The bar for recovering assets that have been dubiously transferred out of an insolvent company may not be as high as one might think.

Background

On 14 June 2016, in its judgment delivered in Great Investments Ltd v Warner [2016] FCAFC 85, the Full Court of the Federal Court of Australia confirmed that a benefit transferred from a company without authority can only be retained by the recipient in very limited circumstances.

The case, which was an appeal from the decision of Justice Griffiths of the Federal Court, was concerned with $6 million of convertible bonds which were transferred from Bellpac Pty Ltd between December 2008 and May 2009. The transfers were made by one of Bellpac’s directors under a power of attorney as payment for that director’s own personal debts, while the company was insolvent.

The liquidators of Bellpac sought to recover the bonds from the appellants, who were the recipients. The appellants argued that the terms of the power of attorney in question gave the director an almost unlimited power to dispose of Bellpac’s assets, including the power to transfer Bellpac assets for his own benefit if he wished. This argument was rejected by Griffiths J at first instance and rejected again on appeal to the Full Court.

Without authority v. knowing receipt

The primary judge considered two alternative ways in which the company put its claim against the appellants for recovery of its rights in relation to the bonds, namely:

  1. the recipients knew (or should have known) that by transferring the bonds as payment for his personal debts, the director was in breach of his fiduciary obligations to the company;
  2. the recipients were strictly liable to the company, subject to defences, because the transfers were made without the company’s authority (whether actual or ostensible).

The first of these claims is commonly referred to as an action for knowing receipt (or the first limb of the rule in Barnes v Addy), and will succeed when it can be shown that the known facts surrounding the transfer would have communicated to a reasonable person a general understanding that a breach of fiduciary duty had occurred. The onus is therefore on the plaintiff to prove that the recipient had sufficient knowledge of the breach.

A without authority claim, on the other hand, is generally easier to make out as the company only needs to establish that the director had no authority to transfer the benefit.

Justice Griffiths, at first instance, found in favour of the company on the basis of a “without authority” claim, but noted that he would also have held that the recipients of the bonds were liable on the alternative basis of “knowing receipt”.

On appeal, the Full Court confirmed that in circumstances where a company seeks only to recover rights, or their value, transferred without authority to a recipient, consideration of “knowing receipt” is not necessary once it is established that the transfer was without authority. Once that is established, the recipients would only be permitted to keep the bonds if they could establish that the bonds were purchased for valuable consideration and without notice of the company’s interest. Such a purchaser is commonly referred to by the courts as a bona fide purchaser for value without notice.

Justice Griffiths found that this defence did not apply for two reasons. First, the appellants had either actual or constructive notice of Bellpac’s legal interest in the bonds but they made no reasonable enquiry into how the director could treat the company’s property as his own in order to settle his debts. Secondly, the appellants were not purchasers for value because they paid no consideration to Bellpac.

In the recent decision of Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81, the New South Wales Court of Appeal considered whether recognising a “without authority” claim would “outflank” actions for “knowing receipt”, in the sense that the latter would come to serve no practical purpose. That position was squarely rejected by Leeming JA and Sackville AJA, who reasoned that a person could be concurrently liable under both sorts of claim even if they are based on different principles.

The Full Court said that it agreed with their Honours’ observations on this point. The Full Court acknowledged that many types of strict liability claims exist alongside claims for knowing receipt and saw no issue in accepting that a transfer might be avoided if a director was acting fraudulently or without authority. Once the transfer has been avoided, the company can seek restitution of the benefit or its value.

However, if the company sought to recover consequential losses as equitable compensation or, in the alternative, to obtain an account and disgorgement of a recipient’s profits, an action for knowing receipt would be needed for those remedies.

Implications

  • The doctrine of “knowing receipt” is not required when a company only seeks to recover a benefit transferred or its value.
  • An action for knowing receipt is necessary, however, when a company seeks to recover compensation for any consequential losses it has suffered due to the transfer, or an account and disgorgement of a recipient’s profits.
  • Recipients of company property who have not provided valuable consideration need to ensure that there are no facts or circumstances surrounding the transfer that would communicate to a reasonable person a general understanding that a breach of fiduciary duty has occurred.
  • Recipients who have provided valuable consideration for the transfer of company property similarly need to ensure that they have no knowledge that would put an honest and reasonable person on inquiry as to the authority of the person to make the transfer.