The recent Supreme Court of NSW decision In the matter of Anglican Development Fund Diocese of Bathurst Board (recs and mgrs apptd) [2015] NSWSC 6, confirms that a board of directors’ residual powers in receivership include consenting to judgment in favour of a creditor.   

BACKGROUND

On 30 September 2013, the Anglican Development Fund Diocese of Bathurst Board (ADF) advised a secured creditor (the Bank) that it could not roll over commercial bills which matured on that day. By the Bank’s application on 1 October 2013, interim receivers were appointed to ADF.

On 15 October 2013, the court ordered, by consent, judgment for the Bank in the amount of approximately $36 million. Those orders also provided that the receivership continue subject to certain terms, including that the receivers must apply to the Court for approval prior to making any distributions to persons adjudicated to be creditors.

WHAT HAPPENED IN THESE PROCEEDINGS?

This application, brought by the receivers, sought approval to make an interim distribution to creditors whose claims had been adjudicated, including the Bank, provided funds were set aside to pay claimants whose proofs of debt were yet to be determined.

The application was opposed by the Anglican Property Trust Diocese of Bathurst (APT), one of four parties whose claim was yet to be adjudicated, on two main grounds:

  1. The consent judgment in favour of the Bank was liable to be set aside.
  2. The alleged lack of impartiality of the receivers and their solicitors meant any potential liability of the Bank to ADF had not been properly considered.

WAS THE CONSENT JUDGMENT LIABLE TO BE SET ASIDE?

APT contended that the consent judgment was liable to be set aside on the basis that the consent was provided by the directors of ADF after the receivers had been appointed.

Although APT conceded that, notwithstanding the appointment of a receiver, the board of directors retained residual powers, it argued that this did not extend to responding to the Bank’s claim, particularly in circumstances where the receivers were given the power under s420(2) of the Corporations Act to bring or defend any proceedings in the name of ADF.

The Court disagreed.

In coming to that conclusion, Black J referred to the Full Court of the Federal Court’s decision in Oswal v Burrup Fertilisers Pty Ltd (recs and mgrs apptd) [2013] FCAFC 9 which, after examining the authorities on residual powers, held that this included the power to consent to a judgment in favour of a debenture holder.

His Honour went on to note that the position may have been different had APT identified a basis to suggest that ADF had grounds to defend the Bank’s claim. If that were the case, it is possible that the consent judgment would have been detrimental to the functions and powers of the receivers, thus putting it outside the scope of residual powers retained by the Board.

THE IMPARTIALITY ARGUMENT

APT’s second key argument to oppose the interim distribution was that the receivers and their solicitors could not bring an impartial mind to an examination of a potential liability of the Bank to ADF. Therefore, an interim distribution ought not be made until any such liability could be properly assessed.

In support of the argument, APT identified a series of connections between the Bank on the one hand and the receivers on the other.

Black J confirmed that the relevant test for independence is whether a fair-minded lay observer might reasonably apprehend that receivers might not bring an impartial mind to the resolution of the relevant question.  His Honour also accepted that there is a substantial line of cases which have expressed reservations as to the retainer of common solicitors for an insolvency practitioner and a major creditor, in circumstances such as the present, where the receivers were appointed by the Court, not the Bank.

That said, his Honour indicated that an inquiry into the receivers’ independence should be raised pursuant to s 423 of theCorporations Act and that, prior to such inquiry, it was not appropriate for his Honour to express a view.

Black J found that, on the facts of this case, an interim distribution to creditors could be made, provided that the distribution was made subject to a condition that the Bank repay its distribution if the debt owed to it was later reduced.

COMMENT

This case confirms that the residual powers of directors during a receivership may include the bringing and concluding of proceedings, provided that it does not prejudice the proper administration of the receivership. However it also serves as a reminder to receivers that, where appointed by a court, their functions are carried out for the benefit of the company as a whole, not a particular creditor.

Where impartiality is suspected, it is open to the Court to inquire into actions of practitioners under s 423 of the Corporations Act.