MSI (Holdings) Pty Ltd (Receivers Appointed) (in Liquidation) ACN 120 419 409 (MSI) against Mainstreet International Group Limited (Mainstreet) ACN 120 747 124.

The appeal was brought by the Receivers, who sought to recover a debt for the secured creditor once a liquidator had been appointed to MSI.

The Court of Appeal handed down the decision recently in favour of MSI.

Facts of the case

Prior to the receivership and liquidation MSI executed a Deed of Charge (Deed) creating a fixed and floating charge in favour of the secured creditor. The charge secured the repayment of monies which were advanced under a loan agreement to MSI by the secured creditor.

MSI defaulted under the Deed and the Charge by not repaying the loan monies to the secured creditor.

Under clause 4.1 of the Deed, charged property was charged in favour of the Chargee as security for payment of secured money which included indebtedness under the loan agreement.

Clauses 15 and 16 of the Deed conferred powers and authorities on the secured creditor exercisable by the Receivers to take legal action to recover the outstanding debt should Mainstreet default on the loan.

District Court proceeding

MSI had originally commenced proceedings against Mainstreet in the District Court at Brisbane in December 2011.

MSI sought to recover a debt as an overdue loan repayment, plus interest and costs from Mainstreet. A default judgment was entered for the amount of $347,291.27 against Mainstreet as they did not file a defence. Mainstreet filed an application seeking orders to set aside the default judgment.

Mainstreet submitted it was a proceeding “purporting to be brought by a Receiver without authority from the Supreme Court pursuant to the Corporations Act.” The submission was accepted by the judge in the District Court and the proceeding was struck out at first instance.

The applicable law

Part 5.4B of the Corporations Act 2001 (Cth) (Act) applies to winding-up in insolvency or by the Court. Sections 471 to 471C of the Act deal with the effect of winding-up orders and how this affects court proceedings.

Section 471B of the Act prohibits the commencement or continuation of legal proceedings if a company is being wound up.

Section 471C of the Act provides that section 471B of the Act will not affect the right of a secured creditor to deal with their security interest.

The appeal

The appeal raised issues with respect to the meaning and application of both sections 471B and 471C of the Act.

MSI’s argument

MSI’s ground of appeal was that the judge in the District Court erred in holding that the proceeding was invalid. MSI submitted that leave of the Supreme Court was not necessary either to bring or to proceed with the proceeding under section 471C of the Act.

MSI submitted that on proper construction of section 471C, the commencement and continuance of the District Court proceeding was done in exercise of a secured right to which it applies, then the prohibition in section 471B could not have operated in respect of the proceeding with the consequence that leave would not have been a necessary prerequisite to commencing or continuing the proceeding.

Further, MSI submitted that by virtue of section 471C, section 471B does not affect the right of the secured creditor to realise or otherwise deal with a security interest, that is, the outstanding debt.

Mainstreet’s argument

Mainstreet argued that in order to rely on the operation of section 471C it must be an uncontested debt, which it said was not the case in this matter.

The Court of Appeal’s findings

The Court of Appeal did not agree with Mainstreet’s submission that there must be an uncontested debt. The Court of Appeal’s view was that section 471C is concerned with a secured creditor’s right to realise or otherwise deal with the security interest. The security interest in this case was the charge. The debt was Charged Property for the purposes of the Deed.

The Court of Appeal held the commencement and continuation of the District Court proceeding is apt to be characterised as a realisation of the secured creditor’s interest for the purposes of s 471C.

MSI relied on the observations of McLelland J in Re Leslie Homes (Aust) Pty Ltd 1. This was approved by the Court of Appeal of NSW in Atkins v Mercantile.2 It was also adopted by Wright J of the Supreme Court of Tasmania in New Imperial Pty Ltd (in Liquidation) v Beveridge.3 The New Imperial decision was also cited by Professor Ford as authority for the proposition that a secured creditor having security over debts owed to the company may sue for them without obtaining

The three judges constituting the Court of Appeal had the same reasons for deciding in favour of MSI.

Consequences for secured creditors

The Court of Appeal decision confirms secured creditors, including banks and other lenders, are entitled to realise their security (in certain circumstances) by continuing and/or commencing a proceeding to recover monies owed pursuant to section 471C of the Act. This is despite the fact that they do not have leave of the Court and they would otherwise be prevented from commencing or continuing with a proceeding pursuant to section 471B which would ordinarily stay Court proceedings while a company is being wound up.