Courts still reluctant to advise on commercial merits

Recently in Kirk, in the matter of Primebroker Securities Ltd (Receivers and Managers Appointed) (in Liq) [2001] FCA 86, receivers and managers sought directions under section 424(1) of the Corporations Act 2001 (Cth) (the Act) seeking to justify whether they were acting reasonably and appropriately in causing Primebroker Securities Ltd (PSL) to enter into and perform the terms of a settlement agreement reached in respect of court proceedings.


The plaintiffs in the proceedings were appointed as joint and several receivers and managers of PSL by the ANZ Banking Group Limited (ANZ) on 4 July 2008.  Subsequent to this appointment, the creditors resolved that PSL should be wound up.

PSL conducted a security lending business where clients would lend shares to PSL in exchange for cash.  When the creditors resolved that PSL should be wound up, Bruval, one of PSL’s clients, was found to owe a substantial sum of money to PSL.  Litigation was commenced and both parties attended mediation.  An offer was made to resolve the issue by Bruval.  The offer was made on the proviso that the plaintiffs would obtain directions from the court that they would be justified in entering into the settlement with Bruval.

Plaintiffs’ concerns

The Plaintiffs were concerned that they would be the subject of criticism by exercising their power to cause PSL to enter into the settlement with Bruval.  The basis for these concerns arose from other litigation against the plaintiffs in similar circumstances.  There it was alleged that the receivers had acted negligently in the management of PSL’s 25 per cent shareholding ‘by failing to join with another major shareholder to sell both holdings together with a control premium and by failing to appoint a director to the board.’1   It was those proceedings which caused the Plaintiffs to err on the side of caution with regard to entering into the settlement with Bruval.


Here the court had to consider;

  1. whether the Court, pursuant to section 424 of the Act, should provide guidance to receivers in relation to commercial decisions; and

  2. how the Court should deal with confidential information (the settlement agreement) exhibited in the plaintiffs’ affidavit.

Confidential information

The terms of the settlement between PSL and Bruval, which were disclosed in the plaintiffs’ affidavit, were confidential to Bruval and the receivers and managers.  The plaintiffs sought orders under section 50 of the Federal Court of Australia Act 1976 requiring that those exhibits remained confidential.  The Court, in its decision, made reference to the ‘importance of encouraging parties to litigation to resolve their differences by agreement.’2  His Honour made an order protecting the confidential information in the interests of the administration of justice.

Section 424

The law with regard to this section is well settled.  The Court found that whilst this section should be construed liberally,3 it could not be invoked in the assessment of the commercial prudence of a transaction.4  North J determined that the real question was whether the plaintiffs were simply seeking the court’s approval for a commercial decision or whether there was a ‘real and practical threat’ that their commercial judgment will be challenged.

In attempting to identify an answer to the issue, the Court turned to the previous challenges against the receivers in the other proceedings explained above.  The previous challenge against the receivers was mounted by the liquidators.  Here, the liquidators chose to respond by affidavit suggesting that the plaintiffs would not be at risk of challenge.

Ultimately, North J did not think that the plaintiffs were at risk of challenge and regarded this case as one in which the Court was being asked to give directions ‘which involve the assessment of the commercial merits.'5   His Honour found that directions should not be given.

Lavan comment

The Court may be prepared to give directions where there is a real risk of challenge to a receiver's decision, but not where the question is a mere assessment of the commercial merits of a proposed course of action.

For further information please contact Alison Robertson, Partner on (08) 9288 6872 /

1Kirk, in the matter of Primebroker Securities Ltd (Receivers and Managers Appointed) (in Liq) [2001] FCA 86 [11].

2Supra n 1 at [35].

3Deputy Commissioner of Taxation v Best & Less Woollongong (1992) 7 ACSR 245 at 247.

4Re One.Tel Networks Holdings Pty Ltd (2001) 40 ACSR 83 at [27] - [31].

5Supra n 1 at [31].

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.