Reported Decision : 42 ACSR 307 New South Wales Supreme Court CITATION : In the matter of Actwane Pty Ltd [2002] NSWSC 572 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 5990/01 HEARING DATE(S) : 24 June 2002 JUDGMENT DATE : 26 June 2002 PARTIES : Anthony Milton Sims, Receiver and Manager of Actwane Pty Ltd (in liq) (Receiver and Manager Appointed) (Applicant) Kevin Shirlaw, Liquidator of Actwane Pty Ltd (in liq) (Receiver and Manager Appointed) (Appearing by leave) JUDGMENT OF : Austin J COUNSEL : C D Freeman (Applicant) G Cussen (Sol) (Liquidator) SOLICITORS : Walker Insolvency Lawyers (Applicant) Kemp Strang (Liquidator) CATCHWORDS : CORPORATIONS - receiver and manager appointed under instrument of charge - application for directions - whether court should give direction that receiver is justified in entering into agreement for sale of assets - whether court should give direction that it would not be unlawful for receiver to enter into agreement notwithstanding that purchaser is owned and controlled by appointor of receiver LEGISLATION CITED : Corporations Act 2001 (Cth) ss 9, 424 Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd (1992) 7 ACSR 255 Farrar v Farrars Ltd (1888) 40 Ch D 395 Franbridge v Societe & Generale Finance Corporation Pty Ltd (1994) 14 ACSR 304 CASES CITED : Re North City Developments Pty Ltd; Ex parte Walker (1990) 20 NSWLR 286 Re One.Tel Networks Holdings Pty Ltd (2002) 14 ACSR 83 Re Vartex Petroleum Industries Pty Ltd (unreported, Supreme Court of New South Wales, Equity Division, 17 August 1989) Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 DECISION : See last paragraph of Reasons for Judgment IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J WEDNESDAY 26 JUNE 2002 5990/01 IN THE MATTER OF ACTWANE PTY LTD BY ANTHONY MILTON SIMS JUDGMENT 1 HIS HONOUR: This is an application by Mr Sims, the receiver and manager of Actwane Pty Ltd ("Actwane"). He applies under s 424 of the Corporations Act 2001 (Cth), which empowers the controller of property of a corporation to apply to the Court for directions in relation to any matter arising in connection with the performance or exercise of any of the controller's functions and powers as controller. Mr Sims was appointed receiver of the property of Actwane and manager of its business under powers contained in two instruments of charge (cf s 424 (2)). As receiver and manager he is a "controller" in relation to property of the corporation, according to the definition in s 9 of the Act. 2 Although the interlocutory process sought somewhat different orders, at the hearing of the application Mr Sims sought the following: (1) Two directions, to the effect that: (a) it would not be unlawful for him to accept a certain offer by Temujin Securities Pty Ltd and thereby enter into an agreement with Temujin Securities solely by reason of the fact that the appointor of the receiver and manager under the deed of appointment dated 1 August 2001 by which he took his position, is also the director and sole shareholder of Temujin Securities; (b) he would be justified in making his decision as to entry into the agreement on the basis of information obtained and inquiries made up to the present time. (2) An order that the costs of the present application are costs properly incurred in the plaintiff's conduct of the receivership. 3 Actwane granted two debenture charges to St George Bank Ltd, each dated 10 February 2001 and registered with the Australian Securities and Investments Commission. The charges secured Actwane's indebtedness to the bank. Mr William Moss guaranteed Actwane's debt. One of the charges was a fixed and floating charge over the property and undertaking of the company, and the other was a fixed charge over the company's liquor licence. They were in virtually identical terms, mutatis mutandis. 4 In June 2001, Mr Moss discharged Actwane's indebtedness to the bank in full, following upon a call on the guarantee. When he made that payment, his liability under the guarantee was thereby discharged. The bank then assigned the charges to Mr Moss, and the charges now secure indebtedness to him. Actwane's debt to Mr Moss stood at $1,587,841.60 as at 31 May 2002. The evidence does not indicate that there is any other secured creditor. 5 Pursuant to his right to do so under the charges, Mr Moss appointed Mr Sims receiver of the property and undertaking of Actwane and manager of its business, by a deed of appointment dated 1 August 2001. Upon his appointment, Mr Sims entered into possession of the following property of Actwane: (a) a hotel and freehold property known as the Canley Vale Hotel at Canley Heights; (b) a liquor licence and vacant commercial property located at The Horsley Drive, Carramar; and (c) a beneficial entitlement to two of the three issued shares in Hotel Redfern Pty Ltd, a company that owns the leasehold to the Skybar Hotel in George Street Redfern. 6 Hotel Redfern Pty Ltd had acquired the business of the Skybar Hotel, its plant and equipment and stock-on-hand in February 2001 for $665,000. The present lease for the Skybar Hotel expires on 31 August 2004, with three options to extend the term for a period of five years each. As at the date of Mr Sims' appointment, the two shares in Hotel Redfern Pty Ltd were held by Actwane Holdings Pty Ltd. Mr Sims took proceedings on behalf of Actwane against Actwane Holdings in this Court to recover the two shares. On 8 April 2002, Bergin J ordered, inter alia, that the two shares be transferred to Actwane. 7 Mr Sims, as receiver, wishes to sell the two shares in Hotel Redfern Pty Ltd. There is no evidence that he has conducted any process of advertising or calling for tender offers or the like. However, he has received an offer that he wishes to accept. 8 The offer is by letter dated 6 June 2002 from Temujin Securities Pty Ltd. Temujin Securities already owns the remaining issued share. The purchase price is $363,068 and in addition, Temujin Securities is prepared to repay a loan account to Actwane of $42,728. The letter of offer stipulates that the "agreement" (presumably, the agreement that will result from Mr Sims as receiver and manager accepting the offer) is in place until 30 June 2002, and if completion has not taken place by that date Temujin Securities reserves the right to renegotiate the price. 9 Mr Sims has formed the opinion that the offer represents fair market value for the two shares. He says the price offered by Temujin Securities is a higher price than he could achieve if the two shares were to be offered for sale publicly, or the business to which the two shares relates were to be offered for sale. He has obtained a valuation of the Skybar Hotel in the sum of $650,000 (excluding stock-in-trade). The creditors of Hotel Redfern Pty Ltd are owed an amount not less than $174,562. According to Mr Sims' calculations, if the Hotel were to be sold at valuation and less payment of creditors, the price realised for the two shares would be $322,528. On a public sale, the agent's costs would be approximately $50,000 and the sale process would require supervision by Mr Sims, whose fee for that work would be approximately $30,000. On that basis, Mr Sims reckons that he would not receive more than $363,068, and would probably receive a substantially lower net amount, if the shares were offered publicly for sale. He also takes into account that any purchaser other than Temujin Securities would not be obtaining 100% ownership or control of the shares, and would therefore (in his opinion) be unlikely to pay full value for the shares. 10 Mr Moss, who appointed Mr Sims as receiver and manager of Actwane, is the director and sole shareholder of Temujin Securities. Therefore, the first direction sought by Mr Sims is a direction (echoing the direction made by Hodgson J in Re Vartex Petroleum Industries Pty Ltd (unreported, Supreme Court of New South Wales, Equity Division, 17 August 1989)) that it would not be unlawful for him to accept the offer solely by reason of that fact. The second direction he seeks, based on my decision in Re One.Tel Networks Holdings Pty Ltd (2002) 14 ACSR 83, is a direction that he would be justified in making his decision as to entry into the agreement with Temujin Securities on the basis of the information obtained and inquiries made up to the present time. 11 It appears from Mr Sims' affidavit, though he does not expressly say so, that Actwane is insolvent. Mr Kevin Shirlaw was appointed administrator of the company on 1 July 2001, and was subsequently appointed liquidator at a meeting of creditors on 24 July 2001. Assuming that the company is insolvent, its shareholders can expect no distribution in the liquidation and therefore the only other interest in its assets, apart from the interest of Mr Moss, is the interest of the unsecured creditors whose debts stand at $107,805.64. Their interest is represented by Mr Shirlaw as liquidator, and he appeared, by leave, at the hearing of the application. 12 Mr Shirlaw neither supports nor opposes the first direction sought by Mr Sims, and does not oppose the Court ordering that the costs of the present application are costs properly incurred in Mr Sims' conduct of the receivership. However, Mr Shirlaw opposes the second direction sought by Mr Sims. He says that Mr Sims should be left to make a commercial decision on the offer for sale on the basis of such information and inquiries as seem to him appropriate. In Mr Shirlaw's submission, this is not a case where the Court should provide the receiver with the comfort of a direction under s 424. Mr Shirlaw expresses concern that the other assets of Actwane, namely the Canley Vale Hotel and the property at Carramar, have been sold by Mr Sims and he wishes to reserve any rights that he may have as liquidator in respect of those sales. 13 The first direction sought by Mr Sims is in substantially the same terms as a direction I gave in the One.Tel case. There I followed Hodgson J's decision in the Vartex Petroleum case, noting that in Franbridge v Societe & Generale Finance Corporation Pty Ltd (1994) 14 ACSR 304 Einfeld J had declined to make a similar direction. My reasoning for concluding that a direction should be made began with Re North City Developments Pty Ltd; Ex parte Walker (1990) 20 NSWLR 286; 2 ACSR 290, where Waddell CJ in Eq decided it was appropriate to make a direction under s 424's predecessor that it would not be unlawful for the receiver to take a certain course of action (in that case the possible unlawfulness arose out of the insolvent trading provisions of the corporations legislation). By analogy, it seemed to me appropriate to make a direction under s 424 as to the lawfulness of the receiver's proposed agreement, having regard to legal principles regarding sale by a mortgagee to itself. The direction that I made was carefully drafted by counsel. It did not involve the Court in expressing opinions on matters of fact as to which there might have been some contest (see One.Tel at 98). The direction did not deal with the position of the receiver under the law concerning proper exercise of mortgagee's power of sale, which depends upon considerations relating to good faith, proper procedure and fair price. It was directed to whether the proposed sale would be unlawful per se, having regard to the "logical difficulty" and the absolute equitable principle stemming from Farrar v Farrars Ltd (1888) 40 Ch D 395. 14 I am content to follow and apply that approach in the present case. Here the "logical difficulty" to which I referred in the One.Tel case does not arise, because the mortgagee who appointed Mr Sims as receiver and manager is not the same entity as the purchaser. As to the absolute equitable principle, the Privy Council's decision in Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349; [1983] 3 All ER is to the effect that the absolute equitable principle does not apply where the sale is to a company in which the mortgagee is interested, although the more fact-based restriction on the exercise of the mortgagee's power of sale is, of course, applicable. In that case the only shareholders in the purchaser company were the mortgagee, his wife and children, and it can be assumed that the mortgagee controlled the purchaser company. There is no obvious basis for not applying the Privy Council's reasoning where the mortgagee is the sole director and shareholder of the purchaser company. 15 I conclude, therefore, that the absolute equitable principle, if it has survived into the 21st century, is not applicable in circumstances such as the present. It therefore seems to me that it is appropriate for the Court to make a direction along lines of the first direction sought by the receiver in this case. However, following the approach I took in the One.Tel case and with a view to making the limited scope of the direction as clear as I can, I shall insert the words "notwithstanding the principle of mortgage law that the mortgagee cannot exercise a power of sale in favour of itself". 16 As to the second direction, in the One.Tel case at 91-93 I reviewed authorities for the proposition that the Court should avoid taking a view of the commercial desirability of an agreement proposed by a receiver, where the receiver makes an application for directions ex parte or where (as here) the receiver's evidence is untested: note, in particular, Lockhart J's observations in Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd (1992) 7 ACSR 255. However, I decided it was appropriate in the circumstances of the One.Tel case to make a more limited direction to the effect that the receiver was justified in making his decision as to entry into the agreement on the basis of information obtained and inquiries made up to the time of the application. I observed (at 93) that to give such a direction would not involve the Court in participating in the plaintiff's commercial decision. 17 The receiver in the present case seeks the same kind of order, but in my opinion the facts are distinguishable from the facts of the One.Tel case. In that case the proposed agreement was the result of difficult and complex negotiations, necessarily conducted over a very short period of time. Additionally, the receiver was in dispute with the joint liquidators of the One.Tel companies as to the ownership of certain assets and as to access to documents and information. The evidence indicated that in all those circumstances, it had not been possible for the One.Tel receiver to carry out the usual investigations and assessments that a receiver and manager would normally carry out, including investigations as to the true ownership of assets and their value and as to his prospects of success in litigation against the joint liquidators or the companies in liquidation (see at 93). It was also relevant to take into account that the obtaining of an appropriate direction from the Court was a condition precedent to the operation of the complex, negotiated agreement. 18 Those circumstances are not present here. In this case the proposal is to accept a straightforward letter of offer in circumstances where the evidence does not reveal any significant negotiations. Nor does there appear to be any external time pressure, the only deadline being one imposed in the letter of offer, for which the evidence does not give any justification. Most importantly, there is no evidence of any constraint upon the receiver that might prevent him from making the usual investigations and assessments. There is therefore no particular need for the receiver to act otherwise than on his own commercial judgment, and no legitimate basis for him to receive the special protection that such a direction would provide. The application for the second direction has the flavour of an attempt by the receiver to obtain such protection for his commercial decision as the Court is prepared to give him, without any particular regard to the circumstances of the case. 19 I am therefore not prepared to give the second direction sought in this case. In reaching this conclusion, I do not mean to suggest that the Court has any hesitation or concern about the receiver's proposal. The position is simply that the receiver should be left to do his job without any particular protection from directions of the Court. 20 Since Mr Sims has been successful with respect to the first direction, though not the second, I regard it as appropriate to make an order that the costs of the application are costs properly incurred in his conduct of the receivership. 21 Therefore my orders are: 1. Direct that, notwithstanding the principle of mortgage law that the mortgagee cannot exercise a power of sale in favour of itself, it would not be unlawful for the plaintiff to accept the offer of Temujin Securities Pty Ltd (a copy of which is Exhibit AX 2) and thereby enter into an agreement with Temujin Securities Pty Ltd solely by reason of the fact that the Appointor of the Receiver and Manager under a Deed of Appointment dated 1 August 2001 is also the director and sole shareholder of Temujin Securities Pty Ltd. 2. Order that the costs of the present application are costs properly incurred in the plaintiff's conduct of the receivership. ********** Last Modified: 07/02/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.