What happens when receivers are appointed?

Catchwords: Insolvency, default, mortgage, receiver, removal of receiver for misconduct, duty of good faith or take reasonable care, scale of receivers’ fees, S 434A Corporations Act, S115 Conveyancing Act, ARITA

The win for the farmers in the Jeogla case [Jeogla Pty Ltd v ANZ Banking Corporation Limited 1999 NSWSC 563- 11 June 1999, 1999 150 FLR 359 per Einstein J], against the receiver appointed by the ANZ bank, demonstrates a larger issue outside the facts of the case itself.

Do banks’ powers in the appointment of receivers work too harshly? Can the mortgagor claim compensation or get rid of the receivers?

The legal ability of a bank to appoint an out of court receiver over farm property is contained in most farm mortgages and also in the Conveyancing Act, NSW (S115A CA). Farm mortgage Deeds are usually registered mortgages, and these are the “instruments” which give the powers to the receiver or controller  to “receive” immediately upon appointment. This is whether the farmer is a sole trader, a partnership or a company. Generally, if there is any “default” in making monthly repayments, being a day late for instance, the Bank immediately has the right to appoint a receiver.

There can also be “default” in not observing another condition of the mortgage. For instance, the power to appoint a receiver may arise if the farmer fails to pay farm rates and taxes on time, fails to insure the farm improvements in the joint name of the bank and pay the premium before it is due, fails to keep the land clear of noxious growths and animals or fails to give the bank a lien over any crops on the land if requested by the bank.

These events of default, which could trigger major legal consequences, are arguably trivial. Many farmers who have read their mortgages, and who can understand legalese, may not have remembered these legal obligations they have agreed to in their farm mortgage. They are more critical if the farmer has already had a S11 mediation certificate (Farm Debt Mediation Act) within the past 3 years.

The appointment of a receiver occurs immediately a written notice of appointment is given to the receiver. This is regardless of whether the farmer has knowledge of the event until a later date. There is no obligation on the bank to act reasonably before making the appointment. The receiver is deemed to be the agent of the borrower mortgagor, not the mortgagee (S115 CA). The receiver is really a type of “double agent” – after all,  the reason for the appointment is to help the mortgagee lender recover the security after default, not help the mortgagor keep going!

There is no obligation under the general law, in the absence of a demand provision in the mortgage itself, to give prior notice, since farmers are excluded from National Credit Code protection not being consumers. If a demand is made, the recipient borrower only has enough time to get money from a convenient place, but not time to negotiate a deal or another loan. In some cases this has been found to be 1 hour or just enough time to affect the mechanics of payment. The receiver can be appointed over a long lunch with the bank manager and then have control of the cash register by mid afternoon! Does this sound a bit arbitrary?

Because of the drastic consequences, bank mortgagees should have to go to Court first, in line with the Canadian position, before they can appoint a receiver. At the very least, making a prior written demand with notice ought to be mandatory. This can be very harsh on borrowers.

The remuneration of the receiver is set by the Conveyancing Act (S115 (6)), at 5 pc of the total monies received during the receivership. However, the receiver can apply to Court for more, but the farmer company or the disenfranchised directors or shareholders have no standing in that application. They are silent.

The ARITA (Australian Restructuring Insolvency & Turnaround Association, formerly IPAA) scale itself was abandoned in 2000. The published recommended scale is frozen at 1999 fee levels. It is like looking at a snapshot of Chernobyl in 1986 taken on a Zorki rangefinder camera!  Some of those rates are nostalgically high even now in 2015. So now there is no fixed or mandatory scale of remuneration and receivers are encouraged to set fees with their bank appointers that reflect “their own cost and fee structures”.  It is a bit like putting a fox into the hen house and asking it to be true to itself.

So it is no surprise that if the receiver starts selling up assets, the farmer could be wearing high hourly charge out rates of a city based accounting firm. The more a receiver takes for fees, they more they make, and the harder it is to get out of receivership and not face company liquidation or personal bankruptcy.

In the area of company receivers, the law was reformed in 1993 following the recommendations of the Harmer Report. The report recommended having a clear right in the company’s legislation to remove a receiver on the application of the company or other persons affected, when it was “just to do so”.

However, the actual legislation, now S434A of the Corporations Act , did not adopt that recommendation.  Instead it included a proviso that the receiver must “have been” guilty of some “misconduct” and left out other persons affected, for instance directors or shareholders, from being able to apply.

Whilst there are other areas of the Corporations Act which might be used to review a receiver’s exercise of powers (cf. S423 “inquire”, S1321 “appeal” CA), there is no clear mandate by S434A for other persons affected being able to remove a receiver for a bad business decision, being stupid or overstaying his welcome, which is short of misconduct.

Indeed, even if there was misconduct, it has to be past misconduct and not something about to occur!  And the appropriate person to make the application to remove a controller/receiver is ironically the corporation in receivership itself (S434A CA). Practically, the corporation can’t apply, unless the receiver agrees, because the receiver has the power to carry on any business of the corporation (S420(2)(h) CA). So perhaps any real rights generated by S434A are illusory.

The  liquidator appointed of the corporation for the winding up (S434B CA) can remove a redundant receiver. However, one main  idea of removing a receiver is to stop liquidation and save the company. The very fact that a liquidator has the only practical standing to apply, makes any such application to remove receiver almost otiose, akin to vultures squabbling over which peace of flesh to strip of a dead carcass.

The Harmer Report also recommended (and saw adopted)  that receivers be fixed with a specific duty to take reasonable care and not act negligently, in selling assets, rather than just a duty to act in good faith, honestly and fairly without collusion or fraud, which was the prior position before S420A (cf. Downsview Nominees- a Privy Council decision [1993] 2 WLR 86].

But the general law relating to non-corporate receiverships has not been reformed. So for farmers in NSW without company structures, receivers cannot be removed from office for mere negligence, in the absence of something technical in the appointment.

In QLD (non corporate and corporate borrowers) there is a duty on a mortgagee to take reasonable care to sell at market value [Property Law Act S85(1)] and there are criminal sanctions for contraventions. In Victoria, there is a duty to act “in good faith” with regard to the interests of the mortgagor [Transfer of Land Act S77(1)] and the mortgagee “must take reasonable steps” to get the best price then available (Goldcel Nominees [1983] 2VR 257 per Murphy J, SC of Victoria)

In the writer’s opinion, there should be an easier way to remove receivers, by “other persons affected” such as shareholders and stop them from committing acts of negligence before they happen. Harsh consequences are currently allowed to follow trivial or technical defaults, with a lack of notice and access to Court supervision, followed by high and unregulated charges.

Receiver/controllers “must take all reasonable care” to sell the property at not less than “market value” or (only if the former is not possible) at “the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold” (S420A Corporations Act, per Einstein J in Jeogla).

What’s wrong about that case is that these matters were only resolved after the damage was done (an historic Hereford herd was sold at less than market value and not as a going concern with the stud) and the bank was taken to Court at massive expense to the farming business. Receivers know that dead companies don’t argue.

Jonathan de Vere Tyndall

Addendum: This article was Updated 30 March 2015. It was originally published in The Land on 20 January 2000. Since the original article in 2000, in 15 years, there has been no successful Court case (which the author can find) where a receiver has been removed for misconduct under S434A Corporations Act. There have been several attempts , but none successful.

Editors note: The articles published contain comment only and not legal advice, for which you should retain a solicitor. No responsibility is accepted for the accuracy of the contents.