423 not as easy as ABC

In a decision delivered last week, the Federal Court of Australia has rejected a bid by a major creditor for an inquiry into the conduct of the receivers and managers (Receivers) of Griffin Coal Mining Company Pty Ltd (Griffin).

The relevant factual background included that:

1. Pursuant to their appointment the Receivers, as agents of the company, were obliged to perform and observe the obligations of Griffin under long-term coal supply agreements (CSAs) that the company made with each of Bluewaters Power 1 Pty Ltd and Bluewaters Power 2 Pty Ltd (collectively, Bluewaters Power).
2. The Receivers later decided that the CSAs were unprofitable, adversely affected their ability to realise the secured property over which they were appointed and therefore limited their capacity to discharge Griffin’s obligations to its financiers.
3. Those financiers (along with the Bluewaters Power parties) were also beneficiaries under the security instruments pursuant to which the Receivers were appointed.
4. As a result of performing the CSAs, the Receivers required funding both from the State of Western Australia and from Bluewaters Power.
5. Under the terms of the security instruments, repayment of Bluewaters Power’s advances were to be made in priority to repayment of the principal and interest on the loans advanced by Griffin financiers.
6. In the course of the matter, the Receivers had encouraged the former Liquidators of Griffin to disclaim the CSAs under s 568 of the Corporations Act 2001 (Cth) (Act) (which is a power preserved to liquidators).
7. Those liquidators were ultimately replaced with new Liquidators; the Court identified that the Receivers ‘appear[ed] to have played a role in that affair.’

The application was made under a less utilised provision of the Act¹, being section 423, which relevantly provides:

423  Supervision of controller

If:

• it appears to the Court or to ASIC that a controller of property of a corporation has not faithfully performed, or is not faithfully performing, the controller’s functions or has not observed, or is not observing, a requirement of:
• in the case of a receiver—the order by which, or the instrument under which, the receiver was appointed; or
• otherwise—an instrument under which the controller entered into possession, or took control, of that property; or
• in any case—the Court; or
• in any case—this Act, the regulations or the rules of court; or
• a person complains to the Court or to ASIC about an act or omission of a controller of property of a corporation in connection with performing or exercising any of the controller’s functions and powers;

the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so inquires, the Court may take such action as it thinks fit.”

The questions that flowed from the dispute included whether there was a sufficient basis for ordering an inquiry into the Receivers’ conduct and if so, whether an inquiry should be ordered in the exercise of the Court’s discretion.

The assessment of sufficiency includes the following relevant matters²:

1. Section 423 is ‘virtually identical’ to the former s 536 of the Act, which was focussed on the conduct of liquidators likely to attract sanctions for ‘disciplinary reasons’.
2. Section 423 sits within the broader regulatory system established under the Act, which exists to ensure the lawful, orderly and efficient conduct of corporations due to the central significance of corporate conduct for the economic and social life of the nation.
3. Section 423 is not to be construed narrowly or confined by fine distinctions: it is a broadly expressed supervisory jurisdiction over the conduct of a person in control of the affairs of a corporation in circumstances where normal market forces and the exercise by shareholders of their rights are attenuated or non-existent.
4. The interest to be served is the public interest.
5. In conducting an inquiry, the Court is performing a regulatory role. In that setting, it is generally not appropriate to employ section 423 for the purpose of vindicating private rights. For example, a section 423 inquiry should not be the occasion for trying what is really an action for negligence or for other breach of duty by a receiver.
6. While section 423 is not concerned with inquiries which are sought primarily to vindicate private rights, there may be overlap in the supervisory function of an inquiry and the vindication of private rights. The two functions are not mutually exclusive.
7. Where the impugned conduct of requires an assessment primarily of the receiver’s commercial judgment in the context of complex legal and factual issues, such conduct will likely fall outside the range of conduct liable to attract disciplinary sanction or control.

As to discretionary considerations, many factors may be relevant. They include the strength and nature of the allegations, any answer offered by the receiver, other available remedies, the stage to which the receivership has progressed, the likely amounts of money involved, the availability of funds to pay for any inquiry, the likely benefits to be derived from it and the legitimate ‘interest’ of the applicant in the outcome.

The principal issue in the proceedings commenced under section 423, was whether the Receivers’ conduct aimed at bringing about a disclaimer of the CSAs fell within the Receivers’ power, under section 420(1) of the Act, to do all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which they were appointed.

Bluewaters Power argued that:

1. it was not within power because the purposes for which the Receivers were appointed included performance of Griffin’s obligations under the CSAs as secured obligations under the security instruments; and
2. the objectives for which the Receivers were appointed included preservation of the secured property and the CSAs form part of the secured

The Receivers in turn argued that their obligation to perform the CSAs, as Griffin’s agent, depended on the continued existence of the agreements and they had no obligation to preserve the agreements on the proper construction of the security instruments.

The Court ultimately found that the alleged misconduct was of a relatively minor nature, largely turning on points of contractual interpretation which appeared (if they existed at all) to be driven by an honest, albeit mistaken apprehension about the nature of the Receivers’ functions and power and that having regard to all the discretionary factors, the Court was not satisfied that an order for an inquiry was warranted at this time.

However, the Court left open the prospect of the application being reagitated if Bluewaters Power commenced and successfully prosecuted proceedings seeking declaratory or other relief against the Receivers, specifically if findings were made in the course of those proceedings that may warrant disciplinary sanction or inquiry into the conduct of the Receivers.

This case is a useful reminder that in circumstances where stakeholders (including other creditors) may be impacted by the conduct of receivers acting in control of a company’s affairs, but without any ability to directly impact that conduct, there is a helpful investigation provision of the Act which can be applied in appropriate situations, sometimes to significant effect.

¹One such example being a matter MPH was involved in. See link here: Oswal, in the matter of Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) v Carson, McEvoy and Theobald (Receivers and Managers) (No 3) [2013] FCA 357

²As summarised in CIP Group Pty Ltd v Watters in his capacity as receiver and manager of GGPG Pty Ltd [2023] FCA 329 and CIP Group Pty Ltd v Watters in his capacity as receiver and manager of GGPG Pty Ltd [2024] FCAFC 5