Friend or foe: What duties do privately appointed receivers owe?

The appointment of receivers in respect of a company is often accompanied by concerns as to whether the assets will be properly dealt with and whether secured creditors will have their debts satisfied.

While it is settled law that a court-appointed receiver owes fiduciary duties to their appointers, there has been little judicial consideration on the question of whether a privately appointed receiver also owes such duties. This is an important question as businesses or individuals appointing a receiver to manage the assets of a struggling company need to ensure that their interests, and the interests of the secured creditors, are paramount.

In the recent New South Wales Supreme Court case of Salmon v Albarran [2023] NSWSC 1238, the Court handed down an important judgment regarding the duties owed by a privately appointed receiver.

Background

In 2006, Terra Cresta Business Solutions (TCBS) appointed Mr Albarran and Mr McDonald as receivers and managers (Receivers) of two related companies: Business Australia Capital Mortgage Pty Limited (BACM) and Business Australia Capital Finance Pty Limited (BACF) (BA Companies). This appointment was pursuant to BACM and BACF executing a “Deed of Charge” granting TCBS $1.5m in secured property in the event of default.

Prior to the Receivers’ appointment, Mr Wily had been appointed as the liquidator of the BA Companies, who subsequently commenced proceedings seeking declarations that the Deed of Charge granted to TCBS, as well as the appointment of the Receivers, was invalid.

In September 2006, on the first day of hearing, the parties agreed to settle their dispute in principle for the sum of $1.3m in favour of TCBS, conditional on the parties entering into a settlement deed. A settlement deed (Deed) was drafted by the Receivers’ solicitor, Mr Brown, which included a proposed release of money from Given Form Pty Limited (Given Form), where the Liquidator “releases the BA Companies in respect of the money paid to them jointly and severally by the Deed Administrator of Given Form.”^[1] The Liquidator didn’t accept the Given Form release and his representatives indicated they were no longer willing to settle for the $1.3 million amount. The liquidator was eventually successful in the proceedings and the BACM charge was found to be invalid.

By 2009, TCBS could not pay the 80% costs order it had incurred and was wound up and the claim in respect of BACF was settled. Mr Salmon, the sole shareholder of TCBS was made bankrupt.

The matters in dispute

In the current proceedings, Mr Salmon and TCBS Group Holdings Pty Ltd, commenced proceedings claiming, among other things, that fiduciary duties were owed to TCBS by the Receivers and therefore:

1. Mr Albarran had breached his fiduciary duties to TCBS by continuing to act when he was in a position of conflict and by pursuing a benefit for himself;
2. Mr Brown knowingly assisted in that breach; and
3. The Receivers breached their duties under their appointment documents, which were said to be a deed.

Accordingly, the Court was asked to consider the important question of whether the Receivers, in fact, owed a fiduciary duty to TCBS.

The Court’s consideration

The Receivers submitted that Mr Albarran was appointed as a receiver and manager by TCBS in respect of BACM and BACF, but that the Receivers were not appointed as agents for TCBS. They further submitted that although court appointed receivers owe fiduciary duties to their appointors, there was no judicial analysis of whether a privately appointed receiver owes the same duties.

Accordingly, the Receiver’s argument was that privately appointed receivers should not owe fiduciary duties to their appointers given they do not hold a position of undivided loyalty and owe duties to their appointor, as well as statutory, legal and equitable duties to the companies over whose assets they are appointed.

The Court’s decision

The Court found that Mr Albarran was in a fiduciary relationship with TCBS when acting as a receiver and manager of both BACF and BACM.

In its analysis of the relevant authorities, the Court noted the position of the High Court, formed in a number of decisions, that fiduciary obligations are proscriptive rather than prescriptive, meaning that the duties only stipulate what a person shouldn’t do. However, there is conflicting authority as to whether a prescriptive duty is owed to keep the appointor informed about the progress of the receivership. For reason of these conflicting authorities, it was held that the duty owed is one of “absolute and disinterested loyalty, which embodies two themes: the conflict rule and the profit rule”.^[2] These rules refer to the basic premise that those in a fiduciary position have the proscriptive obligations not to obtain any unauthorized benefit and not to be in a position of conflict.

The Court considered that the duty of a Receiver is dependent on the fact of appointment alone, rather than based on the fact of appointment of the Court.

In its assessment of the relationship between appointer and receiver, it set out that a receiver:

• is appointed to a role with powers and discretions, the exercise of which will necessarily affect the appointor’s interests;
• assumes a responsibility to act for the benefit of, and in the best interests of, the appointor; and
• has the opportunity to exercise those powers and discretions to the detriment of the appointor, rendering them vulnerable to abuse by the fiduciary of his position.^[3]

Notwithstanding the above findings, the Court found that neither Mr Brown nor Mr Albarran had acted inconsistently with their duties. Additionally, the Plaintiff was unable to establish beyond the balance of probabilities that if Mr Brown and Mr Albarran had ceased to act after the Liquidators first rejected the Deed, TCBS would have been awarded $1.3m. Moreover, there was no indication that the settlement Deed would have been agreed to regardless of the Given Form release, Mr Albarran had not been pursuing a benefit for himself and though not directly, TBCS was aware of the inclusion of the clause.

Queries

If you have any questions about this article, please get in touch with a key contact or any member of our Restructuring, Turnaround & Insolvency team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.

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[1] Salmon v Albarran [2023] NSWSC 1238, 10.

[2] Salmon v Albarran [2023] NSWSC 1238, 309.

[3] Ibid, 304.