Receivership appointments: resolving doubts

Lately, there seems to be a few more receivership appointments about than in recent years. Given the current economic outlook and the heightened financial pressure faced by businesses, we expect that this increase in receivership appointments, which coincides with a rise in activity in the restructuring and insolvency space, is likely to continue in the short to medium term.

It's inevitable that we'll see some scrutiny, or doubt, as to the validity of these appointments, so a brief review is due on s. 418A of the Corporations Act 2001 (Cth). This section empowers the Court to declare whether or not a controller is validly acting.

The section provides that, where there is doubt on a specific ground, whether the purported appointment of a person as receiver of property of a corporation is valid, the receiver, the corporation or a creditor may apply to the Court for an order declaring whether the appointment is valid.

The 2023 case of National Australia Bank Ltd v Redside Pty Ltd (receivers and managers appointed) [2023] VSC 145 contains a helpful account of the key principles.

The bank held a mortgage over Redside's leasehold interest in Crown land. It also held a charge over all Redside's assets and undertaking. Oddly, the mortgage did not contain the power to appoint a receiver. The charge contained such a power but there was some doubt as to the validity of the charge in circumstances where the relevant legislation required prior consent of the Minister to the charge and such consent had not been obtained. After default by Redside under its facilities, the bank appointed receivers pursuant to the charge. To ensure certainty, the bank immediately sought a Court order declaring the validity of the appointment because of doubt whether the absence of Ministerial consent to the charge precluded the appointment of the receivers.

Generally speaking, most s. 418A cases are brought as challenges by the company to the appointment of receivers. Once the company has established doubt on specific grounds about the validity of the appointment, the burden of proof then falls on the secured creditor to justify the appointment.

There are also cases where receivers themselves have sought to confirm their appointments. In addition, and as noted above, the section grants creditors standing to apply as well.

The Court does not have a general discretion to declare an appointment valid or to do so because it is just and convenient. Instead, the Court has to be satisfied that the doubt over the appointment is resolved in a way that confirms the validity of the appointment.

In Redside, the Court recognised the doubt raised by the bank as to the validity of the appointment. It noted that Redside was the party obliged under the relevant legislation to obtain Ministerial consent to the charge and not the bank. The Court considered that it would be adverse to the bank as chargee to hold Redside's failure against the bank and invalidate the charge. The Court also noted that the legislation did not provide that a charge granted in breach of the requirement for consent is void or a nullity. Accordingly, the Court was satisfied that any doubt raised by the absence of consent to the charge was resolved in favour of the validity of the appointment.

The Court also found that Redside was clearly in breach of its facilities and that the bank was entitled to enforce its securities. The Court stated that, had it not been satisfied under s. 418A, it would have appointed the receivers under s. 37 of the Supreme Court Act 1986 (Vic) in any event. This section entitles the Court to appoint a receiver if it considers it just and convenient to do so.

Redside is a good example of the value of a secured creditor recognising the potential for doubt over its appointment of receivers and taking simultaneous steps via s. 418 to have the doubt resolved and the appointment validated. Similarly, it is a reminder to secured creditors to thoroughly consider, prior to an appointment, the enforceability and validity of their security documentation such that a robust enforcement strategy can be pursued.