Receivers are commonly appointed by secured parties on the occurrence of an event of default by the grantor of the security interest in respect of the relevant transaction documents. The Court also has the power to appoint receivers in various circumstances which power was recently exercised on application by a trustee of a debenture trust deed even though there had been no default event.
The decision of Rares J in the matter of Australian Executor Trustees Limited v Provident Capital Ltd demonstrates the broad and discretionary power of the Federal Court to make orders under section 283HB of the Corporations Act, including the appointment of a receiver to property constituting security for the debentures, on application by a trustee or ASIC.
Background
Australian Executor Trustees Limited (AET) was appointed the trustee of the relevant debenture trust deed dated 11 December 1998.
At the date of the June 2012 hearing, Provident, a mortgage fund manager and non-bank lender, owed approximately $128 million to its debenture holders, repayable at various dates. The debentures, regardless of the times of their issue, maturity or interest rate, ranked equally in priority of security in proportion to their face value if they were not paid in full.
There was no suggestion that Provident was in default under the terms of the debentures (meaning that it had not missed any payments to date) or the trust deed. AET brought the application because of its concern regarding Provident's ability to repay all debenture holders equally as and when they were due for payment.
Australian Executor Trustees Ltd v Provident Capital Ltd
The Court accepted Provident was presently solvent. One of the key issues that emerged for the Court was that the Court expected that there would be deficiency in Provident's balance sheet in the future.
Section 283HB gives the Court the ability to appoint a receiver of any property constituting security for debentures on application of the trustee (for the debenture holders) or ASIC (among other powers). In deciding to make such an order, the Court must have regard to:
- the ability of the borrower to repay the amount deposited or lent as and when it becomes due,
- any contravention of section 283GA by the borrower,
- the interest of the borrower's members and creditors, and
- the interest of the members of each of the guarantors.
Provident argued the Court should exercise its power in accordance with the approach taken in the case of Re New York Taxi Cab Limited; Sequin v The Company [1913] where the court in that instance found that despite the fact future payments would not be able to be made, the assets were not presently in jeopardy (in the sense there was no risk of them being seized or taken to meet claim) and the company continued to be a going concern.
Rares J indicated this did not reflect the proper approach to construction of the power in section 283HB, which power was remedial and protective of the interests of those who have lent money to corporations on debentures. The Court noted there are no constraints in the exercise of the power of the Court under that section to appoint a receiver other than to have regards to the considerations in section 283HB(2).
In this instance, the Court, in making its determination, balanced the need to safeguard the interest of the debenture holders against the impact the appointment of a receiver would have in relation to the ongoing business of Provident. The Court noted that there was no evidence to suggest that Provident had not realised any of its assets other than in an appropriate way.
The Court considered whether Provident had the ability to repay the amount deposited or lent as and when it became due and the interest of Provident's members and its creditors. It was noted that Provident needed a moratorium to suspend its liability to pay debenture holders. As a consequence, the Court formed the view that Provident would not be able to pay the amounts deposited or lent to it as and when these became due in the next 12 months and so the order to appoint receivers was made.
Conclusion
This case illustrates that it is not enough for an issuer of debentures to be a going concern and to be currently meeting its repayment requirements under the terms of its debentures.
If either the trustee or ASIC develop concerns about the financial health of a debenture issuer and doubts about its future ability to repay debenture holders as agreed, they can ask the Court to exercise its discretionary powers to appoint a receiver.
Issuers of debentures should be aware of this possibility, and of the Court's willingness to exercise these powers, as has been demonstrated by this case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
