15 July 2015
In this issue:
- The nature and operation of section 420A(1)(a), Corporations Act.
- When does property have a “market value” for the purposes of the section?
- The statutory obligation of the receiver to undertake reasonable care to sell charged assets that have a market value for “not less than market value.”
- Recent observations of the Victorian Court of Appeal on the operation of section 420A.
Pursuant to section 420A(1)(a), Corporations Act when exercising a power of sale over a company’s charged or mortgaged assets that have a market value the receiver is obliged to take all reasonable care to sell the property for “not less than market value.”
The section is aimed at providing a level of protection to the company in receivership and those associated with it, such as guarantors of the company’s debt, as the receiver embarks upon disposal of the company’s charged assets.
Understandably both the receiver and the company in receivership will be concerned with the manner in which this statutory duty has been interpreted and applied by the courts. In this regard, the courts have been concerned with two fundamental questions:
- When sold did the property have a “market value” so as to bring into operation section 420A(1)(a)? Note: In the event that property is found not to have a market value, section 420A adopts a different approach to the receiver’s duty, namely, that the receiver take all reasonable care to sell the property “for the best price that is reasonably obtainable.”
- In the event that the property has a market value did the receiver undertake reasonable care to sell the property for “not less than market value”?
It will be useful to consider these issues in turn.
When sold did the property have a market value?
To address this question the courts have sought to provide a meaningful construction of the phrase “market value.” One such formulation, which has been employed in a number of subsequent cases, can be found in GE Capital Australia v Davis and Ors (2002) NSWSC 1146.
In the case the court recognized that section 420A as drafted requires a distinction to be drawn between property having a “market value” as opposed to there being a market for the property (see para. 116). The fact that property has been sold in the market does not of itself mean that at the time of sale the property possessed a market value. As to whether property had a market value at point of sale the court observed that much “depends on the degree of certainty with which value is ascertainable by reference to events in a market.”
Essentially the court recognised that it is the events, activities or experience in a market that provides the means for determining whether particular property existing within that market has a definite or determinable market value. For example, a parcel of shares in a company listed on the ASX has a definite or determinable market value that can be ascertained at any point in time by reference to the listing that operates in that market. On the other hand with particular property a point may be reached “where market experience does not yield a market value with sufficient certainty to be used as an integer.” (para 116).
In the case itself the court was required to determine whether the main items on the company’s production line had a market value. The court found that the items under review had such special characteristics of use, location, age, history and adaption that they did not have a market value in the sense employed by section 420A(1)(a). In that event a duty arose to take care to sell the property for the best price that was reasonably obtainable, as opposed to a price “not less than market value.” In the case the court found that the best price that was reasonably obtainable was achieved, having regard to the circumstances existing when the property was sold.
Did the receiver exercise reasonable care to sell the property for “not less than market value”?
The receiver having determined, often with expert assistance, that the property involved has a market value, and being informed as to its value before selling it, the remaining issue for determination under section 420A(1)(a) is whether the receiver has taken reasonable steps to sell the property for “not less than market value.”
On this issue the courts have consistently recognised that under section 420A(1)(a) the role of the court is not to ascertain whether market value was realised. Rather the task of the court is to assess the process that the receiver has undertaken in selling the property.
As recently stated by the Victorian Court of Appeal in Boz One Pty Ltd v McLellan (2015) VSCA 68, 23/4/2015, “….it is not necessary for the court to decide what actually was the market value of the property in order to find that s 420A(1)(a) has been breached – all that the court needs to decide is that the process that was followed was not one where all reasonable care was taken to sell the property for its market value, whatever that market value might be.”(para.167).
This is not to say that failing to obtain the estimated market value is without consequences. As the Court of Appeal went on to say, “if it is proved that the price obtained at sale was substantially below the market value, this may be evidence that proper steps were not taken.” (para.168).
A number of authorities provide useful examples of failure to implement reasonable processes of sale. For example, in Keith William Skinner v Jeogla Pty Ltd & Ors (2001) NSWCA 15, 20/2/2001, a receiver was held to be in breach of section 420A(1)(a) in failing to identify and address the correct market when attempting to realise the market value of the property. In Investec Bank (Australia) Ltd v Glodale Pty Ltd & Ors (2009) VSCA 97, 14/5/2009, the court concluded that failure to appoint a non-local agent without knowledge of the market in which property was sold meant that reasonable care had not been taken to ensure that market value was obtained.
A company receiver appointed under security held by a mortgagee or chargee is not appointed to manage the company’s affairs for the benefit of the company in receivership. The receiver’s primary duty is to realise the company’s charged or mortgaged property with a view to satisfying the secured creditor’s debt.
Understandably, the manner in which the receiver has discharged his or her primary duty to exercise the power of sale in the best interests of the secured creditor has potential for close scrutiny and criticism from the company in receivership and those associated with it, such as guarantors of the company’s debt.
With the introduction of section 420A into the Corporations Act a more rigorous duty has been placed on receivers in relation to the power of sale of a company’s charged or mortgaged assets than existed under the general law. The section has proved to be effective in providing companies with additional protection, while preserving the receiver’s primary duty to the secured creditor.