Question

Question 6

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

RIGHTS AND DUTIES AS RECEIVER:

Receivers are usually appointed pursuant to the provisions of a mortgage debenture or a registered mortgage or charge. 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 and other creditors of the company". The duties and responsibilities of the receiver may depend upon the terms of charge between debtor and the creditor, the terms of the deed by which they are appointed and the general law relating to receivers. The documents pursuant to which a receiver is appointed usually specify that the receiver is the agent of the debtor company. 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.

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.

After taking possession of the company, the receiver may do any of the following in its own name, in the name of the company, in the name of both or otherwise:

§ Collect all obligations and money due the company.

§ Exercise and possess all the rights, powers and privileges of the company and its officers and directors.

§ Institute or otherwise participate in any legal proceeding by or against the receiver or the company, or in which the company or its creditors have an interest, and in every way represent the company and its creditors.

§ Be the custodian of all monies coming into the receiver's possession, but it may deposit any part of those monies in a company instituted by the federal deposit insurance corporation.

§ Invest or reinvest those portions of the monies and assets of the company as the receiver deems appropriate.

§ Revise or settle any obligation on those terms and conditions that the receiver deems appropriate.

§ Sell, compound, compromise or assign debts due the company on those terms and conditions that the receiver deems appropriate.

§ Negotiate settlements of claims against the company on those terms and conditions that the receiver deems appropriate.

§ Settle, compromise or obtain the release of claims against the company for cash or other consideration.

§ Sell, exchange, encumber or otherwise deal with any real or personal property that has come into the company's possession by any means on the basis of reasonable market value without notice for cash or on those terms and conditions that the receiver deems appropriate.

§ Execute, acknowledge and deliver any deed or other instrument necessary or proper for any purpose.

The receiver may disburse monies for any of the following:

§ The discharge of any taxes, assessments or charges of any nature against the company or the receiver or on any asset or other property in which the company or the receiver has an interest.

§ The protection or improvement of any asset or other property of the company.

§ The costs and expenses of the liquidation and for exercising the receiver's rights, powers, privileges and duties.

§ Debts and interest owed by the company that arise out of the liquidation or otherwise.

§ The costs and expenses of the operation of the company.

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 (i.e., 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.