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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.
Kemp Strang has received acknowledgements for the quality of
our work in the most recent editions of Chambers & Partners,
Best Lawyers and IFLR1000.
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