Director Beware: Court Joins Director To Receivership Challenge And Orders Security To Indemnify Company - Insolvency/Bankruptcy

This week's TGIF examines a decision where the Court ordered a director, who caused a company to bring proceedings challenging a receiver appointment, to be joined to the claim and indemnify the company for its exposure to a costs order.

Key Takeaways

Where a director causes a company to bring proceedings to challenge the appointment of a receiver, that director may be required to indemnify the company for the risk of an adverse costs order.
The rationale for the indemnity is to protect the secured party and to ensure that the secured assets are not depleted if the challenge is unsuccessful and the company is exposed to a costs order.
The director should also be joined to the proceeding as any declaration on the appointment validity will have a direct effect on their powers and rights as a director.

What happened?

In November 2020, Tred Nominees Pty Ltd (the Company) refinanced a loan through Oak Capital Wholesale Fund Pty Ltd (Oak). The loan was supported by various security documents which, among other things, provided Oak with the right to appoint a receiver on default.

The Company defaulted and Oak appointed receivers over the secured property. Two weeks later, the Company, through its director, filed an application seeking a declaration that the appointment was invalid. Grounds relied on included a failure by Oak to provide warning of the appointment, serve a notice of default in advance of the appointment or allow a reasonable time for the loan to be repaid.

Oak countered with its own application which sought orders that the director be joined as a defendant to the proceeding and indemnify the Company for any costs which the Company might be ordered to pay Oak in the proceeding.

This decision of the Court concerned Oak's application which, the parties agreed, should be determined prior to the final hearing.

Joinder application

The Company, through the director, argued there was no basis for joinder and that a director should only be joined where a receiver applies for a declaration that their appointment is valid.

His Honour rejected this argument and observed that nothing in the case law should be read to limit the circumstances in which a director can be joined. Citing the decision of Edelman J (as his Honour then was) in Jones v Miami Waterfront Developments Pty Ltd [2012] WASC 483, the Court noted the real test for joinder is the effect of the orders upon that third party.

With that in mind, the joinder was allowed on the basis that:

a determination of whether the receivers were validly appointed would have a direct impact on the powers of the director; and
the implication of a contention that the appointment was invalid is that the director's powers are unaffected.

Indemnity application

Oak contended that an indemnity from the director to the Company against any liability for costs was required, unless the Company could demonstrate that the assets of the Company were not imperilled by the conduct of the litigation. It relied on authority which explained the indemnity was for its benefit in that, should it be successful and obtain a costs order against the Company, there was no risk that assets subject of its security would be depleted.

The Company, through its director, led evidence to demonstrate that the equity in the secured property was sufficient to cover any costs liability. However, a valuation was tendered which called into question the level of equity and this uncertainty, together with the lack of any other evidence as to the financial position of the Company, weighed in favour of Oak.

As such, the director was ordered to provide an indemnity to the Company in respect of its potential exposure to an adverse costs order and to underpin that indemnity with appropriate security.

Comment

A challenge to the appointment of a receiver is not unusual and the courts may see an uptick in such applications given the current financial climate. This decision should provide comfort to debenture holders that, if validity is called into question, a director who places secured property at risk through such action can be ordered to provide an indemnity to the company for adverse costs orders – and should be joined to the proceeding.

It is also worth noting that, in such a case, the debenture holder is not required to provide evidence of what its costs will likely be. Such an estimate is not a prerequisite for an indemnity by a director in favour of the Company (like in a conventional security for costs application).

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.