Corporations Law - Whether Court should give a direction to privately appoint receiver and manager - appropriateness of direction when matters of commercial judgment are involved - role of directions where possible future legal action may be taken.

Counsel for the Applicant: A.J. Sullivan QC, A.H. Slater and

B. Glennan

Solicitors for the Applicant: Australian Government Solicitor

Counsel for the First: R.B.S. Macfarlan QC, H.A. Coonan

Solicitors for the First: Dibbs, Crowther and Osborne

Counsel for the Third: D.H. Bloom QC and R.F. Edmonds

The Court: 1. Declines to give directions to the second respondent in his capacity as receiver and manager of the first respondent.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The receiver and manager of companies within the Best and Less Group (Mr Brian Silvia) applies to the Court for a direction pursuant to s. 424 of the Corporations Law that he is justified in accepting an offer made by Mr Berel Ginges by letter dated 22 January 1992 to acquire the assets of the Best and Less Group. The Best and Less Group includes ten companies that carry on the business in partnership of retail clothing stores in three States of Australia ("the partnership").

2. On 6 November 1991 I gave reasons for judgment which led me to dismiss motions of the Deputy Commissioner of Taxation to appoint a provisional liquidator of each of the partnership companies. On 10 February 1992 I declined to give the direction sought by Mr Silvia that he was justified at that stage in accepting the offer of Mr Ginges to acquire the assets of the Best and Less Group. The primary reason given by me was that I was not persuaded that the time had yet arrived for the Court to give the direction sought, assuming of course that it would ever be appropriate for that direction to be given. My reasons for judgment of 6 November 1991 and 10 February 1992 must be read in conjunction with these reasons. I do not propose to repeat what I said in those earlier reasons except where necessary. The present motion of Mr Silvia for directions is supported by Mogul Stud Pty Limited, a secured creditor of assets of the Best and Less companies. The Deputy Commissioner opposes the giving of the direction.

3. Companies legislation has for many years permitted liquidators and receivers of companies to apply to the Court for directions in appropriate cases; but it was not until the enactment of the Companies Act 1947 of the United Kingdom that this right was conferred upon receivers (and receivers and managers) appointed privately. Unlike the comparable English section (Companies Act 1948 (Eng) s. 369(1)), the section in the Corporations Law and its predecessors under the Companies Code (s. 324F) and the Uniform Companies Act 1961 (NSW) (s. 188(3)) do not confer express power upon the Court to make orders binding respondents to the application. The extent to which directions of the Court given under sections of this kind can bind anyone is a matter of considerable doubt. Plainly the Court cannot give directions as to the rights of persons who are not parties to the hearing of the application: Re Odessa Promotions Pty Limited, Pescot v Harrison (1979) ACLC 32,103 per King J. at 32,106 and 32,107; but even if persons are joined as parties to the application it is doubtful if they can be bound in a sense that can give rise to issue estoppel: see In Re Blackbird Pies (Management) Pty Limited (No. 2) (1970) QWN 14 at 33 per Hanger J. and Re Tooth's Trusts (1877) 5 QSCR 10.

4. It would still be open for a company or person to sue a receiver and manager appointed by the debenture holders for a breach of duty even if he had followed the Court's instruction, although he could rely upon the giving of those directions if he seeks relief under s. 1318 of the Corporations Law (C.F. s. 365 of the Uniform Companies Act 1961 and s. 535 of the Companies Code). Comparable provisions exist in Trustee Acts and have done so for many years.

5. The power of the Court to give directions to a receiver must be interpreted liberally. I agree with what was said on that point by King J. in Odessa Promotions at 32,106. An examination of the cases shows how diverse the matters may be that are raised before the Court for directions. Questions frequently arise in a receivership upon which it is necessary or expedient to obtain the directions of the Court, for example, as to the sale of property, as to borrowing, as to legal proceedings, as to giving up possession etc. See generally O'Donovan, Company Receivers and Managers 1981 at 108, 109, 155 and 156; McPherson The Law of Company Liquidation 3rd ed 1987 at 251-253 and the cases cited in both works.

6. Sections of this kind cannot, however, be resorted to for the purpose of seeking the intervention of the Court to make a commercial decision for receivers or liquidators. As Street C.J. in Eq. said in Re Mineral Securities Australia Limited (In Liquidation) (1973) 2 NSWLR 207 at 232:

"When the Court is required to pronounce upon

the commercial prudence of a transaction, it

enters upon a slippery and uncertain field.

Apart from the lawyer's disclaimer of expert

qualifications in matters of business prudence,

the very process of litigation and the necessary

limitations upon the scope of admissible

evidence restrict the available material to far

less than is necessary for the making of a

commercial decision."

See also Duffy v Super Centre Development Corporation Limited (1967) 1 NSWR 382 per Street C.J. in Eq at 383; Sanderson v Classic Car Insurances Pty Limited (1985) 10 ACLR 115 per Young J. at 117.

7. In my reasons of 10 February 1992 I mentioned the endeavours of Mr Silvia, as receiver and manager, to sell the partnership business and assets by public tender including advertisements in various publications. I said that he had received expressions of interest from certain parties including a number of large and well known companies in this country, some of which are retailers. Mr Silvia has approached various companies and organizations. There have been discussions between some of those companies and Mr Silvia and his staff. Information has been sought by them about the Best and Less Group and it has been supplied to the best of Mr Silvia's ability.

8. Tenders closed on 22 January 1992. The only offer of purchase which Mr Silvia had then received was from Mr Berel Ginges on behalf of an undisclosed nominee. At the close of tenders there were four interested parties who expressed an interest in purchasing the partnership business. They required further time to consider any offer to make further inquiries and decide whether in fact they wished to make a formal offer. Among those parties there was at least one large retailer.

9. Since 10 February 1992 Mr Silvia has filed further evidence to support the giving of a direction that he is justified in accepting Mr Ginges's offer at this stage. This evidence establishes that, notwithstanding the efforts of Mr Silvia to furnish information and co-operate with the companies that had initially expressed some interest in acquiring the business of the partnership, it is plain that none of them are interested in proceeding further with the matter. Nor has Mr Silvia received any expressions of interest from any other persons. Mr Silvia is left in the position where the only person interested in acquiring the assets and business of the partnership is Mr Ginges, whose offer made by letter of 22 January 1992 has been confirmed in a letter of 9 March 1992. Mr Ginges is therefore the only person interested in acquiring the business of the partnership. Since 10 February 1992 there has been placed before the Court by Mr Silvia evidence as to subsequent trading of the partnership together with cashflow projections for the partnership business for the six month period to 30 June 1992. The accounts and projections indicate that the business has been and is likely to trade at a loss during the ensuing few months. As at 20 March 1992 there are existing liabilities of the partnership of approximately $44m for orders placed for goods which have not yet been received. Approximately $41m of additional orders are to be placed prior to 30 June 1992.

10. Mr Silvia has assessed the consequences of closing down the Best and Less partnership business and realizing the assets of the partnership. He says that, if the assets of the partnership are sold other than to the only offerer, Mr Ginges, the likely result is that there will be a shortfall to the secured creditors (Mogul Stud owed $20,539,591 and Ginges Holdings Pty Limited owed $4,002,404) of somewhere between $14.8m and $21m. If Mr Ginges's offer is accepted it would appear that the following will occur:-

. the secured creditors will be paid in full;

. staff employed in the business will receive their entitlements to

holiday pay and long service leave which total $2.4m;

. the partnership business will be sold as a going concern.

11. So, Mr Silvia is in a dilemma. If he does not accept Mr Ginges's offer the probability is that the assets of the partnership business will be sold on a forced realization or break-up basis, which will leave a substantial deficiency to the secured creditors, thus increasing the amounts owed to unsecured creditors. The monetary entitlements of staff to holiday pay and money in lieu of long service leave may not be paid in full. The business will cease with all the consequent detriment to a business which employs about 2,000 employees who would lose their jobs. The Deputy Commissioner of Taxation, an unsecured creditor pursuant to the notices of assessment served by him upon the members of the Best and Less Group, will be in no better position than he otherwise would be.

12. If the offer of Mr Ginges is accepted it will leave the Deputy Commissioner of Taxation as the only creditor, or at least the only substantial creditor, although there will be no assets available for payment to him on a winding up.

13. Mr Silvia has submitted by his counsel that the Deputy Commissioner has throughout this matter made it clear that he views with considerable disfavour and suspicion the whole affair from the time last year when the former secured creditor of the partnership (the State Bank of New South Wales) assigned its interest in the securities held by it to Mogul Stud (a company having affiliation with Mr Richard Scheinberg who was one of its directors and who is a member of the Scheinberg family, which is closely involved with the Best and Less Group), followed by the appointment of Mr Silvia as receiver and manager to the present time when the partnership assets and business are to be sold to Mr Ginges.

14. I should say at this stage that the assessments issued by the Deputy Commissioner are or will be challenged in the courts on various bases, so that their ultimate fate is not known. However, I must act on the facts as they are known to me at this stage, and they disclose that the Deputy Commissioner is in law an unsecured creditor of the Best and Less companies by reason of his issuing notices of assessment for tax against them in very large amounts, although I take into account the possibility that they will not stand, in whole or in part.

15. Mr Silvia says that in these circumstances, where the Deputy Commissioner is adopting a hostile attitude towards the whole matter, he needs the protection of the Court by the giving of directions to justify his acceptance of Mr Ginges's offer. The Commissioner does not assert, at least in these proceedings, that there is any defect in the security held by Mogul Stud or in the appointment of Mr Silvia as receiver and manager of the Best and Less companies. Nor does the Deputy Commissioner assert that Mr Silvia has acted otherwise than properly throughout the course of his receivership and in seeking these directions from the Court. Nor is it asserted by the Deputy Commissioner that Mr Silvia, if he accepted Mr Ginges's offer, would have acted improperly. The complaint of the Deputy Commissioner is not against Mr Silvia, but against those who appointed him and who arranged for the taking over from the State Bank of New South Wales of its security. The Deputy Commissioner has not formulated any particular attack that he may make in the future against Mogul Stud or members of the Scheinberg family arising out of the events of last year. Indeed, there may be no such attack made by him at all. I simply do not know.

16. There may be no illegality of any kind in what has been done since the acquisition of the State Bank's securities by Mogul Stud. I do not suggest that there is any such illegality, though the whole exercise has been clever. Cleverness and commercial morality do not always march together. Of course, it is Mr Silvia who seeks the direction of the Court justifying his acceptance of Mr Ginges's offer; but there is no doubt that the public perception of such a direction would be to regard the Court as placing its imprimatur upon the purchase by the nominee of Mr Ginges of the partnership business and that would carry with it an overtone of judicial approval of the events that were put in train upon the acquisition of the State Bank's securities by Mogul Stud and that have led to the proposed purchase by Mr Ginges.

17. I have considerable sympathy for the position in which Mr Silvia finds himself. He appears to have conducted his receivership with considerable skill, drive and ability. But in my view he must make his decision according to the exigencies of the situation and make his own assessment of what is commercially sensible and feasible for him to do. He is a receiver and manager appointed privately, not by the Court. However, I feel bound to say that on the evidence before the Court there could be no suggestion of impropriety on Mr Silvia's part if he decides to accept the offer of Mr Ginges. Nor would the evidence support a finding that the proposed sale to Mr Ginges would be unlawful, and the Deputy Commissioner does not suggest any such unlawfulness.

18. In addition there is before the Court a great deal of complicated and detailed evidence concerning the value of the Best and Less companies including the partnership business. Valuations are made on more than one basis. Although the evidence of value has been tested to some extent, this is a directions hearing and not a dispute between parties with defined issues in an adversarial setting. Opportunity to the Commissioner to test the evidence has been limited by the very nature of the application. This is an additional reason for the Court to approach the giving of directions with care.

19. The Court declines to give directions to the receiver in this case. There will be no order for costs.