Overview of Insolvency laws: Voluntary Administration and ... · Voluntary Administration and Receiverships in Particular Richard Fisher* SUMMARY Voluntary administration and receivership

Overview of Insolvency Laws:Voluntary Administration and

Receiverships in Particular

Richard Fisher*

SUMMARY

Voluntary administration and receivership are two forms ofinsolvency regime which may be available to a secured creditor. Thus,they are regimes which may be contrasted from the perspective of sucha creditor. Included amongst their relative points of distinction will be:

(a) procedural issues such as the flexibility of the secured creditor toeffect an appointment over all of a company’s property or onlysome of it, the status of the appointee as either the company’sagent or the agent of the secured creditor, and whether morethan one person may be appointed as voluntary administratoror receiver of a company’s assets;

(b) the extent to which an appointee must be independent of thesecured creditor and seen to be so;

(c) the liability of the appointee for both existing and post-appointment contracts and the “consequential” liability of thesecured creditors;

(d) the entitlement of either a receiver or a voluntary administratorto be indemnified out of the assets of the company for theliabilities which she or he incurs in the course of their conduct ofthe company’s affairs;

(e) the effect of the appointment of a voluntary administrator or areceiver on the company’s officers;

(f) the extent to which, if at all, such an appointment will limit oraffect the entitlement of other creditors to exercise their rightsagainst the company including unsecured creditors, suppliers ofessential services, secured creditors and the owners or lessors ofproperty which is in the company’s possession; and

42

* LLB (Sydney), MEc (UNE); Blake Dawson Waldron, Sydney.This paper is based substantially on the writer’s work which appears as “Receivers and

Managers”, Pt 4.4, Business Organisations and “Voluntary Administration”, Ch 5, Pt 4.5,Business Organisations, The Laws of Australia (LBC Information Services).

return to AMPLA 1999 Table of Contents

INSOLVENCY: VOLUNTARY ADMINISTRATION & RECEIVERSHIPS 43

(g) the ability of either a voluntary administrator or a receiver toeffect a reorganisation of a company’s affairs.

Introduction

Australia’s insolvency laws, having been based substantially onlike laws in the United Kingdom, were concerned, as a traditionalmatter, with providing fair and orderly regimes for the administrationof a debtor’s affairs. The term “affairs” is used in deliberate distinctionfrom “assets” as it has been accepted for centuries1 that, inappropriate circumstances, the accrued property rights of thirdparties may be disturbed by a trustee in bankruptcy or a liquidator.Thus, by means of preference claims and like proceedings, theproperty available to satisfy the claims of a debtor’s creditors couldbe enhanced. Moreover, in the context of the liquidation of acompany, its directors could be required to compensate either thecompany or its relevant creditors where debts to those creditors wereincurred when the company was known to be insolvent. Theseembellishments aside, the focus of Australia’s insolvency laws was tosecure the “decent burial of its financial corpses”. By way of contrast,the bankruptcy legislation of the United States has for many yearsreflected a concern to facilitate the rehabilitation of a debtor’sbusiness. That concern presently finds expression both in the termsof Ch 11 of the Bankruptcy Code of that country and in itsadministration.

In its report on the General Insolvency Inquiry,2 the Australian LawReform Commission recommended the introduction into Australia’scompany law of a regime which would facilitate the promulgation ofan arrangement which would result in either:

“• a more advantageous realisation of the company’s assets thanwould be effected by an immediate winding up, or

• the continued existence of the company or the whole or apart of its business.”3

That regime is voluntary administration which was introduced intothe Corporations Law by the Corporate Law Reform Act 1992.

The development of the receivership regime may not besummarised so concisely. Moreover, it may be invoked in a variety ofcircumstances and not merely that of the financial distress of theentity to whom a receiver is appointed. So, the High Court ofAustralia, the Federal Court of Australia and the Supreme Courts ofthe States and Territories each have jurisdiction to appoint a receiver

1 See, eg, 13 Eliz I, c 5.2 ALRC, p 45.3 Ibid at para 59.

“in any case in which it appears to the court to be just and convenientso to do”.4 That jurisdiction, whilst it is statutory, is equitable inorigin.5 Further, the Corporations Law confers jurisdiction to appointa receiver in a number of circumstances including:

• oppression proceedings;6

• proceedings by a liquidator to prevent officers and their relatedentities from avoiding liability to a company;7 and

• an investigation or proceedings have begun which may be rendered nugatory by the removal or transfer of assets.8

The appointment of a receiver may also be made out of courteither under an agreement, usually a security instrument,9 or underany one of the property law statutes which authorises theappointment of a receiver for the purpose of enforcing a security.10

Here attention will be confined to a receivership consequent uponan appointment made by the holder of security under the terms ofthe security instrument.

Beyond that, as specific consideration is to be given to voluntaryadministration and receivership, they will be contrasted by referenceto those of their respective aspects which may be significant ifconsideration is to be given by a secured creditor at least to thepossibility of preserving a company or its business which may comeunder one or other of those regimes. In that regard, should the valueof the company’s assets be such as to enable a secured creditor tosatisfy its claim by realising those assets, such an inquiry is likely tobe otiose.

Amongst the questions which will be relevant to a secured creditorwill be:

1. What flexibility is there to effect an appointment over some onlyof the company’s assets and to effect multiple appointments?

44 AMPLA YEARBOOK 1999

4 Sections 31, 32, Judiciary Act 1903 (Cth) (High Court); ss 57(1), Federal Court of AustraliaAct 1976 (Cth); s 67, Supreme Court Act 1970 (NSW); s 7(1), Supreme Court Act 1986 (Vic); s 5(8), Judicature Act 1876 (Qld); s 25(9), Supreme Court Act 1935 (WA); s 29(1), Supreme CourtAct 1935 (SA); s 11(2), Supreme Court Civil Procedure Act 1932 (Tas); s 26(1), AustralianCapital Territory Supreme Court Act 1933 (ACT); s 69(1), Supreme Court Act 1979 (NT).5 Re Manchester and Milford Railway Co; Ex parte Cambrian Railway Co (1880) 14 Ch D 645.6 Section 260, Corporations Law.7 Section 486A, Corporations Law.8 Section 1323, Corporations Law.9 Gaskell v Gosling [1890] 1 QB 669.10 Section 109(1)(c), Conveyancing Act 1919 (NSW); s 101(1)(c), Property Law Act 1958 (Vic);s 83(1)(c), Property Law Act 1974(Qld); s 57(1)(c), Property Law Act 1969 (WA); s 47(1)(c), Lawof Property Act 1936 (SA); s 21(1)(c), Conveyancing and Law of Property Act 1884 (Tas); ss 91,97, Conveyancing and Law of Property Act 1898 (NSW) apply in the ACT; s 10, An Act to giveTrustees, Mortgagees and others certain powers now commonly inserted in Settlements,Mortgages and Wills 1862 (SA) applies in the NT.


2. To what extent will the appointee be liable for the company’sdebts?

3. Is the appointee entitled to be indemnified out of the company’sassets for debts incurred in the course of managing the company’saffairs?

4. What effect will the appointment have on the company’s existingmanagement?

5. Will the appointment affect the rights of the company’s othercreditors, including —

• unsecured creditors,

• suppliers of essential services,

• secured creditors, and

• owners or lessors of property in the company’s possession?

6. Are there any advantages which one form of appointment hasover the other when it comes to reorganising the company’saffairs?

Appointment

In addition to a voluntary administrator being able to be appointedto a company by its board of directors11 and its liquidator orprovisional liquidator,12 the holder of security over the whole orsubstantially the whole13 of its property may appoint a voluntaryadministrator in circumstances where that security has become andremains enforceable14 and the company has not already been wound

11 Section 436A(1), Corporations Law.12 Section 436A(2), Corporations Law.13 There is no assistance in the law as to what is meant by the phrase “a charge on the whole,or substantially the whole, of a company’s property”. As a matter of construction, the phrasewould apply to a charge notwithstanding the existence of prior ranking charges whether onspecific property of the company or which also applied to the whole, or substantially thewhole, of its property: s 450A(3), Corporations Law. Moreover, it is arguable that a mechanicalarithmetic approach to determining whether a charge applies to substantially the whole of acompany’s property is inappropriate. Rather, the proper approach, having regard to the objectsof the voluntary administration procedure: s 435A, Corporations Law; paras 444 to 450 (inc) andpara 459 of the Explanatory Memorandum published with the Corporate Law Reform Bill 1992,which identify the need for an independent person to assume control of a company’s businessfor the purpose of assessing the prospects of rehabilitating it, is to enquire whether the assetsto which the charge extends are all of those assets of the company which are required topreserve the integrity of its business. That this may be the approach to the proper constructionof the phrase appears not so much from these considerations in the context of the statutorypower of the chargee to appoint an administrator but rather in the circumstance of the right ofsuch a chargee to enforce its security notwithstanding the administrator’s appointment: s 441A,Corporations Law.14 Section 436C(1), Corporations Law.

up.15 Moreover, once a company is under voluntary administration, afurther voluntary administrator may not be appointed to it.16 So, achargeholder who does not approve of the identity of a particularappointee as voluntary administrator of a company cannot exerciseits power to appoint a voluntary administrator for the purpose ofeffecting an alternative appointment, although, as will be notedbelow, that chargeholder still has an opportunity to place thecompany into receivership.17 Moreover, a receiver appointed in thosecircumstances is able to assert, as against the voluntary administrator,a prior entitlement to the control of the company’s assets. By way ofcontrast, the appointment of a receiver to a company’s assets,whether following the appointment of a voluntary administrator orotherwise, is a matter which is regulated solely by the terms of theagreement between the company and the chargeholder.18

Nature of Appointment

Not only is the power to appoint a receiver regulated by the terms ofthe security instrument under which that appointment is made, so alsois its nature. In the context of a consideration of the capacity of anappointee to preserve the business of a company, a thresholdconsideration will be whether the chargeholder is able to appoint a“receiver and manager” or merely a “receiver”. The distinction betweena “receiver” and a “receiver and manager” is explained in this way.19

“what is the meaning of ‘the appointment of a receiver and, ifnecessary, of a manager’? ‘A receiver’ is a term which was wellknown in the Court of Chancery, as meaning a person whoreceives rents or other income, pays ascertained outgoings, butwho does not, if I may say so, manage the property in the senseof buying or selling or anything of that kind. … If a receiver wasappointed … the trade stopped immediately. He collected allthe debts, sold the stock-in-trade and other assets, and thenunder the order of the Court the debts of the concern wereliquidated and the balance divided. If it was desired to continuethe trade at all, it was necessary to appoint a manager, or areceiver and manager as it was generally called. He could buyand sell and carry on the trade.”

As will be discussed below, that distinction between theappointment of a “receiver” and a “receiver and manager” to property


15 Section 436D(2), Corporations Law. The phrase “already being wound up” is not apposite todescribe provisional liquidation so such an appointment would not preclude the possibility ofa voluntary administration.16 Section 436D, Corporations Law.17 Section 441A, Corporations Law.18 Wrights Hardware Pty Ltd v Evans (1988) 13 ACLR 631.19 Re Manchester & Milford Rly Co; Ex parte Cambrian Rly Co (1880) 14 Ch D 645 at 653 perLord Jessel MR.


of a company is increasingly blurred and, except where pertinent todo so, receivers and managers as well as receivers will be describedas “receivers”.

It might be noted that a further category of appointment; being thatof “controller”, has been introduced into the Corporations Law.20 Theterm “controller” is wider than either “receiver” or “receiver andmanager”; it being defined, in relation to property of a company, tomean:

“(a) a receiver, or receiver and manager, of that property; or(b) anyone else who (whether or not as agent for the

corporation) is in possession, or has control, of thatproperty for the purpose of enforcing a charge.”21

An additional distinction is made in the case of a controller withpowers to conduct the company’s business who is a “managingcontroller” which term, in relation to property of a company, means:

“(a) a receiver and manager of that property; or(b) any other controller of that property who has functions or

powers in connection with managing the corporation.”22

Power to Effect Appointment of a Manager

As has been noted, the appointment of a receiver out of court willbe regulated strictly by the terms of the documentation under whichthat appointment is made.23 So, if that documentation merelyprovides for the appointment of a receiver and manager, theappointee may not be constituted a receiver simpliciter.24 A fortiori,where the charge only permits the appointment of a receiversimpliciter, a receiver and manager cannot be appointed. If an

20 The history of this amendment to the Corporations Law is to be found in the “HarmerReport”. That report observed on the then increasing practice of mortgagees enforcing theirsecurity by way of the appointment of their agents to take possession of the charged propertyrather than appointing receivers. The rationale for the practice was to avoid the priority thenenjoyed by the Commissioner of Taxation in relation to particular categories of tax deductionswhich were made by a company but not remitted to the Commissioner. The Commissionrecommended that those provisions of the Corporations Law which regulate the conduct ofreceivers should, where appropriate, also apply to mortgagee’s agents.21 Section 9, Corporations Law, definition of “controller”.22 Section 9, Corporations Law, definition of “managing controller”.23 Wrights Hardware Pty Ltd v Evans (1988) 13 ACLR 631.24 Harold Meggitt Ltd v Discount & Finance Ltd (1938) 56 WN (NSW) 23. That case wasconcerned with the appointment of a receiver simpliciter rather than of a receiver and managerwhich latter category of appointment was the only appointment permitted by the charge. Theappointment of the receiver was held to be invalid and the chargee incurred a liability indamages for trespass and conversion of the company’s property. Professor O’Donovan in“Company Receivers and Managers” (2nd ed, LBC Information Services), Looseleaf Service(“O’Donovan”) contends that this decision, in effect, was overruled by the subsequentdecisions in Re Custom Card (NSW) Pty Ltd [1979] 1 NSWLR 241; on appeal, sub nom, Bank ofNew South Wales v Commissioner of Taxation of Commonwealth of Australia (1979) 145 CLR438 and Re Surfside Palms Motels Pty Ltd (1984) 2 ACLC 648; 9 ACLR 179. These decisions,

appointment is made inconsistently with the provisions of theinstrument under which it is made both the chargeholder and thereceiver may be liable to the company in both trespass andconversion.25

Notwithstanding any limitation on the character of theappointment which may be made under any particular instrument,the distinction between the office of receiver and that of receiver andmanager is increasingly blurred. First, the enactment of s 420(2)(h) ofthe Corporations Law has the effect that, unless there is some expresslimitation on the appointee’s available powers contained in theinstrument under which the appointment is made, the appointee mayexercise a power to carry on business notwithstanding that thatinstrument merely provides for the appointment of a receiver26

provided that the exercise of that power is consistent with thepurposes for which the appointment was made.27 Secondly, thedocumentation under which the appointment of either a receiver or areceiver and manager is made typically authorises the grant ofextensive powers to the appointee, including broad powers ofmanagement. Accordingly, even though an instrument under which areceiver is appointed may only contemplate the appointment of areceiver simpliciter, no objection can be taken to such an appointeebeing granted and exercising powers of management should thatcircumstance be permitted by that instrument.28

As against those possible limitations on the power of a receiver tomanage the business of a company to which she or he has been


however, were concerned with whether a statutory provision which merely referred to areceiver, applied equally to a person who was appointed as receiver and manager as to aperson who was appointed as a receiver simpliciter. As to that, Needham J in Re Custom Card(NSW) Pty Ltd said (at 248):

“There is no doubt that a receiver and manager has greater powers and duties than a receiver:see, for example, Re Manchester and Milford Railway Co; Ex parte Cambrian Railway Co;Harold Meggitt Ltd v Discount & Finance Ltd; Marshall v South Staffordshire Tramways Co; ReNewdigate Colliery Ltd. The essential distinction is that the receiver and manager has thepower to carry on the business of the company, whereas the receiver has not. It could not,however, in my opinion, be said that a person appointed as receiver and manager is not areceiver.”

25 Harold Meggitt Ltd v Discount Finance Ltd (1938) 56 WN (NSW) 23.26 The predecessor to that section was s 324A(2) of the various Companies Codes and theCompanies Act (ACT). However, no corresponding provision is to be found in the UniformCompanies Acts or the companies legislation which preceded them. It is submitted that thewords in the preamble to s 420(2), Corporations Law; any provision of “the instrument underwhich, the receiver was appointed, being a provision that limits the receiver’s powers in anyway”, only apply to an express limitation of the receiver’s powers with the result that, absentsuch a limitation, a receiver will have “power to carry on any business of the corporation”.27 Sun-Life Properties Pty Ltd v Chellaston Pty Ltd (1993) 10 ACSR 476.28 Re Odessa Promotions Pty Ltd (in liq); Ex parte Pescod v Harrison (1981) ACLC 40-523 inwhich case the charge under consideration permitted extensive powers of management to beconferred upon a receiver but only permitted the appointment of a receiver simpliciter. Notwithstanding that, the appointee in that case was held to be justified in acting as though hewere a receiver and manager and in exercising the powers which were conferred upon himconsistently with the provisions contained in the charge.


appointed, a voluntary administrator assumes plenary control andresponsibility for the conduct of the company’s affairs29 and thepowers of the voluntary administrator supersede those otherwiseexercisable by its directors and other officers.30

Power to Effect Multiple Appointments

It may be administratively convenient if the powers invested in anappointee can be exercised by any one of two or more of them. Inthe case of a voluntary administrator, one or more administrators maybe appointed31 and those appointees may act jointly or severally.32 Aswith other aspects of the appointment of a receiver, the capacity of achargeholder to appoint more than one receiver and whethermultiple receivers can act severally as well as jointly will dependupon the express33 or implied34 terms of the security instrument.

Power to Constitute Appointee as Agent of the Company

Beyond those considerations, an issue for chargeholders will bethe extent to which they may have a liability for the conduct of theirreceivers and, in particular, whether they will be liable as mortgageesin possession.35 One means by which such a liability may be limitedis for a receiver to be appointed as the company’s agent. However,for that appointment to be effective, it must be expressly authorisedby the instrument under which the appointment was made,otherwise the receiver will be the chargeholder’s agent.36 Moreover, ifthe company is wound up, the receiver ceases to be the company’sagent, assuming that she or he was appointed as such, and becomesthe mortgagee’s agent.37 Voluntary administrators, on the other hand,

29 Section 437A, Corporations Law.30 Section 437C, Corporations Law.31 Section 451A(1), Corporations Law.32 Section 451A(2)(a), Corporations Law.33 Wrights Hardware Pty Ltd v Evans (1988) 13 ACLR 631; Kerry Lowe Management Pty Ltd vIsherwood (1989) 15 ACLR 615.34 NEC Information Systems Australia Pty Ltd v Lockhart (1991) 9 ACLC 658; 4 ACSR 411;Melsom v Velcrete Pty Ltd (1995) 20 ACSR 291. These decisions have been criticised by thelearned author of O’Donovan, para 3.120. An appeal from the decision in Melsom v Velcrete PtyLtd (1995) 20 ACSR 291; sub nom Kendle v Melsom (1998) 26 ACSR 444, to the High Court was,in effect, dismissed.35 See, eg, O’Donovan, op cit n 24, Appendix 3.36 Re Vimbos Ltd [1990] 1 Ch 470. It might be noted that the appointment of a receiver as thecompany’s agent as well as the power to make such an appointment, will be revoked by theliquidation of the company; Gosling v Gaskell [1897] AC 575; Mercantile Creditors Ltd v Atkins(1985) 3 ACLC 485. However, both the liquidator and the court have power to authorise thereceiver to continue to carry on the business of a company in liquidation either generally or asotherwise specified in the approval and where the receiver acts on that approval it will be asagent of the company: s 420C, Corporations Law.37 Gosling v Gaskell [1890] 1 QB 669.

are, by reason of their appointment as such, the agents of thecompany.38

Qualifications of Appointee

Most security instruments under which receivers are appointedalso provide for the chargeholder to appoint an investigatingaccountant. Typically, the power to appoint an investigatingaccountant is exercised when the chargeholder is concerned as towhether it should enforce its security, and, if so, by what means. It isalso the case that, in the ordinary course, the accountants whoundertake such so-called pre-appointment assignments are alsoretained by the chargeholder to enforce its security, where thatcourse is recommended. Whilst the statutory provisions whichregulate the appointment of receivers39 and voluntary administrators40

are, for practical purposes, substantially the same, to the extent thatthey each require the appointee to be a registered liquidator and nothave such a prior connection with the company as to prejudice theirindependence, there is additionally, in the case of voluntaryadministrations, a power in the court to remove a voluntaryadministrator41 which has been exercised where she or he has someconnection with the company or its officers which is not stipulated asone of the disqualifications from appointment but which is such as toraise an issue as to the voluntary administrator’s independence,whether real or apparent.42 So, in Lam Soon Australia Pty Ltd v Molit(No 55) Pty Ltd 43 the Full Court of the Federal Court considered thepresumably common circumstance of an administrator givingpre-appointment advice to the directors of or others connected withan insolvent company as to the options available for the conduct ofits affairs. In the course of holding that that circumstance did not, ofitself, disqualify the voluntary administrator from acting, the courtsaid:44

“The essential requirement in every case is that the insolvencypractitioner at all times before appointment as administrator, andafter the appointment, act objectively in a manner which gives


38 Section 437B, Corporations Law.39 Section 418, Corporations Law.40 Sections 448A, 448B, 448C and 448D, Corporations Law.41 Section 449B, Corporations Law.42 Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 12 ACLC 594;13 ACSR 544; Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104; Advance HousingPty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 12 ACLC 701; 14 ACSR 230;Dallinger v Halcha Holdings Pty Ltd (1995) 14 ACLC 263; 18 ACSR 835; Commonwealth ofAustralia v Irving (1996) 14 ACLC 645; 19 ACSR 459; Velkovski v Ryan (1996) 19 ACSR 514; LamSoon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 14 ACLC 1737; 22 ACSR 169.43 (1996) 14 ACLC 1737; 22 ACSR 169.44 Ibid at 1749, 184.


due regard and balance to the interests of all creditors, includingdifferent classes of creditors where different classes exist.”

In relation to appointments by secured creditors it was held inVelkovski v Ryan45 that a prior connection between the voluntaryadministrator’s firm and the chargeholder was a ground for effectinga change in the appointee.

Liability of Appointee

A common practice when a chargeholder appoints a receiver orsome other third party to enforce its security from a company is forthe appointee to be given an indemnity in respect of both her or hisremuneration as well as any liabilities incurred in the course ofadministering the company and its assets.46 Accordingly, a questionfor secured creditors will concern the nature and extent of areceiver’s liabilities as opposed to those of a voluntary administrator.

Liability for Pre-Appointment Contracts

Receivers are not liable under the general law for contracts whichpre-date their appointment47 unless they adopt such contracts,48 norare their appointors, unless the receiver, acting as the agent of thesecured creditor, repudiates such a contract. For a contract to beadopted by a receiver, the receiver must do more than merelycontinue either with its implementation or rely upon it.49 There mustbe some positive act on the part of the receiver in relation to thecontract which is consistent with the receiver making the contract hisor her own.50 Likewise, there is no general law obligation upon avoluntary administrator to discharge a company’s liabilities under anypre-appointment contract.

Liability under Pre-Appointment Leases

However, both receivers and voluntary administrators can be liableto pay rent under pre-receivership leases. As has been noted, under the

45 (1996) 19 ACSR 514.46 Re Just Juice Corporation Pty Ltd; Ex parte James v Commonwealth Bank of Australia (1992)8 ACSR 444.47 Parsons v Sovereign Bank of Canada [1913] AC 160; Associated Newspapers Ltd v Grinston(1949) 66 WN (NSW) 211; Re British Investment and Development Co Pty Ltd (1979) ACLC 40-522.48 Parsons v Sovereign Bank of Canada [1913] AC 160; Re British Investment and DevelopmentCo Pty Ltd (1979) ACLC 40-522.49 Re British Investment and Development Co Pty Ltd , ibid.50 Re British Investment and Development Co Pty Ltd , ibid.

general law a receiver was not liable for rent or the other incidents ofleases undertaken by the company prior to the receiver’s appointment.This was so notwithstanding that the company might occupy the leasedproperty during the receivership51 or that the receiver might cause thecompany to pay rent falling due under the lease.52 Accordingly, theliability of receivers under pre-receivership leases corresponded withtheir liability under other pre-appointment contracts. Receivers andvoluntary administrators, however, have a statutory liability to pay therent or such other amounts payable by a company as accrue due undera lease or like agreement for the period commencing on the eighth dayafter their appointment. That statutory liability is imposed not only inrespect of leases of real property but also other agreements by whichthe company uses, occupies or is in possession of the property of athird party.53 However, in the case of receivers, that liability ends eitherwhen the company ceases to use, occupy or possess the property orwhen their appointment to the property is terminated.54 As to voluntaryadministrators, their personal liability on account of property used oroccupied by the company also ceases if:

• a receiver is appointed to that property; or

• a chargee, under the provisions of a charge, either itself or by anagent takes possession or assumes control of that property.55

Further, the court may excuse a receiver or voluntary administratorfrom that statutory personal liability,56 although, if the court does so,the company’s liability in relation to the property is not affected.57

The receiver or voluntary administrator may also avoid personalliability under a lease or like agreement by serving upon the owneror lessor of the relevant property a notice to the effect that thereceiver or voluntary administrator does not propose to exercise anyrights in relation to that property.58 That notice will cease to haveeffect if either the receiver or voluntary administrator revokes it orexercises rights in relation to the property59 but mere continued


51 Re British Investment and Development Co Pty Ltd , ibid.52 Consolidated Entertainments Ltd v Taylor [1937] 4 All ER 432.53 (a) In the case of receivers, s 419A(2), Corporations Law. In the case of voluntary

administrators, s 443B(2), Corporations Law.(b) This statutory liability is not expressed in terms which are apposite to impose an

obligation upon controllers for the use of property supplied to a company subject to a“reservation of title” clause; Osborne Computer Corporation Pty Ltd v Riddell (1995) 17ACSR 606.

54 Section 419A(2), Corporations Law.55 Section 443B(1), Corporations Law.56 In the case of receivers, s 419A(7), Corporations Law. In the case of voluntaryadministrators, s 443B(8), Corporations Law.57 Ibid.58 In the case of receivers, s 419A(3) and (4), Corporations Law. In the case of voluntaryadministrators, s 443B(3) and (4), Corporations Law.59 In the case of receivers, s 419A(5), Corporations Law. In the case of voluntaryadministrators, s 443B(5), Corporations Law.


possession of the property is not such an exercise of rights.60 Theimposition on the receiver or voluntary administrator of that statutorypersonal liability is not to be taken as involving an adoption by eitherof them of the relevant lease or other agreement.61

Liability for Post-Appointment Contracts

Receivers are personally “liable for debts incurred by [them] in thecourse of the [receivership] for services rendered, goods purchasedor property hired, leased, used or occupied”.62 This liability attachesto receivers irrespective of whether they are acting as agents of thecompany or as agents for their appointor. However, the liability doesnot extend to continuing or periodic obligations which arise after thereceiver’s appointment under a contract undertaken prior to thattime. Such obligations were incurred when the contract wasundertaken.63 Of course, as has been noted, where those obligationsarise under an agreement for the use, occupation or possession ofproperty the receiver may have personal liability.

In the case of administrators, they are personally liable for debts64

they incur in the course of the administration of the company forservices rendered, goods bought or property which is hired, leased,used or occupied.65 That liability may not be excluded by agreementwith the supplier but that limitation is without prejudice to theadministrator’s right of indemnity against the company or any otherrights.66 Moreover, it is a liability which subsists notwithstanding thatits creditors resolve that the company be wound up and that theadministrator be its liquidator.67 The administrator is also personallyliable for such amounts as are deducted from any payment made bya company under voluntary administration on account of a taxationliability.68

60 In the case of receivers, s 419A(6), Corporations Law. In the case of voluntaryadministrators, s 443B(6), Corporations Law.61 In the case of receivers, s 419A(8), Corporations Law. In the case of voluntaryadministrators, s 443B(9), Corporations Law.62 Section 419, Corporations Law.63 Re British Investments and Development Co Pty Ltd (1979) ACLC 40-522; Russell HalpernNominees Pty Ltd v Martin (1986) 10 ACLR 539.64 The term “debt” does not include a liability for unliquidated damages incurred by thecompany in the course of its administration; Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd(No 2) (1996) 14 ACLC 1371; 21 ACSR 157.65 Section 443A(1), Corporations Law. In addition to these statutory obligations, anadministrator may incur other personal liabilities as in Commonwealth Bank of Australia vButterell (1994) 12 ACLC 727; 14 ACSR 343 where the administrator had innocently convertedgoods in the company’s possession which belonged to a third party by reason of an effective“reservation of title” clause.66 Section 443A(2), Corporations Law.67 Energy & Resource Conservation Co Ltd v Abigroup Contractors Pty Ltd (1997) 22 ACSR 721.68 Section 443BA, Corporations Law.

Appointee’s Right of Indemnity

To enable voluntary administrators to discharge their obligations,they are entitled to be indemnified out of the assets of the companyfor debts incurred in the course of its administration for which theyhave a personal liability69 as well as for their remuneration.70 Subjectto the order of distribution of a company’s assets in the event of itsliquidation,71 the administrator’s right of indemnity enjoys priority tothe claims of all the company’s unsecured creditors.72 That right ofindemnity would also enjoy priority to the claims of the holder of afloating charge over the company’s assets73 unless:

• prior to the appointment of the administrator, the chargeholderappointed a receiver to the company’s property or otherwiseacted to take possession of it in which event the administratordoes not have priority except to the extent to which the chargeeagrees;74 or

• during the course of the administration the chargeholder appointed a receiver to the company’s property or otherwise actedto take possession of it in which event the administrator onlyenjoys priority to the chargeholder in respect of debts incurred orremuneration accruing before written notice of the appointment orother action on the part of the chargee was served on the admin-istrator.75

Administrators have a lien over the company’s property, to theextent that it is not subject to a fixed charge, to secure their right ofindemnity.76 However, that lien is only effective against the holder ofa floating charge to the extent that the claims of the administratorenjoy priority to the claims of the chargeholder.77

Leaving aside any entitlement on the part of a receiver to beindemnified by her or his appointor, the general law provides for a


69 Section 443D(a), Corporations Law. To the extent that an administrator has liabilities whichare not the subject of the statutory right of indemnification, he or she may have an equitableentitlement to be indemnified out of the company’s assets; Commonwealth Bank of Australia vButterell (1994) 12 ACLC 727; 14 ACSR 343.70 Section 443D(b), Corporations Law.71 Section 556. However, see the decision in Shirlaw v Taylor (1991) 9 ACLC 1246; 5 ACSR 767as to the rights of the administrator to assert his or her lien over the company’s property asagainst its liquidator.72 Section 443E(1)(a), Corporations Law.73 Section 443E(1)(b), Corporations Law.74 Section 443E(2), Corporations Law.75 Section 443E(3), Corporations Law.76 Section 443F(1), Corporations Law.77 Section 443F(2), Corporations Law. Having regard to the decision in Shirlaw v Taylor (1991)9 ACLC 1246; 5 ACSR 767 the administrator would be entitled to assert that lien against, eg, areceiver appointed within the decision period (s 441A, Corporations Law) by a chargee under afixed and floating charge over all of the company’s property to the extent that the property wasthe subject of the floating charge and for that purpose retain possession of that property asagainst the receiver until the lien was discharged.


receiver’s entitlement to indemnification. Under the general law areceiver is entitled to be indemnified out of the assets of the companyto which the receiver was appointed for:

• the receiver’s remuneration; and

• the costs, expenses and liabilities properly incurred78 by thereceiver in the course of the receivership.79

That right of indemnification confers priority upon a receiver toreimbursement on those accounts as against:

• creditors enjoying preferential entitlement to the mortgagee whichappointed the receiver;80

• creditors holding fixed and floating charges or like security overthe assets of the company which enjoy priority to that of thatmortgagee;81

• creditors holding fixed charges over specified property of thecompany where that property was realised by the receiver, but thepriority is limited to so much of the receiver’s remuneration andthe receiver’s costs and expenses as relate to the realisation of thatproperty;82 and

• the claims of the secured creditor which appointed the receiver.83

Effect of Appointment on Directors and Other Officers

The ability to continue to manage a company’s business pendingsale or a restructuring will depend, in part, upon the impact of therelevant regime on the company’s directors and other officers. Theappointment of a receiver does not remove directors or otherofficers84 from office, although a receiver with powers of managementwould be entitled to terminate a contract of employment between thecompany and any of its officers in their capacity as its employees.85

However, the exercise by the directors and other officers of thecompany of their powers and authorities will be circumscribed by theterms of the receiver’s appointment. It may be that the receiver isappointed to only some of the company’s property, in whichcircumstance the powers of the company’s officers to deal with the78 Re Just Juice Corporation Pty Ltd; Ex parte James v Commonwealth Bank of Australia (1992)8 ACSR 444.79 National Australia Bank Ltd v Composite Buyers Ltd (1991) 6 ACSR 94; 9 ACLC 1, 553.80 Bank of New South Wales v Commissioner of Taxation (1979) 54 ALJR 129.81 National Australia Bank Ltd v Composite Buyers Ltd (1991) 6 ACSR 94; 9 ACLC 1, 553.82 Re Universal Distributing Co Ltd (1933) 48 CLR 171.83 Moodemere Pty Ltd v Waters (1987) 5 ACLC 790.84 For the purposes of the Corporations Law, Pt 5.2, the term “officer” is defined in relation toa registered foreign company to include a local agent of that company: s 416, Corporations Law.85 Airlines Airspares Ltd v Handley Page Ltd [1970] 1 Ch 193.

balance of its property will be unfettered. Equally, irrespective of theextent of the receiver’s appointment, so far as it concerns thecompany’s property, the receiver might not be invested with plenarypowers of management with the result that some powers will only beexercisable by the officers of the company. A determination of theextent to which the powers of a company’s officers have beendiminished will depend on the terms of the instruments both underwhich the appointment was made and by which it was made. In eachcase, “the capacity of [the directors and other officers of acorporation] to function bears a direct inverse relationship to thevalidity and scope of the receivership and management”.86

The grant to a receiver of the right to exercise powers which wouldotherwise have been exercisable by the company’s directors does notdeprive the directors of those powers. Rather, so far as the directorsare concerned, “the appointment of a receiver for debenture holderssuspends the powers of the directors over the assets in respect ofwhich the receiver has been appointed so far as is requisite to enablethe receiver to discharge his functions”.87 Should the company’sdirectors wish to exercise a power “the real question is whether thedirectors … can do so without prejudicing the legitimate interests ofthe receiver and the secured creditor in the realisation of the assets”.88

A competition between a receiver and the directors of a companyin relation to the exercise of a particular power can arise incircumstances where the interests of the receiver’s appointor are inissue as where there is a dispute concerning the validity of thereceiver’s appointment or where the company brings proceedingsagainst the receiver’s appointor for damages as a result of thewrongful appointment of the receiver.89 In such circumstances,whatever the terms of the receiver’s powers may be, the directorshave power to initiate such proceedings in the name of thecompany.90 Additionally, the company’s right to redeem the chargedproperty is not affected by the appointment of a receiver so thedirectors “ought to be able to exercise [powers] on behalf of thecompany by selling or mortgaging its assets, provided that theamount thereby realised is sufficient to redeem the securities in fulland to meet all the personal liability of the receivers and their feesand disbursements”.91 However, to the extent that proceedings or


86 Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1970) 92 WN (NSW) 199 at209.87 Re Emmadarr Ltd [1979] 1 Ch 540 at 544.88 Re Geneva Finance Ltd; Ex Parte Quigley v Cook (1992) 7 ACSR 415 at 430.89 Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491.90 Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] 1 QB 814;Paramount Acceptance Co Ltd v Souster [1981] 2 NZLR 38; cf Tudor Grange Holdings Ltd vCitibank NA [1992] Ch 53.91 Brooklands Motor Co Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd (1994)7 NZCLR 260 at 449.


negotiations of those kinds may expose the company to a liability forcosts thereby depreciating the value of the interest of the receiver’sappointor in its assets, the receiver would be entitled to restrain theproceedings pending the grant of an indemnity by the directors orthe establishment of some other arrangement whereby those assetswere protected.92

Beyond the powers which may continue to be exercised by thedirectors and other officers of the company following theappointment of a receiver, certain of their obligations will survivenotwithstanding that appointment. So, to the extent that theCorporations Law imposes duties upon the directors of a companysuch as in relation to the preparation and lodging of its accounts aswell as reporting thereon93 those duties must continue to be observed.Given the ongoing existence of those duties, the directors have anentitlement to have access to the company’s books and records.94

Additionally, each director and secretary of the company95 isrequired to make out and submit a report as to the company’s affairswithin 14 days of notice of the receiver’s appointment being servedon the company96 or such longer period as the receiver or the courtmay allow.97 A receiver may by notice in writing also require directorsas well as other officers or former officers of the company98 toprovide such verified information as is specified99 in that notice.100

Where verified information is provided to the receiver of a company,the person giving that information is entitled to be reimbursed suchof the costs and expenses of doing so as the receiver considersreasonable.101

92 Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] 1 QB 814.93 Part 3.6, Corporations Law.94 Re Geneva Finance Ltd; Ex parte Quigley v Cook (1992) 7 ACSR 415 at 430.95 In the case of a registered foreign company, the obligation to lodge the report as to affairs iscast upon its local agent: s 429(1)(b), Corporations Law.96 Section 429(2)(b), Corporations Law, Forms 507 and 507A, Sched 2, CorporationsRegulations.97 Section 429(3), Corporations Law.98 Those who may be required to give reports to a controller are:

“(a) persons who are or have been officers of the corporation;(b) where the corporation was incorporated within one year before the control day –

persons who have taken part in the formation of the corporation;(c) persons who are employed by the corporation or have been so employed within one

year before the control day and are, in the opinion of the controller, capable of givingthe information required;

(d) persons who are, or have been within one year before the control day, officers of, or employed by, a corporation that is, or within that year was, an officer of thecorporation.”;

s 430(1), Corporations Law, Forms 507 and 507A, Sched 2, Corporations Regulations.99 Section 430(2), Corporations Law, provides:

“a notice ... may specify the information that the controller requires as to affairs of thecorporation by reference to information that this Law requires to to be included in any otherreport, statement or notice under this Law.”

100 Section 430(1), Corporations Law.101 Section 430(3), Corporations Law.

As with receivership, officers of the company102 are not removedfrom office by the appointment of a voluntary administrator,103

although, unlike and, indeed, by way of complete contrast with,receivership, the administrator has the power to remove directorsfrom office as such.104 Moreover, whilst the company’s officers mayremain in office during the period of the voluntary administration,they may not exercise or purport to exercise any power or functionwithout the administrator’s prior written approval.105 Moreover,should an officer of the company either:

• cause it to enter into a transaction affecting its property;106 or

• be knowingly concerned in or be a party to that transaction107

where that transaction was undertaken either:

• without the prior written consent of the administrator;108 or

• otherwise than under an order of the court made before the trans-action was entered into109

that officer is guilty of an offence110 and, irrespective of whether thecourt imposes a penalty, the officer may be ordered to compensatethe company or any other person for any loss which has beensuffered in consequence of the transaction being undertaken.111

To fortify the voluntary administrator’s effective control of theaffairs of the company, further specific provision is made in relation tothe transactions affecting its property. Dealings with the company’sproperty are under the administrator’s control, subject to any order ofthe court112 and to the rights of both the company’s secured creditorsand third parties who are the owners or lessors of property in thecompany’s possession. Any transaction or dealing with the property ofa company under administration which is not undertaken:

• by the administrator on the company’s behalf;

• with the administrator’s prior written consent; or


102 “‘officer’ in relation to a company under administration, includes:(a) a receiver who is not also a manager; and(b) a receiver and manager appointed by a court; and(c) a liquidator or provisional liquidator appointed by the Court before the administration

began.”;s 437C(4), Corporations Law.

103 Section 437C(2), Corporations Law.104 Section 442A(a), Corporations Law.105 Section 437C(1), Corporations Law.106 Section 437D(5)(a), Corporations Law.107 Section 437D(5)(b), Corporations Law.108 Section 437D(2)(b), Corporations Law.109 Section 437D(2)(c), Corporations Law.110 Section 437D(5), Corporations Law.111 Section 437E(1), Corporations Law.112 Section 437D, Corporations Law.


• under an order of the court made prior to the transaction

• is void113 unless the court otherwise orders.114

Each director of the company is required to deliver such books andrecords of the company as are in his or her possession to theadministrator as soon as practicable after the administrator’sappointment115 and inform the administrator of the whereabouts ofany other such books and records to the extent that information isknown to that director.116 The directors are also required to provide areport as to the company’s affairs117 to the administrator within sevendays of the commencement of the administration or such longerperiod as the administrator allows.118 In addition, the administratormay require any director of the company to meet with theadministrator and to provide such information about the business,property and affairs of the company as the administrator requests.119

Effect of Appointment on Creditors Generally

One of the most significant aspects of the voluntary administrationprocedure and, in some respects, one of its most controversialfeatures is the moratorium which, with some exceptions, is imposedupon creditors and the exercise of their rights.

During the period of the voluntary administration or themoratorium period, proceedings against the company or its propertymay not be commenced or proceeded with other than either with theadministrator’s written consent120 or the leave of the court.121 In thecase of winding up proceedings against the company, the court mustadjourn those proceedings if it is satisfied that it is in the interests of113 Section 437D(2), Corporations Law.114 Section 437D(4), Corporations Law.115 Section 438B(1)(a), Corporations Law.116 Section 438B(1)(b), Corporations Law.117 Form 507, Sched 1, Corporations Regulations.118 Section 438B(2), Corporations Law.119 Section 438B(3), Corporations Law.120 Section 440E, Corporations Law.121 (a) Section 440D(1), Corporations Law. Where leave of the court is granted it may be

subject to terms and the commencement or their further prosecution must beundertaken consistently with those terms (if any): s 440D(1)(b), Corporations Law.

(b) Any grant of leave by the court under s 440D, Corporations Law, does not survive theexecution by the company of a deed of company arrangement where that deed bindsthe relevant creditor. In such a circumstance the creditor must seek leave under s 444Eto further pursue any proceedings which were instituted consistently with leavegranted under s 440D, Corporations Law: Roder Zelt-Und Hallenkonstruktionen GMBH v Rosedown Park Pty Ltd (1995) 13 ACLC 776; 17 ACSR 153.

(c) When refusing leave to a creditor to continue proceedings against a company underadministration, Young J concluded in Foxcroft v The Ink Group Pty Ltd (1994) 12 ACLC1063; 15 ACSR 203 that the cases concerning the grant of leave to prosecuteproceedings against a company in liquidation did not provide assistance. His Honoursaid (at ACLC 1064-5; ACSR 204-5):

the company’s creditors for the company to continue underadministration rather than to be wound up.122 Similarly, whereapplication is made to appoint a provisional liquidator, the courtmust adjourn that application unless it is satisfied that theappointment of a provisional liquidator would better serve theinterests of the company’s creditors.123 Other than following aresolution passed at the meeting of creditors convened to considerthe company’s future, it may not be wound up voluntarily during themoratorium period.124

There is no corresponding limitation on the exercise by creditorsof their rights in the event of a receivership. Moreover, as was notedabove, one of the consequences for a receiver of the liquidation of acompany is that it terminates the receiver’s agency, if any, of thecompany and she or he becomes the agent of the mortgagee.

One critical aspect of the moratorium, so far as the maintenance ofthe company’s business is concerned, is that suppliers of essentialservices; electricity, gas, water or telecommunication services,125 maynot refuse to continue to supply those services to a company underadministration by reason only of there being an amount owing to thesupplier or make it a condition of the continued supply of services to


“There is, however, quite a big difference between a company in administration and acompany in liquidation. A company in administration is seeking to continue to trade and is, in accordance with s 435A, seeking to maximise the chance of it remaining inbusiness. A company in liquidation is one where the liquidator is seeking not to tradebut to realise the company’s assets as soon as possible for the best price, in order to beable to distribute the net available funds to the creditors and in some circumstances, themembers.

The provisions of Pt 5.3A, as exemplified in sections such as 437C, 437F, 440C and440D, provide that there shall be a complete freeze of proceedings against the companyduring the administration so that the administrator can have time to assess the situation,and the company’s creditors have an opportunity to work out the net position and adoptan attitude under s 439C which will be in their common interest. To allow one creditoror potential creditor to proceed would not only take the administrator’s attention fromwhat he needs to do under the division in a relatively short period of time, but it wouldalso involve costs in running the legal action on behalf of the administrator, as well asperhaps giving the claimant some advantage over the other creditors or potentialcreditors.

Accordingly, it seems to me that an application under s 440D will rarely be granted. Itmay be that where the company is insured against the liability the subject of theproceedings, the administrator will ordinarily consent or the court will give conditionalleave, but outside this field it is hard to see situations where it would be proper to grantleave, though doubtless there are such situations.”

122 Section 440A(2), Corporations Law. McPherson JA in Creevey v Deputy Commissioner ofTaxation (1996) 19 ACSR 456 said (at 457):

“In order to satisfy the court of the matter referred to in s 440(2) of the Corporations Law,one would expect that there would have to be some persuasive evidence to enable it tobe seen that there were assets which, if realised under one form of administration ratherthan the other, would produce a larger dividend, or at least an accelerated dividend forthe creditors.”

123 Section 440A(3), Corporations Law.124 Section 440A(1), Corporations Law.125 Section 600F(2), Corporations Law.


the company that that amount be paid.126 However, unlike thegeneral restraint upon creditors, this is also a benefit which accrues ina receivership.127

A seeming curiosity of the voluntary administration regime is that aguarantee128 on account of a liability129 of the company cannot beenforced during the moratorium period against either any director ofthe company who is a natural person or any spouse, de facto spouse orrelative130 of such a director131 otherwise than with the court’s leave.132

Notwithstanding that restraint on enforcement, a guaranteed creditor isentitled to seek relief from the court against the guarantor under s 1323of the Corporations Law as though a proceeding against the guarantorhad commenced thereunder and the guaranteed creditor was the onlyaggrieved person for the purposes of that section.133 That relief mayinclude orders restraining the guarantor either from dealing with his orher property in particular ways or from leaving Australia.134 Moreover,the restraint on enforcement of guarantees does not apply to creditorswho have obtained judgment against the guarantor prior to thecommencement of the administration as the rights under the guaranteehave merged in the judgment.135

Effect of Appointment on Secured Creditors

The capacity of a receiver to dictate the course of a company’saffairs will also depend upon the extent to which her or hisappointor’s security enjoys priority to that of any other securedcreditor.

Secured creditors whose charges are registrable under theCorporations Law136 will be entitled to that priority against thereceiver’s appointor as is determined by the rules which are therebyestablished.137 Similarly, if more than one of those secured creditors

126 Section 600F(1), Corporations Law.127 Section 600F(2)(e), Corporations Law.128 “‘guarantee’, in relation to a liability of a company, includes a relevant agreement (asdefined in s 9 of the Law) because of which a person other than the company has incurred, ormay incur, whether jointly with the company or otherwise, a liability in respect of the liabilityof the company”: s 440J(4), Corporations Law.129 “liability” means a debt, liability or other obligation: s 440J(4), Corporations Law.130 “relative” in relation to a person, means the spouse, parent or remoter lineal ancestor, son,daughter or remoter issue, or brother or sister of that person: s 9, Corporations Law.131 Section 440J(1)(a), Corporations Law.132 Section 440J(1), Corporations Law. The court may impose terms on the grant of leave andany enforcement of the guarantee must be undertaken consistently with those terms.133 Section 440J(2), Corporations Law.134 Section 1323(1), Corporations Law.135 Re Behan; Ex parte Pioneer Concrete (Qld) Pty Ltd (1995) 13 ACLC 1644; 17 ACSR 725.136 Section 262, Corporations Law.137 See Pt 4.3, “Company Finance”, para 223 et seq, Business Organisations, The Laws ofAustralia (LBC Information Services).

appoints a receiver, the standing of those receivers to exercise theirrespective powers will be determined by the priority enjoyed by theirappointors inter se. Beyond those rules, a company may createsecurity over its intellectual property, the priority of which isdetermined by the legislation which regulates the registration ofinterests in such property.138 Moreover, real property mortgagescreated in relation to Torrens system land are subject to a system ofregistration which affects land of that kind.139 The priority of thosemortgages, as with other charges which are not registrable under theCorporations Law, such as either land the title to which is establishedby the general law140 or land which is leased from the Crown,141 isdetermined by the general law.142 Where the charge under which thecreditor claims its interest was granted to secure the payment of theprice of property acquired from that creditor contemporaneouslywith the grant of that charge, it takes priority to earlier charges whichattach to the property notwithstanding the terms of those earliercharges, that the later charge was registrable under the CorporationsLaw or that the creditor took its later charge with notice.143 That isalso the case for a charge granted to a third party who advances aloan to finance the acquisition of that property.144

If a receiver contracts to sell property of the company which issubject to a charge enjoying priority to the security held by thereceiver’s appointor, that prior ranking security must be discharged ifthe receiver is to convey unencumbered title to the purchaser.However, that general rule is ameliorated by s 420B of theCorporations Law which confers jurisdiction upon the court toauthorise some receivers to sell or otherwise dispose of specifiedproperty of a company even though that property is subject to acharge which has priority to the charge under which the receiver wasappointed.145 That jurisdiction is only exercisable where the court issatisfied that:


138 See Pt 4.3, “Company Finance”, para 229 et seq, Business Organisations, The Laws ofAustralia (LBC Information Services).139 An interest in Torrens title land created by the grant of a mortgage may also be protected bythe registration of a caveat: Butler v Fairclough (1917) 23 CLR 78; Abigail v Lapin [1934] AC 491.140 See Pt 18.9, “Securities”, Finance, Banking and Securities, The Laws of Australia (LBCInformation Services).141 See Pt 18.9, “Securities”, Finance, Banking and Securities, The Laws of Australia (LBCInformation Services).142 See para 232, Pt 4.3, “Company Finance”, Business Organisations, The Laws of Australia(LBC Information Services).143 Mathieson v Wahlen (1928) 28 SR (NSW) 189; Re Bunbury Foods Ltd; Ex parte Robertson vNissho Iwai Australia (1984) 2 ACLC 639; Sogelease Australia Ltd v Boston Australia Ltd (1991)26 NSWLR 1.144 Abbey National Building Society v Cann (1991) 1 AC 56.145 Section 420B(1), Corporations Law. This provision was introduced into the CorporationsLaw by the Corporations Law Amendment Act 1992 and reflects a recommendation in the“Harmer Report” (ALRC, p 45), which, by way of background to that recommendation,observed (at para 210):


(a) the receiver would have power to sell the property apart fromthe existence of the prior charge;

(b) the receiver has taken all reasonable steps to obtain the consentof the prior chargeholder to the sale of the property but withoutsuccess;

(c) the sale of the property is in the best interests of the companyand its creditors; and

(d) the sale will not unreasonably prejudice the interests of the priorchargeholder;146

and, in exercising that jurisdiction, the court is to have regard to theneed to adequately protect the rights and interests of the priorchargeholder.147 Where the property which is subject to the priorcharge is being sold together with other property of the company, thecourt, in the exercise of its jurisdiction, may have regard to both:

• the extent to which the sale price of that other property may beadversely affected if not sold with the property which is subject tothe prior charge; and

• whether the sale price of the property which is subject to the priorcharge would be greater if that property were sold independent-ly of a sale of the other property.148

If the court exercises that jurisdiction, it may make its order subjectto conditions, including a condition that the net proceeds of sale of theproperty which is subject to the prior charge together with a portion ofthe proceeds of sale of the other property being sold, be applied inpayment of specified amounts secured by the prior charge.149

Leaving aside s 420B of the Corporations Law, a secured creditorwhose charge enjoys priority to that security under which a receiverwas appointed may enforce its security notwithstanding the receiver’sappointment.

“210. Prior charge. Although a charge under which a receiver is appointed will usuallyembrace all the assets of a company, there is the possibility that another secured creditormay have security in priority to the chargeholder over part of the property of thecompany (for example, by a mortgage of land upon which the company conducts itsbusiness). In such a case the receiver may be effectively prevented from disposing of allof the saleable property of the company (particularly the business of a company as agoing concern) at the most favourable price. The problem may be that the debt owed tothe other secured creditor exceeds the market value of the property held as security forthe debt. The receiver will not, in those circumstances, be able to sell that propertyunless the other secured creditor is prepared to discharge the security upon payment ofa sum less than the debt for which the property is security.”

Given that background to the section, it would seem that the court, if asked to exercise itspower under the section, would do so by requiring the discharge of a prior security against thepayment of the value of that security to the prior chargeholder net of the estimated costs ofrealising that security.146 Section 420B(2), Corporations Law.147 Section 420B(3), Corporations Law.148 Section 420B(4), Corporations Law.149 Section 420B(6), Corporations Law.

In the case of voluntary administration, the rights of securedcreditors are more circumscribed. A secured creditor may notenforce150 its charge during the moratorium period except:

• with the administrator’s written consent;151

• with the court’s leave;152

• where the creditor holds a charge or charges153 over the whole, orsubstantially the whole, of the company’s property154 and eitherhas already commenced or during the decision period155 com-mences to enforce the charge in relation to all of the chargedproperty;156

• where enforcement proceedings were commenced prior to thebeginning of the moratorium period;157

• if the charged property is perishable.158

A secured creditor is not precluded from serving a notice under itscharge by reason of that limitation.159

The restrictions imposed upon secured creditors under thevoluntary administration regime do not extend, however, to lieneesor pledgees as they are not the holders of “charges” for the purposesof that regime. Accordingly, secured creditors of that kind, such asrepairers or warehousemen, whose claims arose before thecommencement of the administration may exercise their rightswithout being affected by the “moratorium” provisions whichotherwise operate in the course of a voluntary administration.160 Nor


150 See s 9, Corporations Law, definition of “enforce”.151 Section 440B(a), Corporations Law. Should the administrator refuse to give consent, he orshe is not personally liable to an action or other proceedings for damages resulting from thatrefusal: s 440E, Corporations Law.152 Section 440B(b), Corporations Law.153 Section 441A(2), Corporations Law.154 See n 13 for a discussion of the meaning of the phrase “the whole, or substantially thewhole, of the company’s property”.155 Section 441A, Corporations Law. See s 9, Corporations Law for a definition of “decisionperiod” which, for most practical purposes, will be the ten business days commencing on thebusiness day next after the day on which the chargeholder receives notice of the voluntaryadministrator’s appointment.156 Section 441B, Corporations Law. The charged property of the company may not includegoods supplied to it subject to a “reservation of title” clause. In addition there is the right of anadministrator to assert a lien over property which is the subject of a floating charge. Questionsmay arise, therefore, between the administrator and, say, a receiver appointed to enforce acharge over the whole, or substantially the whole, of a company’s property as to who has theright of possession of such goods.157 Section 441C, Corporations Law.158 Section 441A(3) and (4), Corporations Law.159 Section 441E, Corporations Law.160 Osborne Computer Corporation Pty Ltd v Airroad Distribution Pty Ltd (1995) 13 ACLC 1129;17 ACSR 614.


do such restrictions apply to the holders of charges over premiseswhich are occupied but not owned by the company.161

In the case of a charge or charges over the whole or substantiallythe whole of the company’s property, it may be enforced during thedecision period by any of the chargee,162 a receiver appointed by thechargee under a power contained in an instrument relating to thecharge,163 a receiver appointed by a court on the application of thechargee for the purpose of enforcing the charge164 or a person who isappointed (whether as agent of the chargee or of the company) totake possession or assume control of the company’s property165

provided that where there are two or more charges, the same personis the chargee in respect of all of them.166 The mode of enforcementof the charge or charges need not be the same in respect of all of thecharged property, rather it or they merely require to be enforced inrespect of all the charged property.167 Moreover, the mode ofenforcement is not immutable even after the expiry of the decisionperiod.168 So, for example, a chargee who has appointed a receivermay terminate that appointment and either appoint a person as itsagent to take possession of the charged property or exercise itspower of sale in respect of any of the charged property even thoughthe decision period has elapsed. The chargee, receiver or otherperson when enforcing the charge or charges is not required toobtain the administrator’s prior written consent either to the exerciseof any power or function169 or to the sale of or any other transactionaffecting any of the company’s property and the administrator’spowers are subordinated to the powers of the chargee, receiver orother person in that circumstance.170

Where, prior to the commencement of the moratorium period, acharge, irrespective of whether it extends to the whole, orsubstantially the whole, of the company’s property, is being enforcedby the chargee, a receiver or other person having:

161 Cotton Trading Corporation Pty Ltd v Pengilley (1996) 21 ACSR 385. However, should such asecured creditor require relief against the company, as, eg, an order for possession, s 440Dwould apply to the proceedings which were necessary for obtaining that relief.162 Section 441A(3) and (4), Corporations Law; s 9, Corporations Law, definition of “enforce”,para (a).163 Section 441A(3) and (4), Corporations Law; s 9, Corporations Law, definition of “enforce”,para (b).164 Section 441A(3) and (4), Corporations Law; s 9, Corporations Law, definition of “enforce”,para (d).165 Section 441A(2)(b), Corporations Law. This would not preclude a chargee who held securityover part of the company’s property from both taking an assignment from another chargee whoheld security over the balance of the company’s property and, if that assignment were perfectedprior to the expiry of the decision period, the first chargee from enforcing those charges.166 Section 441A(1)(b), Corporations Law; s 441A(2)(d), Corporations Law.167 Section 441A(3)(b), Corporations Law; s 441A(4)(b), Corporations Law.168 Section 441A(3), Corporations Law.169 Section 441A(4), Corporations Law.170 Section 442B, Corporations Law.

• taken possession of the company’s property;

• entered an agreement to sell the company’s property;

• arranged for the company’s property to be sold by public auction;

• publicly invited tenders for the purchase of the company’s property;

• exercised any other power in relation to that property for the purpose of enforcing the charge171

the general limitation on the rights of a chargee to enforce its securitydoes not apply and the chargee, receiver or other person mayexercise any power or function without the prior written consent ofthe administrator.172 Moreover, the prior written consent of theadministrator (who may only exercise his or her powers subject tothe powers of that chargee, receiver or other person)173 is notrequired in relation to a transaction that affects that property wherethat transaction is entered into either by the chargee in the exercise ofits powers as such or in the performance or exercise of a function orpower of the receiver or other person which is undertaken for thepurpose of enforcing the charge.174

If a chargee holds security over perishable property, that security,to the extent to which it applies to that property, may be enforced atany time during the moratorium period notwithstanding that thecharge also extends to other property of the company.175 None of thechargee, a receiver or other person who is enforcing that charge(whose respective powers are superior to those of theadministrator)176 require the administrator’s prior written consenteither to the exercise of a power or function177 or to undertake atransaction which affects that property.178

In the circumstance that a chargee, receiver or other person mayenforce and is enforcing a charge on the property of a companyduring the moratorium period, the court, on the application of theadministrator, may order that chargee, receiver or other person, otherthan a chargee, receiver or other person who is enforcing a charge onthe whole or substantially the whole of the company’s property,179

not to perform specified functions or exercise specified powersexcept as permitted by the order.180 That order only has effect during


171 Section 441B(1), Corporations Law.172 Section 441B(2), Corporations Law.173 Section 442B, Corporations Law.174 Section 441B(3), Corporations Law.175 Section 441C(1), Corporations Law; s 441C(2), Corporations Law.176 Section 442D, Corporations Law.177 Section 441C(2), Corporations Law.178 Section 441C(3), Corporations Law.179 Section 441D(1), Corporations Law.180 Section 441D(2), Corporations Law.


the moratorium period181 and may only be made if the court issatisfied that the interests of the chargee are adequately protected.182

Where the administrator of a company assumes control or takespossession of any of its property which is subject to a charge183 he orshe may not dispose of that property184 otherwise than:

• in the ordinary course of the company’s business;185

• with the written consent of the chargee;186

• with the leave of the court187

although the leave of the court may not be given unless the court issatisfied that arrangements have been made to adequately protect theinterests of the chargee.188

If the charge is in the nature of a floating charge, subject to thoselimitations and the superior powers of the chargee, receiver or otherperson who is entitled to and who is enforcing the charge, theadministrator may deal with the company’s property which is subjectto that charge as though it continued to be a floating charge.189

Additionally, in the case of the company’s assets which are subject toa floating charge, the administrator’s right of indemnity out of thoseassets will enjoy priority to the claims of the chargee unless thechargee has:

• appointed a receiver under the terms of the charge;

• obtained an order appointing a receiver to enforce the charge;

• entered into possession or assume control of the company’s prop-erty for the purpose of enforcing the charge; or

• appointed a person (whether as agent of the chargee or of thecompany) to take possession of the company’s property, either:

(a) prior to the commencement of the administration, in whichevent the administrator, if the receiver or person is still in officeor the chargee is still in possession or control of the company’sproperty, will not have priority except to the extent that thechargee agrees;190 or

181 Section 441D(3), Corporations Law.182 As noted, the powers of the administrator in this regard are subject to the powers of achargee, receiver or other person who is entitled to and who is enforcing that charge.183 Section 442C(1), Corporations Law.184 Section 442C(2)(a), Corporations Law.185 Section 442C(2)(b), Corporations Law.186 Section 442C(2)(c), Corporations Law.187 Section 442C(3), Corporations Law.188 Section 442B(2), Corporations Law.189 Section 443E(2), Corporations Law.190 The chargee may take possession or assume control of the company’s property or a receiveror other person may be appointed after the commencement of the administration:

(b) after the commencement of the administration,191 where theadministrator only enjoys priority for those debts incurred orremuneration accruing prior to the administrator being givenwritten notice either of the appointment or of the chargee having taken possession of the company’s property.192

The lien which the administrator has over the company’s propertyis only effective against a secured creditor to the extent that theadministrator’s claim against the company enjoys priority to the claimof that secured creditor.193

Effect of Appointment on Owners and Lessors ofProperty

Owners and lessors of property which is used or occupied by or inthe possession of a company under the terms of a contract are notable ipso facto to terminate that contract where a receiver isappointed to that property by the holder of a charge from thecompany in the absence of some contractual provision to thecontrary.194 Accordingly, unless there is some other default under thecontract on the part of the company which has not been waived orwhich the other party to the contract is not otherwise estopped fromraising, the company may continue to enjoy the property to which ithas access under its terms.

Where the benefit of a pre-receivership contract continues to betaken by a company, mere continued reliance on the contract by thereceiver does not result, under the general law, in the adoption of thecontract by the receiver195 so as to render her or him personally liablefor the performance of its terms. In relation to the ongoing use by acompany in receivership of leasehold premises which the companyoccupied under a pre-receivership lease, Needham J, in Re BritishInvestments & Development Co Pty Ltd,196 said:

“This is a case where the Receiver was carrying out an existingcontract made by the company before the Receiver went intopossession and, in that event, the general law is that unless he


(a) if the chargee holds a charge or charges (including the floating charge) over the wholeor substantially the whole of the company’s property and begins to enforce its securityover all that property during the decision period (s 441A, Corporations Law); or

(b) to the extent to which the relevant property the subject of the floating charge is perishable: s 441C, Corporations Law.

191 Section 443E(3), Corporations Law.192 Section 443F(2), Corporations Law; see Shirlaw v Taylor (1991) 9 ACLC 1246; 5 ACSR 767.193 Section 443E(3), Corporations Law.194 Parsons v The Sovereign Bank of Canada [1913] AC 160.195 Associated Newspapers Ltd v Grinston [1949] 66 WN (NSW) 211.196 (1979) ACLC 40-522.


personally makes himself liable, then, by merely carrying out thecontract, he does not accept a personal responsibility.”197

That was also the case where a receiver continued to place ordersunder a long-term pre-receivership contract for the supply of paper tothe company to which a receiver had been appointed by the court.198

However, now, where a company continues to use or occupy orbe in possession of property under an agreement which came intoexistence before the appointment of a receiver to the company andthe receiver is the receiver of that property,199 the Corporations Lawrenders the receiver liable for so much of the rent or other amountspayable under that agreement as relates to the period:(a) beginning more than seven days after the receiver’s

appointment; and(b) during which the company continues to use or occupy that

property and the receiver continues to be its receiver.200

The statutory imposition of liability on the receiver on that accountdoes not have the consequence that she or he either is taken to haveadopted the agreement under which the company occupies or usesthat property or otherwise has any liability under that agreement.201

Without affecting the liability of the company under thatagreement,202 the receiver may serve a notice on the owner or lessorof the property to the effect that she or he does not propose toexercise any rights in relation to it,203 and for so long as that noticeremains in force, the receiver has no liability on account of the rent orother monies payable by the company under that agreement.204 Thatnotice will cease to have effect where the receiver as such eitherrevokes it or exercise or purports to exercise a right in relation to the

197 Ibid at 32, 102.198 Parsons v The Sovereign Bank of Canada [1913] AC 160.199 Section 419A(1). The Corporations Law Amendment Act 1992 introduced this section intothe Corporations Law following a recommendation in the “Harmer Report” (ALRC, p 45). Therationale for that recommendation was explained as follows:

“218. Liability under leases. ... Although a receiver should not be considered to haveadopted a lease merely because the company remains in occupation of the leasedproperty, it does not appear equitable that a receiver should permit a company tocontinue to obtain the benefit of the occupation of premises or the use of chattels undera lease agreement without being liable for the payments which the company is liable tomake for that continued occupation or use. It might be suggested that the owners ofsuch property have a remedy in evicting the company from possession of the land ortaking possession of the chattels, but that can take considerable time. In the meantimethe company (and, indirectly, the chargeholder) has obtained the continued benefit ofoccupation or use while the owner of the property must rank after the chargeholder asan unsecured creditor for the payments due for such occupation or use.”

200 Section 419A(2), Corporations Law.201 Section 419A(8), Corporations Law.202 Section 419A(4), Corporations Law.203 Section 419A(3), Corporations Law.204 Section 419A(4), Corporations Law.

property.205 However, mere continued possession or control of thatproperty does not amount to the exercise of a right in relation to itunless the receiver either uses the property or asserts as against itsowner or lessor a continuing right to possess or control it.206

The court may also excuse a receiver from personal liability onaccount of the rent or other amounts payable by a company under anagreement under which it occupies property owned by or leased to itby a third party but any such order does not excuse the companyfrom liability under that agreement.207

Owners of property which is in the possession of a company byreason of it having been sold subject to an effective reservation oftitle clause208 are not protected by s 419A of the Corporations Law.209

Accordingly, other than to pursue such rights as it has as a creditor ofthe company, the only remedy available to such an owner is todemand possession of the property, should that be permitted by thecontract under which it was agreed to be sold. When such a demandhas been properly made the licence which the company otherwisehad to use the property is terminated.210 If, inconsistently with thetermination of that licence, the property is used by the company andthe receiver, each of them will be liable to the owner in conversion.211

By way of contrast, where a voluntary administrator is appointedto a company, the owner or lessor of property which is used oroccupied by or in the possession of the company cannot takepossession or otherwise seek to recover that property during themoratorium period212 except:

• with the administrator’s written consent;213


205 Section 419A(5), Corporations Law.206 Section 419A(6), Corporations Law.207 Section 419A(7), Corporations Law. The matters to which the court shall have regard whenexercising its power under this subsection are not specified. In recommending the grant of sucha power, the “Harmer Report” (ALRC, p 45) said (para 220): “This would, for example, assist areceiver who is unaware of the existence of certain property of a company or of the fact that thelegal title to the property belongs to another person.”Presumably, considerations of this kind would inform the court’s decision.208 Aluminium Industrie Vassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676.209 Osborne Computer Corporation Ltd v Riddell (1995) 13 ACLC 1210; 17 ACSR 606 which wasa decision concerning s 443B, Corporations Law, being the corresponding section concerningthe liability of voluntary administrators: Pt 5.3A, Corporations Law.210 Ibid.211 Ibid.212 In Cotton Trading Corporation Pty Ltd v Pengilley (1996) 21 ACSR 385 it was held that thislimitation on the exercise by owners of property in the possession of a company underadministration did not extend to mortgagees who had taken their charges over that propertyfrom the owner. This decision was obiter and it may be open to argue that that conclusionwould further depend upon the mortgagees’ rights enjoying priority to those of the company.In any event, to the extent that the mortgagee sought an order for possession of the propertythe general limitation on proceedings against the company applied: s 440D, Corporations Law.213 Section 440C(a), Corporations Law.


• with the leave of the court;214

• where, prior to the beginning of the moratorium period, a receiver or other person took possession of the property or exer-cised any other power in relation to it for the purpose of enforc-ing the right of the owner or lessor to take possession of the it;215

or

• where the property is perishable.216

Although owners or lessors of property may serve any noticewhich may be or is required to be served under an agreement withthe company notwithstanding those limitations.217

However, as with a receiver, an administrator is personally liablefor such rental or other payments as are attributable to that periodcommencing more than seven days after the administration beganand continuing either until the administration ends or until thecompany ceases to use or occupy the property.218 Additionally, theadministrator, without affecting the company’s liability, may alsoavoid personal liability by serving a notice on the owner or lessor tothe effect that the company does not propose to exercise rights inrelation to the property.219

214 (a) Section 440C(b), Corporations Law. Should the administrator refuse to give consent, heor she is not personally liable to an action or other proceedings for damages resultingfrom that refusal: s 440E, Roder Zelt-Und Hallenkonstruktionen GMBH v Rosedown Park Pty Ltd (1995) 13 ACLC 776; 17 ACSR 153.

(b) Any grant of leave under s 440D, Corporations Law, to the owner or lessor of propertyin the company’s possession to proceed either to recover that property or against thecompany does not survive the execution of a deed of company arrangement at which time, should that deed bind the owner or lessor of property as a creditor of the company, a further grant of leave must be sought under s 444E, Corporations Law:Roder Zelt-Und Hallenkonstruktionen GMBH v Rosedown Park Pty Ltd (1995) 13 ACLC776; 17 ACSR 153.

215 Section 441F, Corporations Law.216 Section 441G, Corporations Law.217 (a) Section 441J, Corporations Law: Roder Zelt-Und Hallenkonstruktionen GMBH v

Rosedown Park Pty Ltd (1995) 13 ACLC 776; 17 ACSR 153.(b) In the case of owners of property supplied to the company under a “reservation of title”

stipulation, subject to the particular terms of their contractual arrangements, the serviceof notice requiring the return of the property upon the company and its administratormay terminate any authority which they might otherwise have had to use it (Osborne Computer Corporation Pty Ltd v Riddell (1995) 13 ACLC 1210; 17 ACSR 606), albeit that the company might remain in possession thereof until the end of the administration.

218 Section 443B(2), Corporations Law. That section does not apply to the use of propertysupplied to the company subject to a “reservation of title” clause: Osborne ComputerCorporation Pty Ltd v Riddell (1995) 13 ACLC 1210; 17 ACSR 606. However, the statutoryauthority which a voluntary administrator has to use that property requires that he or she do so“in the ordinary course of the company’s business”: s 422C(2), Corporations Law. Thatrequirement may not be satisfied in the case of such property where the vendor/owner hasserved a notice requiring its return: Osborne Computer Corporation Pty Ltd v Riddell (1995) 13ACLC 1210; 17 ACSR 606. Accordingly, in such a circumstance, if the administrator continues touse that property he or she would be liable, at least, to a claim in conversion: Roder Zelt-UndHallenkonstruktionen GMBH v Rosedown Park Pty Ltd (1995) 13 ACLC 776; 17 ACSR 153.219 Section 443B(3) and (4), Corporations Law.

In the case of both perishable property and property which is thesubject of repossession action commenced prior to thecommencement of the moratorium period, the administrator’s priorwritten consent is not required either to the exercise of a power orfunction in relation to the property220 or to any transaction affectingit.221 Moreover, the administrator’s powers and functions in relation tothat property are subordinate to those of the receiver or other personwho has taken possession or assumed control of it.222 However, thecourt, on the application of the administrator, may order any personwho has taken possession of that property not to exercise specifiedfunctions or powers in relation to it except as permitted by theorder.223 Such an order may only be made if the court is satisfied thatadequate arrangements have been made to protect the owner orlessor224 and the order only has effect during the moratorium period.225

Options for Reorganisation of the Company

In some circumstances, it may not be possible for a chargeholderto satisfy its claims against a company by the realisation of its securityin the short term. Faced with that possibility, the chargeholder maywish to consider a reorganisation of the company’s affairs combinedwith a medium to long term commitment on its part to continue tomake secured advances to the company.

One of the obligations imposed upon a voluntary administrator isto investigate the company’s affairs226 and to form an opinion as towhether it would be in the creditors’ interests for:

• the company to execute a deed of company arrangement;

• the administration to end; or

• the company to be wound up.227

Having done so, the administrator is required to report to thecompany’s creditors upon the results of that investigation, theopinion which he or she has formed in relation to the appropriatecourse to be adopted for the future of the company228 as well as thereasons for that opinion and, where the administrator has concluded


220 Section 441F(2), Corporations Law: s 441G(1), Corporations Law.221 Section 441F(3), Corporations Law: s 441G(2), Corporations Law.222 Section 442D(3), Corporations Law.223 Section 441H(2), Corporations Law.224 Section 441H(3), Corporations Law.225 Section 441H(4), Corporations Law.226 Section 438A(a), Corporations Law.227 Section 438A(b), Corporations Law.228 There is no provision exculpating an administrator from liability in relation to the opinionwhich he or she may express in relation to the options available to the creditors of a company


that it would be in the interests of the company’s creditors for it toexecute a deed of company arrangement, the details of that proposeddeed.229 The details to be given of a proposed deed are “those detailswhich can reasonably be expected to [be] material to creditors indeciding whether to vote in favour of the resolution that the companyexecute the deed”.230 The administrator, in addition to expressing anopinion as to the best option for creditors, should also address theother options and the reasons for not favouring them although,subject to the reasons given for proposing the best option, they maybe dealt with “briefly and expeditiously”.231 The administrator’s reportmust also identify any transactions which, in her or his opinion, maybe liable to be avoided by a liquidator if the company were to bewound up.232 A failure on the part of the administrator to report eitherwhich is under administration. Presumably, liability would only attach if there was a breach ofthe duty of care imposed upon any professional adviser judged, in this case, not only byreference to the material available to the administrator upon which the opinion could be basedbut also the time available both for obtaining further material and for forming the opinion.Moreover, it may be that the court could exercise its power under s 1318, Corporations Law, toexculpate the administrator from liability in the appropriate circumstances.229 (a) Section 439A(4), Corporations Law; Deputy Commissioner of Taxation v Pddam Pty Ltd

(1996) 14 ACLC 659; 19 ACSR 498; Deputy Commissioner of Taxation (Cth) v Comcorp Australia Ltd (1996) 14 ACLC 1616; 21 ACSR 590. Having regard to both decisions such as Phosphate Co-Operative Co of Australia Ltd v Shears [1989] VR 665; (1988) 6 ACLC1046; 14 ACLR 323 as well as the power of the court either:

• to terminate a deed of company arrangement on the grounds, inter alia, thatmaterial information in the report was false or misleading or that there was amaterial omission from the report; or

• under s 447A, Corporations Law, to set aside the resolution requiring the company toexecute a deed of company arrangement by reason of the administrator’s failure toadequately examine and report upon both the benefits which might accrue to thecompany’s directors by reason of the execution of the deed and transactions intowhich the company had entered with third parties with whom the company’s directorswere associated (Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707)

administrators should be concerned to ensure that their reports include all suchinformation as “would tend to influence a sensible [creditor’s] decision on [which of theoptions for the company’s future] is in his interests”: Phosphate Co-Operative Co ofAustralia Ltd v Shears [1989] VR 665 at 689; (1988) 6 ACLC 1046 at 1065; 14 ACLR 323 at345. Accordingly, regard may usefully be had to those principles regulating theformulation of explanatory statements which are prepared in support of proposedschemes of arrangement. Against these considerations it has been accepted that, as thetime available for the preparation of an administrator’s report is limited, it should notbe expected to be as extensive or detailed as the explanatory statement required to bepublished with a proposed scheme of arrangement: Hagenvale Pty Ltd v Depela Pty Ltd(1995) 13 ACLC 885; 17 ACSR 139; Deputy Federal Commissioner of Taxation vComcorp Australia Ltd (1995) 13 ACLC 1671; Deputy Commissioner of Taxation (Cth) vComcorp Australia Ltd (1996) 14 ACLC 1616; 21 ACSR 590.

(b) Corporations Regulations, r 1.0.03(1) requires the administrator’s report to be inaccordance with Form 507 in Sched 2 to the Corporations Regulations. In McDonald vAustralian Securities Commission (1996) 15 ACLC 1; 22 ACSR 379, it was held that that regulation was invalid and that the publication of that Form was neither sufficient nor necessary for the administrator’s report which is required by s 439A(4), Corporations Law.

230 Deputy Commissioner of Taxation (Cth) v Comcorp Australia Ltd (1996) 14 ACLC 1616 at1646; 21 ACSR 590 at 624.231 Deputy Commissioner of Taxation (Cth) v Comcorp Australia Ltd ibid.232 Corporations Regulations, reg 5.3A.02. This regulation is confined to transactions such aspreferences and uncommercial transactions which are liable to be avoided under s 588FE as well

on these matters or any other information which is material to thedecision of the creditors may render either the deed or the resolutionrequiring its execution liable to be set aside.233 However, whenscrutinising an administrator’s report, for the purpose of assessing itsadequacy, regard needs also to be had to the limited time which, inthe ordinary course, is available for its preparation.234 The report isconsidered at the meeting of the company’s creditors which isconvened to decide the company’s future.235

This procedure may be contrasted with the much more complexcourse of propounding a scheme of arrangement which is the onlyoption which may be available to a receiver for effecting somecompromise or other arrangement between a company and itscreditors. Broadly speaking, the propounding of a scheme ofarrangement involves:

• the drafting of the scheme document itself together with anexplanatory statement;

• submitting those draft documents to the ASIC for consideration236

and, where the company is a listed public company, to the StockExchange;237

• applying to the court for orders convening a meeting or meetingsof creditors to consider the proposed scheme;238

• convening and conducting meeting or meetings of creditors con-sistently with the court’s order; and

• applying for approval of scheme if the statutory majority of 50 percent in number representing 75 per cent in value of the claims ofcreditors who vote is attained.239


as proceedings under s 588FH (transactions which relieve related parties of obligations underguarantees) and s 588FJ (floating charges granted within the 6 months preceding thecommencement of the liquidation). However, the regulation does not relieve the administratorof the general law obligation to report all information which is material: see n 229 as well asPhosphate Co-operative Co of Australia Ltd v Shears [1989] VR 665 at 689; (1988) 6 ACLC 1046 at1065; 14 ACLR 323 at 345 and Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707including the prospect of recovery proceedings against the company’s directors for breach oftheir duty to prevent the company from engaging in insolvent trading: s 588G, Corporations Law.233 Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 but the court must be satisfiedbefore exercising its discretion to do so that such a course would be in the intersts of thecompany’s creditors: Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 14 ACLC 659;19 ACSR 498.234 Hagenvale Pty Ltd v Depela Pty Ltd (1995) 13 ACLC 885; 17 ACSR 139; Deputy FederalCommissioner of Taxation v Comcorp Australia Ltd (1995) 13 ACLC 1671; Deputy Commissionerof Taxation (Cth) v Comcorp Australia Ltd (1996) 14 ACLC 1616 at 1646; 21 ACSR 590 at 624.235 Section 439A, Corporations Law.236 Section 411(2)(a), Corporations Law.237 ASX Listing Rules.238 Section 411(1), Corporations Law.239 Section 411(4), Corporations Law.


Beyond the procedural simplicity which attends the promotion ofa deed of company arrangement as opposed to a scheme ofarrangement, there are at least two further considerations whichmilitate in favour of a deed of company arrangement:(a) it may involve discriminatory treatment amongst the creditors

who are bound by its terms without the need to observe the“class rules” which would apply if the proposed compromisewere to be effected by way of a scheme of arrangement; and

(b) irrespective of whether they are bound by the terms of the deedof company arrangement, both some secured creditors as wellas the owners or lessors of property in the company’spossession may be restrained from exercising their respectiveproperty rights.

As to the class rules, they impose upon the promoter of a schemethe obligation to determine whether those creditors who are to bebound by it should be divided into more than one class for thepurpose of the meetings which are to be convened to consider thescheme. A failure to ensure that all the classes of creditors who are tobe bound by the scheme have an opportunity to meet separately toconsider it will result in the scheme not being approved on the basisthat in that circumstance the court cannot be satisfied that the schemehas been agreed to by the requisite majority of creditors.240 Againstthe need to ensure that some creditors are not improperly overborneby a majority, there is the consideration that “to break creditors upinto classes, however, will give each class an opportunity to veto thescheme, a process which undermines the basic approach of decisionby a large majority and one which should only be permitted if thereare dissimilar interests related to the company and its scheme to beprotected”.241

When determining whether the creditors of a company who are tobe bound by a scheme should be divided into more than one classregard is primarily had to the observations of Bowen LJ in ReSovereign Life Assurance Co v Dodd 242 where his Lordship said:243

“It seems plain that we must give such a meaning to the term‘class’ as will prevent the section being so worked as to result inconfiscation and injustice, and that it must be confined to thosepersons whose rights are not so dissimilar as to make it

240 Re Hellenic and General Trust [1976] 1 WLR 123; Nordic Bank plc v International HarvesterAustralia Ltd [1983] 2 VR 298; (1983) 1 ACLC 889; 7 ACLR 796; Re Gazelle Constructions Pty Ltd(1984)2 ACLC 680; 10 ACLR 140; Re Brian Cassidy Electrical Industries Pty Ltd (1984) 2 ACLC628; 9 ACLR 140; Re Bond Corporation Holdings Ltd (1991) 9 ACLC 1264; 5 ACSR 304; ReCrusader Ltd (1995) 13 ACLC 1008; 17 ACSR 336.241 Nordic Bank plc v International Harvester Australia Ltd [1983] 2 VR 298 at 301; (1983) 1ACLC 889 at 893; 7 ACLR 796 at 799; Re Crusader Ltd (1995) 13 ACLC 1008; 17 ACSR 336.242 [1892] 2 QB 573.243 Ibid at 583.

impossible for them to consult together with a view to theircommon interest”

and those made by Street J (as his Honour then was) in Re Jax MarinePty Ltd 244 who said:245

“It seems to me to be difficult, to the point in a practical sense ofbeing impossible, to attempt on a preliminary summons under s 181246 to do other than classify creditors in a broad andobjective manner. If one finds a group of creditors whose claimsagainst the company are of a precisely similar legal characterthen prima facie they should be regarded as a class. It is similar-ity of rights that underlies the test enunciated by Bowen LJ.”

More recently Owen J in Re Bond Corporation Holdings Ltd 247 putit thus:248

“In determining classes of creditors, the court must balance thedanger of a compromise being forced on dissenting creditors bya majority, against the danger of a minority of creditors havingthe power to veto the scheme. The court must be satisfied thatthe result of a meeting is likely to reflect properly the views ofthe creditors concerned. In approaching its task, the court mustidentify the legal character of the rights and obligations of thecreditors against the company and must assess the way in whichthose rights and obligations will be affected in theimplementation of the scheme. Creditors whose legal rights andobligations (as understood) are so dissimilar to those of othercreditors that it would be impossible for them to consulttogether with a view to their common interest must be treated asa separate class.”

In applying these principles, the environment of the scheme willbe relevant,249 so it is pertinent to contrast the rights which creditorsof the company would enjoy if the scheme were approved and thoserights which they would have otherwise. Thus, in the case of ascheme between a company and its creditors where the alternative tothe scheme is liquidation the rights of the creditors to be bound bythe scheme may be contrasted with their rights on the liquidation ofthe company. Accordingly, creditors such as employees250 who mayenjoy preferential entitlements in the distribution of the company’sassets on its liquidation must be constituted as separate classes from


244 [1967] 1 NSWR 145; (1966) 85 WN (NSW) 130.245 Ibid at 149, 135.246 The equivalent provision in the Companies Act 1961 to s 411, Corporations Law.247 (1991) 9 ACLC 1,264; 5 ACSR 304.248 Ibid at 1,274, 317: cited with approval in Re First Phoenix Consolidated Ltd (in prov liq)(1992) 10 ACLC 584.249 Re Linter Textile Corporation Ltd [1991] 2 VR 561; (1990) 8 ACLC 1089;4 ACSR 99; Re BondCorporation Holdings Ltd (1991) 9 ACLC 1264; 5 ACSR 304.250 Section 556(1)(e), (f), (g) and (h), Corporations Law.


creditors who enjoy no such preferential entitlements for the purposeof the meetings to be convened to consider the proposed scheme.251

Similarly, if the proposed scheme would result in the claims of somecreditors either being subordinated to the claims of other creditorswith which the claims of those firstmentioned creditors would rankpari passu on a liquidation or being extinguished, the creditorswhose claims are subordinated or extinguished should meet as aseparate class.252

An assessment also needs to be made as to “the way in which (the)rights and obligations (of those to be bound by the scheme) will beaffected in (its) implementation”.253 So either an abrogation of therights which some creditors would otherwise enjoy or the conferringof particular rights or privileges on one or a number of them mayrequire that they constitute a separate class for the purposes of themeetings to consider the scheme.254

Against those well settled rules it appears that, at least in someinstances, a deed of company arrangement may discriminateamongst creditors without it being necessary for them to meetseparately to consider whether it should be adopted as the basis forregulating the company’s future. In Lam Soon Australia Pty Ltd vMolit (No 55) Pty Ltd 255 an appeal was allowed from Molit (No 55) PtyLtd v Lam Soon Australia Pty Ltd 256 (which was followed in ReAndersens Home Furnishing Co Pty Ltd 257 and M & S ButlerInvestments Pty Ltd v Granny May’s Franchising Pty Ltd) 258 to theextent that it was held in the Full Court that the trial judge hadwrongly avoided a deed of company arrangement on the ground thatit was unfairly discriminatory to one of the company’s creditors bycomparison with the others of them. The discrimination for which thedeed provided was based upon a consideration of whether thecompany wished to continue a commercial relationship with the

251 In Re First Phoenix Consolidated Ltd (in prov liq) (1992) 10 ACLC 584, it was suggested thatthere was no such general rule. However, the observations of Cooper J are obiter and must beread in the context of the concession which was made in that case in favour of those unsecuredcreditors who would have enjoyed preferential treatment had the company been wound up.252 Re Gazelle Constructions Pty Ltd (1984) 2 ACLC 680, 10 ACLR 140.253 Re Bond Corporation Holdings Ltd (1991) 9 ACLC 1264 at 1,274; 5 ACSR 304 at 317.254 Re Bond Corporation Holdings Ltd ibid. In Re Direct Acceptance Corporation Ltd (1987) 5ACLC 1,037 it appeared that approximately one-third of the members of the company whowere to be bound by the scheme would be adversely affected by reason of their shareholdingsbecoming susceptible to a liability for capital gains tax. This was not expressly found to besufficient to constitute those members as a separate class although as some of them whoattended the meeting voted against the scheme and a large number did not participate in themeeting at all it was a ground for the court exercising its general discretion to withholdapproval of the scheme.255 (1996) 14 ACLC 1734; 22 ACSR 169.256 (1996) 14 ACLC 366; 19 ACSR 160.257 (1996) 14 ACLC 1710.258 (1997) 24 ACSR 695.

relevant creditor with the benefit of the discrimination accruing tothose with whom the company wanted to continue to deal. Inparticular, it provided for the landlords of those premises which thecompany wished to continue to occupy to receive 100 cents in theone dollar on their claims whereas the landlord of the shop which thecompany proposed to vacate was to receive a dividend at somelesser rate. On appeal, such a discriminatory arrangement was held tobe permissible subject to the following caveat.259

“However, where as in this case a deed which is proposed willdiscriminate between creditors and there is no community ofinterest between the groups, it is important that an administratorexamine the proposal carefully and critically in order to ensurethat the less advantaged group is not unfairly prejudiced. Thatmust involve at least that the administrator take steps to ensure,so far as it is possible, that the deed is no less beneficial to allcreditors than liquidation is likely to be.”

It is also possible to discriminate against the interests of, say,related creditors on the basis that they receive no entitlements underthe deed of company arrangement but neither are their claims againstthe company released.260

As to the regulation of the rights of secured creditors and ownersor lessors of property in the possession of the company after it hasexecuted a deed of company arrangement, a secured creditor’s rightsas such are affected by a deed only if it so provides and if thatcreditor voted in favour of the resolution in consequence of whichthe company executed the deed.261 That is also the case for owners orlessors of property which is in the company’s possession and theexercise of their rights in relation to that property.262 However, theseexceptions in favour of secured creditors and the owners or lessors ofproperty in the possession of the company only apply to non-curialproceedings such as, in the case of a secured creditor, theappointment of a receiver. They do not apply “in respect of courtproceedings to enforce their rights as secured creditors or owners orlessors, where those persons are creditors with claims arising on orbefore the day specified in the deed, and where those claims areassociated with the security or the property”.263 Nor do they apply to


259 (1996) 14 ACLC 1734 at 1749; 22 ACSR 169 at 184.260 Employers’ Mutual Indemnity (Workers Compensation) Ltd v JST Transport Services Pty Ltd(1997) 23 ACSR 197.261 Section 444D(2), Corporations Law.262 Section 444D(3), Corporations Law.263 J & B Records Ltd v Brashs Pty Ltd (1995) 13 ACLC 458; 16 ACSR 285 at ACLC 466; ACSR 293which was followed in Roder Zelt-Und & Hallenkonstruktionen GMBH v Rosedown Park Pty Ltd(1995) 13 ACLC 776; 17 ACSR 153; Hamilton v National Australia Bank Ltd (1996) 14 ACLC1202; 19 ACSR 647 and Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 14 ACLC 1734;22 ACSR 169.


a monetary claim made in court proceedings either which is securedor which represents the rent or some other payment which is liable tobe made by the company on account of property which it uses oroccupies.264

Moreover, the court, on the application of the deed’sadministrator,265 may restrain a secured creditor from realising itssecurity or otherwise dealing with it except as the court mightpermit266 and subject to such conditions as the court imposes.267 Thepower to restrain a secured creditor from exercising its rights doesnot extend to a chargee who has security in respect of the whole, orsubstantially the whole, of the company’s property268 and whocommenced the enforcement of that security in respect of all of thecharged property prior to the commencement of the administrationor during the decision period.269 Further, the court may only restrainthose secured creditors who are amenable to its orders if it is satisfiedthat should the creditor enforce its security there would be a materialadverse effect on the purposes of the deed270 and that the interests ofthe secured creditor will be adequately protected.271

The owner or lessor of property which is in the company’spossession may also be restrained by the court, on the application ofthe deed’s administrator,272 from taking possession of or otherwiserecovering that property.273 For the court to make such an order itmust be satisfied of the same matters as regulate the exercise of itspower to restrain a chargee from exercising its security rights.274

264 Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 14 ACLC 366; 19 ACSR 160 andLam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 14 ACLC 1734; 22 ACSR 169.265 Section 444F(7)(b), Corporations Law.266 Section 444F(2), Corporations Law.267 Section 444F(6), Corporations Law.268 See n 13 for a discussion of the meaning of the phrase “the whole, or substantially thewhole, of the company’s property”.269 Section 444F(2) and 441A(3), Corporations Law.270 Section 444F(3)(a), Corporations Law.271 Section 444F(3)(b), Corporations Law. The protection of a secured creditor’s rights may notmerely involve preserving those tangible assets of the company to which its charge relates or afund in lieu thereof but also those choses in action which form part of its security even thoughto do so involves liquidating the company rather than resolving its affairs under a deed ofcompany arrangement: Hamilton v National Australia Bank Ltd (1996) 14 ACLC 1202; 19 ACSR647.272 Section 444F(7)(b), Corporations Law.273 Section 444F(4), Corporations Law.274 Section 444F(5), Corporations Law.

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Overview of Insolvency laws: Voluntary Administration and ... · Voluntary Administration and Receiverships in Particular Richard Fisher* SUMMARY Voluntary administration and receivership

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