Receiver’s duty: taking all reasonable care to obtain not less than market value

Under section 420A(1)(a) of the Corporations Act 2001 (Cth), when selling property of a corporation that has a market value, a controller must take all reasonable care to sell the property for not less than its market value.

In the recent case of Boz One Pty Ltd v McLellan [2015] VSCA 68, no selling agent was appointed and there was no advertising or auction. Despite this, the Full Court held the receiver had taken all reasonable care to sell the property for not less than its market value.

Background

A company IPS had two 50% shareholders: Boz One (a company controlled by a Mr Rolfe) and IPM (a company controlled by a Mr Miller).

Wallabah (another company controlled by Mr Rolfe) made loans to IPS. There was uncertainty regarding the amount and the terms of the debt. IPS’ records stated that the Wallabah debt was $671,835.

The secured creditor of Boz One and Wallabah appointed a receiver and manager to Boz One’s shares in IPS and to the debt owed by IPS to Wallabah.

The receiver sold Boz One’s 50% shareholding in IPS (for $2.00) and the Wallabah debt owed by IPS (for $499,998) (Sold Assets) to Mr Miller.

As a result of the sale Mr Miller (or his entities) became the sole shareholder of IPS and the Wallabah debt owed by IPS was assigned to Mr Miller.

Complicating factors

The sale was complicated by uncertainty about:

• the existence of sub-leases over land where Boz One conducted its business, undermining the security of its business and future income stream;
• the validity of a charge granted by IPS as guarantor to a third party financier for a loan of $500,000 made to Wallabah; and
• the amount and terms of the Wallabah debt and IPS’ ability to repay it.

The provisions of the IPS constitution were also relevant.

IPS constitution

The 50% shareholder IPM (in effect Mr Miller) had a first right of refusal on any sale of Boz One’s shares in IPS.

For any third party purchaser of Boz One’s shares, there was the risk they would not be able to appoint a director to IPS. Mr Miller had the ability to control the appointment of directors to IPS.

Receiver’s arguments

The receiver argued that a sale on the open market was unsuitable because:

• Each of the complicating factors in combination provided a strong disincentive for any third party purchaser to make an offer.
• There was a risk that a sale on the open market would not attract any bids or only nominal bids.
• In either an open market process or a sale by private negotiation, Mr Miller was in a unique position having a first right of refusal.
• If no bids were received on the open market, Mr Miller was likely to make a nominal offer to purchase the shareholding and, if only nominal bids were made, he was only likely to match the highest nominal bid.
• The complicating factors created a market environment in which the Sold Assets had value only for Mr Miller.

Scope of duty

The Full Court summarised the principles applying to the duty under section 420A(1)(a):

• The duty is not defined by prescriptive steps that must always be undertaken when exercising power of sale. Rather, the scope of the duty is defined by a general obligation to ‘take all reasonable care’.
• What must be done to comply with this general obligation will depend on the circumstances, including the nature of the assets being sold and the circumstances of the mortgagor.
• While failure to take a particular step – such as an open market sale process – may constitute a breach in some cases, the failure may not constitute a breach in others.
• In deciding whether a controller’s failure to take a particular step constitutes a breach, that step should not be considered in isolation. Rather, the court should consider the controller’s conduct as a whole in the context in which the controller was required to make decisions about which steps to take and which steps not to take. The controller’s conduct must be looked at holistically by reference to the dynamic circumstances that the controller faced at the relevant time.

Holistic approach

The Full Court held the receiver was placed in an extraordinarily difficult position by the convergence of several interdependent factors that adversely affected the value of the Sold Assets. In these circumstances the receiver was required to adopt an integrated legal and commercial approach to those factors rather than addressing each of them in isolation.

In that context, the receiver was justified in concluding that an open market sale process, as opposed to a private sale to Mr Miller, had greater potential to create legal and commercial obstacles to achieving a sale price that was not less than market value.

The Full Court said the facts of the case were not comparable to other cases. The following circumstances were particularly relevant in Boz One:

• The Sold Assets were shares in a private company that effectively operated as a partnership. The receiver understood the true nature of the Sold Assets and also understood that their true value was affected by unique circumstances relating to the complicating factors. The market for the Sold Assets did not have the distinct and well-established features of the real estate market.
• It would have been unrealistic to treat Boz One’s IPS shares and the Wallabah debt as assets that operated in independent markets and that could be sold independently of each other. The receiver acted reasonably in assessing that the best way to maximise the value for the assets was to sell them as a bundle to Mr Miller.
• The receiver did not engage experts to advise on the markets for the Sold Assets, or to conduct a sale of the assets. The Full Court doubted whether any expert existed who had relevant expertise and experience to properly assist the receiver without duplicating the detailed examination undertaken by the receiver of IPS’ circumstances.
• The mortgagors argued that the receiver would have achieved a higher sale price for the shares if they had appointed a local agent and put the shares on the open market with a proper marketing campaign. The Full Court said there is a crucial difference between the sale of land – which has a distinct and well-established market in respect of which local knowledge by a real estate agent is very important – and the sale of shares in a private company, which is beset with multiple problems for which local knowledge would not provide any material assistance.
• The receiver had no security over and could not control IPS or its assets and business. As a practical matter the receiver was dependent on Mr Miller and Mr Rolfe (who had conflicting interests) for vital information about the third party charge.
• The receiver had obtained independent legal advice on key issues, including the prospects of success of a court action to challenge the validity of the charge and the cost and duration of such an action.
• The receiver also considered matters relevant to the Wallabah debt, including the discounting of the debt and the solvency of IPS.
• The receiver had obtained current valuations shortly before the sale of the Sold Assets.
• Significantly, Mr Miller was in the position of a unique purchaser of the Sold Assets due to the provisions in the IPS constitution.

Intermingling of Sold Assets: no straightforward answer

At the trial the mortgagors were represented by the same counsel and no issue was raised regarding the apportionment of the sale price, in particular the value of $2 attributed to the shares.

On appeal the mortgagors sought to raise issues regarding the intermingling of the sale of Sold Assets. In essence the issue related to whether the receiver could sell property under different securities where the mortgagors and liabilities secured were different.

Leave was not given to pursue the intermingling issue on the appeal because it had not been argued at the trial.

The Full Court commented that the question of whether the sale by receivers of assets belonging to a group of companies that have common owners, directors or other links in a single transaction constitutes a breach of section 420A(1) of the Act does not lend itself to a straightforward answer. Rather, the question involves complex legal issues, which require close analysis of the facts of each case.

If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404.