White v Huxtable, in the matter of Lake Federation Pty Ltd

Factual background 5 On 7 July 2005, Ian Carson and Warren Brian White were appointed as receivers and managers of all the secured property of Lake Federation. The appointment was made by Thorney. 6 Lake Federation is the trustee of the Lake Federation Trust which was established by a trust deed dated 9 May 2002. The principal asset of the Lake Federation Trust is a proposed residential and recreational property development project located near Ballarat. The proposed development involves a master planned community encompassing various types of housing, two hotels, a school, shopping centre, two golf courses, commercial space and a lakeside village retail area. The land comprising the project consists of 11 parcels of land which Lake Federation purchased from a number of vendors. There was an intended twelfth parcel of land, but the contract for the acquisition of that land did not settle prior to the appointment of the receivers and managers of Lake Federation. The development was to be funded by money borrowed under a facility agreement of 17 October 2003 ('Facility Agreement') by which Thorney agreed to and did advance moneys to Lake Federation for the financing of the project. 7 As at 19 March 2005, total drawdown under the Facility Agreement by Lake Federation amounted to $9,998,613. The advances by Thorney were secured by a fixed and floating charge dated 17 October 2003 over the assets and undertaking of Lake Federation and the Lake Federation Trust. The advances were also secured by mortgages over each of the 11 parcels of land. Clause 7.2 of the fixed and floating charge provided that any receiver or receiver and manager appointed under the charge would be the agent of the chargor, subject to the exception in cl 7.5, which provided that in the event of liquidation the receiver would become the agent of the chargee. There is a provision to similar effect in the deed of the appointment of the receivers and managers dated 7 July 2005. 8 Lake Federation defaulted under the Facility Agreement and the plaintiffs were appointed by Thorney as the receivers and managers on 7 July 2005. The receivers and managers set about realising the secured property. In summary, the realisation involved the following steps:

1. investigating the Lake Federation property and the relevant planning scheme and restrictions;
2. seeking advice on various issues affecting some of the relevant parcels of land;
3. obtaining of an independent valuation of the Lake Federation property;
4. seeking expert advice from sales agents as to the best means to sell the property; and
5. undertaking the sale of the property by a tender process and subsequent negotiation. 9 The receivers and managers obtained legal and planning advice concerning the effect of the Ballarat planning scheme on the Lake Federation property. In addition, they commissioned a valuation from CB Richard Ellis ('CBRE'). CBRE's final amended valuation was provided on 15 November 2005. The receivers also appointed a sales agent, having received proposals from three different firms. Sutherland Farrelly ('Sutherland') was appointed by the receivers on 13 October 2005 as the real estate agent to conduct the sale of the Lake Federation property. 10 Sutherland advised that the most appropriate method of sale of the Lake Federation property was by public tender, having regard to the substantial development opportunity offered by the property. They proposed a tender closing date of 7 December 2005, together with a marketing program. They also recommended that potential purchasers be permitted to submit a tender subject to due diligence or other conditions, which the receivers reserved the right to consider or not consider, as the case may be. Sutherland undertook a detailed marketing campaign between 26 October 2005 and the closing date of the tender process, 7 December 2005. 11 A property report was prepared by Sutherland for the assistance of potential purchasers. Subject to signing a disclaimer letter, potential purchasers were also to be provided with a series of property reports that had been prepared for Lake Federation prior to the appointment of the receivers. The tender process was conducted over the period from 26 October 2005 to 7 December 2005. In broad terms, the results were that 114 enquiries were received from advertisements, and 96 confidentiality deeds and 41 disclaimer letters were forwarded to prospective purchasers. 12 Ultimately, although a greater number of confidentiality deeds and disclaimer letters were returned to Sutherland, only 18 prospective purchasers reached the point of receiving tender documents. As at the closing date for the receipt of tender documents on 7 December 2005, no offers capable of acceptance had been received. By 8 December 2005, however, five expressions of interest had been received from the following entities: Roadcon; Ron Silverstein; Financial Alliance (a firm of chartered accountants apparently acting for entities associated with the directors of Lake Federation); Medallist; and Thorney itself. 13 Subsequently, the receivers were contacted by a number of other potentially interested parties, including Dean Pask of Pask Group and Tom Cahill of Sadikay Group. However, none of these contacts materialised into an offer of any kind for the property. 14 On 13 December 2005, the receivers decided to formally abandon the tender process. They then sought to commence negotiations with parties who had expressed an interest in buying the Lake Federation properties but who had not made an offer capable of acceptance. The deadline for receipt of offers in acceptable form from those interested parties was extended to 11 January 2006. 15 On 11 January 2006, one of the representatives of the receivers spoke to Paul Fridman of Fridcorp, who expressed interest in making an offer but said that he required further time to do so. The receivers' representative told him that the receivers would most likely exchange a contract for sale of the properties by no later than 16 or 17 January 2006 and the receivers could only consider an offer from Fridcorp if it was received before the contract of sale was exchanged. 16 As at the close of business on 11 January 2006, only one offer capable of acceptance had been received. The offer was from TIGA, offering the sum of $7.5 million to purchase the Lake Federation property. TIGA is a company associated with the appointor of the receivers, Thorney. One of the directors of TIGA is also a director of Thorney. It appears that TIGA is owned by TIGA Property Pty Ltd which, in turn, is owned by Thorney Investment Group Australia Pty Ltd. The receivers recommended to Thorney that the TIGA offer be accepted, subject to obtaining a court direction pursuant to s 424 of the Corporations Act. 17 On 17 January 2006, the Contract of Sale between Lake Federation and TIGA ('the Contract') was signed and exchanged. The Contract contains a special condition to the effect that the Contract is subject to and conditional on the vendor and the receivers and managers obtaining 'Court Approval' on or before a date being 120 days after the date of sale under the Contract. The Contract defines 'Court Approval' as follows. 'Court Approval means the approval of a court of competent jurisdiction to a sale of the property by the vendor to the purchaser on the terms set out in the executed contract pursuant to s 424 of the Corporations Act.' 18 The evidence indicates that, throughout the sale process, the receivers and managers consulted with the directors of Lake Federation. However, the defendants have raised various objections to the sale process, including objections to the appointment of Sutherland and, most especially, in relation to the timing and duration of the tender process. In the circumstances, given that the directors do not oppose the revised form of relief sought, it is unnecessary for me to detail each of these objections.

Scope of the relief sought 19 On the face of the affidavit material and in light of the original form of the direction, it appeared that the receivers and managers were seeking a direction from the Court approving the Contract in quite widely expressed terms. For instance, Mr White's affidavit said that the plaintiffs sought a direction of the Court to sell the Lake Federation property to TIGA. In support of that application, Mr White said that he believed that he had taken all reasonable care in selling the Lake Federation property and that the sale and tender process had allowed him to sufficiently test the market and to obtain an offer from TIGA which is not less than market value. 20 However, in the course of argument, counsel for the plaintiffs made it clear that the form of direction sought was based upon, and confined to, a direction of the kind made by Austin J in Re One.Tel Networks Holdings Pty Ltd (2001) 40 ACSR 83 ('One.Tel'), and/or by Hodgson J in Re Vartex Petroleum Industries Pty Ltd (Unreported, Supreme Court of New South Wales, Hodgson J, 17 August 1989) ('Vartex'). It was accepted by counsel for the plaintiffs that the revised form of direction would be appropriate in the circumstances and the defendants did not oppose a direction expressed in those more limited terms.

discussion of authorities in relation to directions pursuant to section 424 21 In my view, a direction in the revised form is supported by the authorities and it is appropriate for me to make the direction in circumstances where it is not opposed by the only interested parties, the directors of Lake Federation. A direction under s 424 of the Corporations Act is a direction only. A direction in that form does not address the question whether the receivers have acted reasonably and/or discharged their duties under s 420A. Nor is such a direction binding on the defendants in such a way as to create any kind of legal estoppel. This is so notwithstanding that the directors have been joined in the proceeding as defendants and filed material opposing the making of the direction in the original form. 22 A number of cases indicate that a direction under s 424 of the Corporations Act has the limited force I have described. In Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd (1992) 7 ACSR 245 ('Best & Less'), Lockhart J said that the extent to which directions of the court under s 424 and similar sections can bind anyone is a matter of considerable doubt: at 246. His Honour said that the court plainly cannot give directions as to the rights of persons who are not parties to the hearing of the application. Moreover, even if persons are joined as parties to the application, his Honour said that it is doubtful they can be bound in a sense that can give rise to an issue estoppel. Lockhart J added at 246 that: '[i]t would still be open for a company or person to sue a receiver and manager... for 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.' 23 Similar views have been expressed in other cases. In One.Tel, Austin J said that there is some doubt as to whether directions of a court given under a section of this kind can bind anyone, even a party to the application, citing Best & Less: at 93 [37]. In Vartex, Hodgson J was less equivocal, stating that a direction would not bind a director of the company who was represented before the court. 24 The same view has been expressed in the context of the provision of the Corporations Act that permits directions to be given for the benefit of a liquidator of a company. In Re Ansett Australia Ltd and Mentha (2001) 39 ACSR 355 ('Re Ansett') at 370 [59], the Court referred approvingly to the following passage in the judgment of McLelland J in Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 679-680: 'Modern Australian authority confirms the view that s 479(3) "does not enable the court to make binding orders in the nature of judgments" and that the function of a liquidator's application for directions "is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation".' 25 In Vartex, Hodgson J was careful to point out that the direction he proposed to make had a very limited operation. The direction in Vartex was to the effect that a particular agreement for sale would not be improper merely because the purchaser was the appointor of the receivers. His Honour said that such advice would say nothing about the possibility that the sale may be improper because of particular dealings which may or may not have occurred between the appointor and the plaintiff, or on any other grounds unconnected with the mere identity of the purchaser as the mortgagee. 26 In One.Tel, Austin J made a similar observation, at 98 [65]: 'In these circumstances, it seems to me that a direction in terms of [the proposed direction] is justified. I hesitate to use the word "declare", which suggests a binding declaration of right rather than a direction having the more limited significance that I have described. I note that the word "declare" is used in some of the cases, no doubt in a special sense, but I have decided it would be better to use the word "direct", which is sanctioned by s 424 itself. While Hodgson J in Vartex Petroleum indicated a willingness to direct that the proposed sale was not "improper" by virtue of the mere fact that it was from a receiver to the mortgagee, I would prefer not to use the word "improper", which might suggest a conclusion with respect to the factual circumstances of the sale and the bona fides of the plaintiff.' 27 Other limits on the court's power to give directions under s 424 have been discussed in the authorities. In particular, the authorities make it clear that it is not appropriate for the court to give directions about the commercial propriety or reasonableness of a transaction that the receiver proposes to enter into: see One.Tel at 91 [30], 92 [33] and 93 [38]; and Best & Less at 247, 249 and 250. In Franbridge Pty Ltd v Societé & Generale Finance Corporation Pty Ltd (1994) 14 ACSR 304 ('Franbridge'), Einfeld J refused to make directions to the effect that a particular transaction was not improper and, more particularly, that the receiver had acted reasonably: at 308, 309. 28 The relatively narrow approach to s 424 sanctioned by the authorities contrasts with the approach which has more recently been adopted to s 447A of the Corporations Act. Section 447A is found in Part 5.3A of the Act, which is concerned with external administration. Section 447A(1) provides that the Court may make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company. 29 In Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 at 279-280, the High Court said that the powers conferred by s 447A are wide, but they are not entirely without limit. The High Court found that there is nothing on the face of s 447A(1) that suggests it should be read down; it confers power to make orders which will have effect in the future. Their Honours said that the orders contemplated by s 447A(2) go beyond a curial determination of what is the effect of existing provisions of the Part in relation to a particular company, and contemplate orders that alter how Part 5.3A is to operate in relation to a particular company under administration. 30 The power under s 447A is extremely wide. This may explain the preparedness of the Goldberg J in Re Ansett to give directions approving a particular agreement to be entered into by the administrators. In that case, Goldberg J noted that it is not the role of the court to make a commercial judgment for the liquidators or administrators or to substitute its judgment for their judgment, but then added at 371: [A]lthough courts will not pronounce upon the commercial prudence of a particular transaction, they will act in an appropriate case to protect liquidators and administrators from claims that they have acted unreasonably in entering into particular transactions. That protection will remain so long as the liquidators or administrators have made a full and fair disclosure to the court of all facts material to the subject-matter under consideration.' 31 In Re Ansett, Goldberg J give a direction under s 447A that the Court approved a particular contractual arrangement that the administrators proposed to enter into. 32 Another case to similar effect is Re Ansett Australia Ltd (2002) 41 ACSR 605 at 615-616 [44]-[46] and 618 [54]. In that case, Goldberg J acknowledged that the Court should not give directions as to whether or not a decision made by the administrators is a commercial decision. However, his Honour said at 616 [46]: '… where issues as to the propriety or reasonableness of the conduct undertaken, or the decision made, by an administrator is called in question, it is open to the court to give a direction which, in substance, sanctions or approves the conduct undertaken, or decision made, by the administrator.' 33 His Honour also said that in so far as it might be thought that it was implicit in his reasons for directing that the administrators may properly perform and give effect to the agreement, that was a necessary and inevitable consequence of a consideration of the propriety and reasonableness of the conduct of the administrators in entering into and seeking to perform and give effect to the agreement: at 618 [54]. 34 It therefore seems that, while ss 424 and 447A of the Corporations Act have their respective limits, the courts have been prepared to go further into the commercial arena in making directions under the wider power conferred by s 447A than they have in giving directions to receivers under s 424. 35 The cases decided under s 424 show a distinct disinclination on the part of courts to make any direction that approves, or appears to approve, the undertaking of a commercial transaction by a receiver. Likewise, the courts have resisted the notion that they should make a direction under s 424 that a receiver has acted reasonably in the performance of his duties pursuant to s 420A. There is a good reason for this caution. Unless directions are carefully worded, they might give a false public perception that the court is placing its imprimatur upon a particular transaction: see Lockhart J in Best & Less at 249 and Franbridge, where Einfeld J said at 308: 'The court should not be asked to make orders, give directions or make declarations that would convey to the public, quite wrongly, for the reasons Lockhart and Hodgson JJ point out, that the court is giving judicial approval to the sale after due consideration in accordance with regular procedures when, however the words are hedged, in fact it is not doing that at all.' 36 The cases make it clear, however, that it may be appropriate to make a direction to the effect that a particular transaction is not unlawful solely because the counter-party to the transaction is a company associated with the entity which appointed the receivers and managers. This is precisely what was done by Hodson J in Vartex. In that case, his Honour referred to the principle of mortgage law that a mortgagee cannot exercise a power of sale in favour of itself ('the mortgagee principle') and went on to find that the mortgagee principle does not apply so as to prevent a receiver appointed by a mortgagee from selling the mortgage property to the mortgagee who appointed him. The same approach was adopted by Austin J in One.Tel at 95-97 [51]-[60]. Moreover, in Re Actwane Pty Ltd [2002] NSWSC 572 ('Actwane'), Austin J followed the approach in Vartex and One.Tel and made a direction that: '… notwithstanding the principle of mortgage law that the mortgagee cannot exercise a power of sale in favour of itself, it would not be unlawful for the plaintiff to… enter into an agreement with Temujin Securities Pty Ltd solely by reason of the fact that the Appointor of the Receiver and Manager under a Deed of Appointment dated 1 August 2001 is also the director and sole shareholder of Temujin Securities Pty Ltd.' 37 In the present case, the deed of charge dated 17 October 2003 provides that the receiver and manager from appointment is the agent of the chargor, Lake Federation. As Hodson J pointed out in Vartex, the consequence of that agency is that the sale of property by the receivers and managers to a company associated with the appointor does not infringe the mortgage principle: see also Franbridge at 308 and Actwane at [13]-[15].

direction in this application 38 In the circumstances that I have described and in the light of the authorities I have discussed, I consider that it is appropriate in this case to make a direction in the revised form sought by the plaintiffs. That form closely adheres to the form of order made by Hodson J in Vartex. In my view, it is much clearer to provide that the Contract is not 'unlawful solely by reason of' the relationship between TIGA and Thorney than to use the form of words which appeared in the originating process in this case, namely 'notwithstanding the relationship between' TIGA and receivers' appointor, Thorney. I appreciate that Austin J in One.Tel used the form of words 'notwithstanding' etc, but I prefer the more direct expression 'not unlawful solely by reason of'. I also note that Austin J used the expression 'solely by reason of' in Actwane. 39 Like Austin J in One.Tel and Hodson J in Vartex, I would stress that the direction is intended to establish only that the Contract is not unlawful by reason of the relationship between TIGA and Thorney. The direction does not deal with the position of the plaintiffs under the law concerning the proper exercise of powers of sale by a receiver and manager, which depends upon considerations relating to good faith, proper procedure and fair price. I am not expressing any view about those matters; nor is it appropriate to do so in a summary procedure such as this, where a limited direction only was sought. However, I would add that nothing I have seen on the evidence before me suggests any impropriety on the part of the receivers and managers. 40 For these reasons, I propose to make a direction under s 424 in the revised form sought by the plaintiffs.

costs of the application 41 After the above reasons were delivered orally, the defendants applied for an order that the plaintiffs pay their costs of and incidental to the application. 42 Several grounds were advanced by the defendants in support of the application. Firstly, the originating process filed by the plaintiffs sought a direction that was expressed in wider terms (the defendants say significantly wider) than the revised form ultimately obtained by the plaintiffs without opposition from the defendants. The original form of the direction concerned not only the lawfulness of entering into the Contract with TIGA, notwithstanding its relationship with Thorney, but also sought a direction that the Contract was not 'improper' 'on the facts and in the circumstances presently known to them'. The defendants submitted that the original form was suggestive that the plaintiffs were seeking a direction from the Court which went towards the commercial reasonableness of the plaintiffs' conduct, and was a direction of the kind that Austin J refused to make in One.Tel. 43 Secondly, the defendants argued that their appreciation of the wide scope of the original form of the direction was a reasonable one in view of Mr White's affidavit of 15 February 2006. Paragraph 152 of the affidavit expressed Mr White's belief that he had taken all reasonable care in selling the Lake Federation property and had performed his obligations under s 420A(1) of the Corporations Act to sell the property for market value, and that he had sufficiently tested the market so as to obtain an offer that was not less than market value. Mr White's affidavit does, to some extent at least, tend to support the defendant's view that they thought they were coming to oppose a direction which sought court approbation of the reasonableness of the receivers' conduct. Perhaps another factor relevant to the defendants' appreciation of the scope of the direction sought by the plaintiffs is the form of the special condition and definition of 'Court Approval' in the Contract. 44 Thirdly, the defendants point to Hodgson J's view in Vartex concerning the costs of an opposing director. It appears from Hodgson J's reasons for judgment that the form of direction sought in Vartex was wider than the one ultimately made and, in the result, Hodgson J ordered that the costs of the director be paid out of the funds in the hands of the receiver: see also Actwane. The defendants sought a similar order in the present case. 45 In opposition to the defendants' application for costs, counsel for the plaintiffs submitted that, as a matter of substance, the direction sought by the plaintiffs was always confined within the limits indicated by the Vartex and One.Tel cases. Counsel for the plaintiffs also submitted that the lengthy affidavit by Mr White was entirely appropriate because the Court needed to have before it a full account of the transactions that had led up to the contract of sale in question. I accept the latter point that the affidavit material was entirely appropriate in supporting the discretionary order that was sought from the Court, even assuming it was always limited in the form of the direction that I have made. However, I consider that the defendants were affected in their opposition to the direction because of the wider way in which it was originally cast. 46 The plaintiffs have not obtained the full ambit of the relief which they originally sought. In the circumstances, I propose to make an order to the same effect as the order which Hodgson J made in Vartex. I will order that the costs of the defendants of and incidental to the application be paid out of the funds in the hands of the plaintiffs in their capacity as receivers and managers of Lake Federation.

orders 47 Pursuant to s 424 of the Corporations Act, I will make a direction in the revised form sought by the plaintiffs, that: It is not unlawful solely by reason of the relationship between TIGA (Ballarat) Pty Ltd (ACN 117 812 030) ('TIGA') and the appointor of the plaintiffs, Thorney Properties (Ballarat) Pty Ltd (ACN 106 693 725), for the plaintiffs to enter into the contract of sale dated 17 January 2006 ('Contract') between Lake Federation Pty Ltd (receivers and managers appointed) ('Lake Federation') and TIGA in respect of the property described in Sch 1 of the Contract. 48 I will also order that the defendants' costs of and incidental to the application be paid out of the funds in the hands of the plaintiffs as receivers and managers of Lake Federation.

I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Young.

Solicitor for the Plaintiffs: Corrs Chambers Westgarth