the costs of this proceeding, then there is no likelihood that the proper interests of PAG as a secured creditor, or the proper discharge of the powers and the exercise of the functions of the PAG receivers, will be imperilled by the continued prosecution of the penalty claims and the breach claims.