When will the court order an inquiry into the conduct of receivers and managers?


Last week, Siopis J in the Federal Court delivered reasons for decision in an unusual application under s 423 of the Corporations Act 2001 (Cth) for an inquiry into the conduct of receivers and managers.

The plaintiff in these proceedings, the managing director of several entities in external controllership (Plaintiff) sought an inquiry into the conduct of the receivers and managers (Defendants) in respect to seven impugned acts in the receivership.

The Plaintiff claimed the Defendants:

  • retained in the subsidiary company (Subsidiary) large amounts of cash and did not liquidate the Subsidiary’s indebtedness to the secured creditor (First Claim);

  • used documents of the Subsidiary for the purpose of marketing the sale of shares held by the Plaintiff in the holding company (Parent) over which the defendants had also been appointed receivers and managers (Second Claim);

  • disclosed to third parties documents in respect of which the Subsidiary owed contractual and equitable duties of confidentiality (Third Claim);

  • caused the Subsidiary to enter into a new supply agreement on substantially less favourable terms than the previous supply agreement (Fourth Claim);

  • arranged for themselves to continue after their proposed resignation as receivers and managers of the Subsidiary, for the purpose of facilitating the sale of shares mentioned above (Fifth Claim);

  • procured for themselves a covenant from each of the purchasers of shares, that they each would use all reasonable endeavours to procure that neither the Subsidiary nor the Parent make any claim against them in relation to their conduct (Sixth Claim); and

  • charged fees which were excessive and incurred disbursements which were unnecessary or excessive (Seventh Claim).

The decision

The court noted, at paragraph 63¹, the importance of placing limits on the circumstances in which a court may make an enquiry under s 423, so as to not undermine the ordinary litigation process.

The First through Sixth Claims were found not to fall within the scope of s 423 for the following reasons:

  • the nature of the allegations against the defendants, even if established, “would not be liable to attract sanctions or controls for what might broadly be described as disciplinary reasons”;

  • each of the actions the subject of the First through Sixth Claims were matters for the commercial judgment of the defendants; and

  • there were existing proceedings covering the same issues, which influenced the ordering of an inquiry as it would give rise to duplication and a waste of resources for no discernible benefit.

In relation to the Seventh Claim, it was found to fall within the scope of s 423.  This was not disputed by the defendants.

It was noted that the fees and expenses were high for the last six weeks of the receiverships when compared to the preceding fees and expenses incurred during the receiverships.

It was ordered that an inquiry be made into the fees and expenses incurred as a result of interstate staff through staff travel expenses and accommodation, among other things.

This was partly due to the defendants not adducing evidence of sufficient detail in relation to the costs that were incurred, because (they submitted) they were concerned not to include narrations which would disclose confidential information to the Plaintiff.

Lavan Legal comment

This case is an important illustration of the factors taken into account when determining whether an inquiry into the conduct of receivers and managers is appropriate.

These include:

  • whether the behaviour complained of was the character that would attract disciplinary sanctions;

  • whether the actions in dispute were the mere exercise of commercial judgment by the receivers and managers; and

  • whether the matters sought to be investigated are already the subject of litigation.

Although the majority of the claims were rejected, the Seventh Claim highlights the importance of retaining detailed, contemporaneous information pertaining to fees and costs.  If nothing else, it avoids significant inconvenience at a later date when required to justify historical costs and fees.

¹ For the full details on this case, please click here.
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.