The recent decision of Oswal, in the matter of Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) v Carson, McEvoy and Theobald (Receivers and Managers) (No 3) [2013] FCA 357 confirms that the Federal Court will not order an inquiry into the alleged misconduct of receivers and managers where the relevant events are matters of commercial judgment.

The decision does, however, leave open the question of whether it is appropriate for a receiver to take on an appointment, knowing that he or she will incur significant expenses in travelling to and from the principal place of business of the company in receivership.

THE FACTS

The facts of the receivership of Burrup Fertilisers Pty Ltd (BFPL) are relatively well known. The decision is one of a number of proceedings filed by Mr Oswal in challenging to the receivers’ conduct and power to realise assets of BFPL. In this case, Mr Oswal sought to invoke the Court’s jurisdiction under s 423 of the Corporations Act to have an inquiry into, amongst other things, the following matters:

  • whether it was appropriate for receivers to retain large cash reserves in the Company, rather than pay down the secured debt;
  • whether the receivers had acted improperly in negotiating a gas supply agreement that was said to be on less favourable terms than an existing pre-appointment agreement; and
  • whether the fees and expenses incurred were excessive.

THE LAW

In determining whether to exercise its discretion to order an inquiry, the Court must be satisfied that the applicant has shown a sufficient basis for that order. A distinction must be drawn between s 423, which allows the Court to inquire into potential misconduct, and s 1321(1), which provides for an appeal against acts, omissions and decisions of external administrators. The real focus of s 423 is to investigate conduct that ought to attract scrutiny for disciplinary reasons.

THE DECISION

Siopis J declined to order an inquiry into the matters raised in the first two dot points (or any of the other matters raised by Mr Oswal) for reasons including that:

  • It is inappropriate to order an inquiry into matters of commercial judgment. The Court is reluctant to interfere in the commercial decision of external administrators and will only do so in exceptional circumstances.
  • Many of the matters raised by Mr Oswal were already the subject of proceedings in other jurisdictions. To order an inquiry into those matters would be a waste of resources and would create a risk of inconsistent findings.
  • Inquiries under s 423 should not be ordered where the subject matter is complex or may be the subject of substantial dispute.

However, the Court did order an inquiry into whether it was appropriate for the receivers to have accepted the appointment in circumstances where it was asserted that they did not have sufficient resources in Western Australia to adequately staff the receivership.

COMMENT

We will watch with interest the Court's inquiry.  As a matter of commercial reality, it may be that in many instances no firm of receivers will have sufficient staff to satisfactorily carry out their duties without relying in part on staff from interstate.

The decision does highlight that fees and expenses of insolvency practitioners remains a hot topic. Care must be taken to ensure that all fees and expenses are justifiable in the circumstances of the particular appointment.