The Full Court of the Federal Court of Australia recently affirmed the decision of Justice Barker in disallowing Mr Oswal, the director of Burrup Holdings Limited (BHL) and Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) (BFPL) access to certain books and records of the companies.

In the decision of Oswal v Burrup Fertilisers Pty Limited (Receivers and Managers Appointed) [2013] FCAFC 9, the Full Court stated that the Receivers and Managers’ decision to refuse access to certain books and records was valid in the situation where granting access may negatively impact the realisation of secured assets.

The Case

In 2010, ANZ appointed Ian Carson, David McEvoy and Simon Theobald as joint and several Receivers and Managers over the assets of BFPL pursuant to a fixed and floating charge and also over the shares held by BHL in BFPL pursuant to a share mortgage.

Mr Oswal sought access to a number of categories of books and records of BFPL created after the appointment of Receivers and Managers under general legal principles and the Corporations Act 2001 (Cth) (Corporations Act) which was denied.

On appeal, Mr Oswal just sought access under the common law to a refined set of books and records including those regarding the potential or actual sale of assets, documents referred to in a statement of Claim against him and information on business operation. He was successful in gaining access to some of the documents including financial records however was refused access to documents relating to the sale of assets by the Receivers and Managers.

Mr Oswal’s basis for seeking access, being to ensure that the sale of assets was conducted in a proper manner and for market value, was rejected as a reason for the Court to order the Receiver and Mangers to provide him access to the material sought.

Mr Oswal was refused access both in the primary decision of Oswal v Burrup Holdings Limited [2011] FCA 609 and on appeal in the decision of Justices Dowsett, Foster and Nicholas on the basis that if he was provided with these categories of books and records this would have a “real risk” of affecting the ability of the Receivers and Managers to carry out the receivership.

The decision states,

“…the substance of his Honour’s decision was that Mr Oswal’s obvious desire to second-guess or keep an eye on the Receivers while they set about selling the charged property in the interests of ANZ, in the circumstances of this case, was an insufficient basis for denying to the Receivers the primacy which their appointment gave to them in respect of the realisation of that property”.

Statements such as these in the joint judgment demonstrate that the Courts are not willing to permit the ability of the Receivers and mangers to realise assets of the company under their appointment come “second fiddle” to the ability for directors to seek access to books and records to oversee such sales.

Key Legal Principles

The key principles adopted by both the primary judge and on appeal were:

  1. A director owes fiduciary duties to the company and has a right of access to the books and records which relate to the affairs of the company so that he might properly perform his duties.
  2. The right of access to books and records arises at common law and under the Corporations Act and the Court has a discretion whether or not to order that an inspection take place.  
  3.  If there is no evidence that a misuse of power is involved the Court will be reluctant to prevent a director from making an inspection.  
  4. The Court will however examine the impact of an appointment of Receivers and Managers on the ability of the directors to inspect the books and records. The “…task is to look at the effect which the exercise of the power will have on the Receiver’s functions rather than to concentrate on the identification and delineation of the residual duties reposed in the directors”.  
  5. The Court recognised that there are residual duties which the directors must carry out and that they must continue to ensure the best interests of the company are fulfilled however this must not prejudice the proper administration of the Receivership.  
  6. The appointment of a receiver therefore alters the usual position of a director to the extent necessary to allow the Receiver to fulfil their purpose of realising assets for the benefit of the debenture holder.  
  7. A Receiver is entitled to possession of the books and records of the company by virtue of the proprietary interest of the debenture holder and the entitlement to possession is not a legal interest but rather exists to enable him to fulfil the role for which he was appointed.

In Conclusion

This case sends a very clear message to directors who have Receivers and Managers appointed to their company that during the appointment of the Receivers ability to inspect books and records of the companies will be curtailed to the extent that it restricts the ability of the Receivers and Managers to realise assets comes second to the realisation of secured assets.