Australia: Court rejects guarantor's defence and supports Receiver's sale process in section 420A case

This week's TGIF considers the recent NSW Supreme Court decision of Westpac Bank v Raflick Sayah [2015] NSWC 1167, provides comfort to banks and their receivers in that it validated the actions of a Receiver who had obtained expert advice on a sale process and had undertaken a thorough process.

The facts

In short, the bank had provided a facility to Green Alliance Pty Ltd which was supported by a personal guarantee from a director. The business of Green Alliance had been the provision of services and supply and installation of household and commercial energy efficient products (including pink bats and energy efficient fluorescent lamps). Green Alliance's business was severely impacted by the Federal government's decision to terminate the Federal Home Insulation program in February 2010.

Pursuant to its securities, the bank appointed receivers and managers to Green Alliance and the receivers and managers proceeded to realise the assets of the company

The claims

The bank sought to recover a shortfall arising out of the facility from a director under a personal guarantee.  In defence, the director raised several cross claims including a claim that the bank's receivers had breached his duties (including a breach of section 420A of the Corporations Act) to both Green Alliance and guarantor in that the receivers had sold the fluorescent lamps, energy efficient showerheads and pink batts for less than true market value or at prices not being the best prices reasonably obtainable, having regard to the circumstances.

Court's decision

The Court rejected all of the claims by the director. In the course of its decision it confirmed the following.

While accepting there is some debate in the authorities, the Court felt that the better view is that section 420A does not gives a guarantor a direct right against a defaulting receiver;

In confirming the receivers had met their general law and statutory duties, the  Court considered the following:

  • The business of Green Alliance was no longer a going concern;
  • The fact that the director had, before the receiver's appointment, sold stock himself through GraysOnline;
  • The nature of the stock (primarily, small items of lighting stock in large volumes);
  • The receivers had sought advice from the National Valuer of GraysOnline as to the most effective means of sale of the stock; 
  • The receivers had obtained a valuation of the stock;
  • Based on advice, the receivers determined that an online auction was the most cost effective means of sale, with a timeline of two weeks with a further three weeks to allow collection of sold items;
  • GraysOnline carried out the online auction and advertised it as follows: emails to 50 participants in the energy product sector, advertised the auction on their website, notified 23,840 customers in the Building Material category; sent an email to 80,599 general customers and advertised the auction in the Sydney Morning Herald;
  • Representatives of GraysOnline gave evidence that there was healthy interest in the auction given the number of online visitors and bids; and
  • The director gave evidence himself that there was healthy interest in the auction and that it was well conducted.

Comment

The case does not change the law in relation to section 420A and the duties of receivers. It confirms the importance of a receiver obtaining advice on the appropriate means of sale of an asset(s), particularly if they are unusual assets or items of stock, and then following that advice in the sale process itself. 

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.

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