Question

Imaging Pty Ltd (Imaging) sells health care and consumer imaging products. Big Bank has a security interest over all of the business and assets of Imaging. ​

Imaging has been struggling financially and has missed a loan repayment due to Big Bank. The loan agreement between Big Bank and Imaging provides that where there is​ a default in payment Big Bank is entitled to appoint a receiver.

On 1 June 2019 Tim is appointed receiver of Imaging. Tim decides to sell the medical imaging assets. He lists the assets on Gumtree and takes the first offer. ​Tim decides that the medical imaging side of the business is not profitable and dismisses 15​ employees.

Advise Tim as to his rights and duties as receiver.

Answer 1

Imaging being the receiver has the following Rights & Duties:

1. The primary duty of the receiver is "to get in the assets covered by the charge pursuant to which he is appointed, and to manage and realise those assets with a view to discharging the debt owed to the debenture-holders

2.

For the most part, receivers are usually appointed pursuant to the provisions of a mortgage debenture or a registered mortgage or charge. Their duties are prescribed by:

• the terms of the charge;
• the terms of the deed by which they are appointed; and
• the general law relating to receivers.

The position of a receiver is a somewhat anomalous one. The documents pursuant to which a receiver is appointed usually specify that the receiver is the agent of the debtor company. However, there is no doubt at law or in fact that the receiver's primary responsibility is to the mortgagee that made the appointment. Although the receiver is expressed to be the company's agent, the receiver does not take directions from the company, but rather gives directions to it. However, the company is bound by acts performed within the scope of the receiver's authority. The receiver may enter into contracts and incur debts on the company's behalf, and the company is liable for such debts and even for torts committed in the execution of the receiver's duties.

The primary duty of the receiver is "to get in the assets covered by the charge pursuant to which he is appointed, and to manage and realise those assets with a view to discharging the debt owed to the debenture-holders". Depending on the terms of the appointment and the nature of the relevant business, the receiver's duties may include all or any of the following:

• collecting debts due to the company;
• recovering property owned by the company;
• paying rates, duties and taxes;
• carrying out repairs and insuring the property;
• creating or terminating leases of company property;
• commencing or continuing litigation on the company's behalf;
• carrying on the company's business; and
• selling the company's assets.

If the receiver is authorised and elects to manage and operate the relevant business prior to sale, it has a duty to both the debenture holder and the company "to manage the property with due diligence, subject to his primary duty of attempting to create a situation where the interest on the secured debt can be paid and the debt itself repaid".

If the receiver determines that the property should be sold, then the receiver's duty is the same as that of a mortgagee exercising its power of sale. That duty is owed to the debenture holder and the company, as well as guarantors of the debt and secured creditors, and is both contractual and equitable. The receiver has a duty to act in good faith (ie, to act without collusion, corruption, fraud, dishonesty or recklessness), and also to take reasonable precautions to realise the market value of the property on the date on which it is sold - this includes:

• taking advice as to the method of sale (public auction is not necessarily the best method in all circumstances);
• the steps to be taken to make the sale successful; and
• what is a suitable reserve price in the circumstances.

At the same time, there may be no duty on a receiver to improve the mortgaged property or increase its value, or to pursue planning permission so that the property could be developed to realise a better price.

It follows that where a receiver fails to carry out its duties with due diligence, the receiver may become personally liable to the debenture holder or the company. A receiver can be held to account for negligence in the conduct of a receivership if it:

• is held liable for the loss of interest resulting from its failure to deposit money in a bank in a timely manner;
• is liable for losses resulting from the failure of a bank, where it placed the receivership income in the same account as its own funds;
• exceeds its authority by taking possession of property not charged; or
• negligently mishandles the sale of the company's property.

It is therefore incumbent on a receiver to exercise due care and diligence in carrying out its duties, and to obtain proper advice before taking decisions which may significantly affect the assets under receivership or potentially diminish the value of those assets.

- - Source International Law Office (Christopher Coye)