In Fatupaito v Harris [2018] NZCA 497, the New Zealand Court of Appeal considered the validity of the appointment of receivers. The Court found that the appointment was invalid – which is a rare. The commentary below sets out valuable lessons for those receivers (albeit very few in number in the current environment) taking appointments outside of the ordinary course.
The spectre of personal liability for trespass and conversion lies for are invalidly appointed. Generally, irrespective of the mode of appointment it always makes sense to understand the rationale behind the appointment and to ensure that the indemnity is cast widely from an entity of substance. Getting it wrong can and has cost careers.
Factual background
A mortgagee held a general security deed from the mortgagor which was registered under the New Zealand equivalent of the PPSA.
Mr Olliver was sole director of the mortgagee and it was under his effective control.
In addition to various properties, the mortgagor also had claims against both Mr Olliver’s estranged wife and a trust in which she had an interest. Following unsuccessful negotiations between companies associated with Mr Olliver and the liquidators of the mortgagor in which, in effect, Mr Olliver had sought to purchase not only the properties but also those claims, the mortgagee appointed receivers to the mortgagor.
The liquidators challenged the validity of that appointment on the basis that it was made for an ulterior purpose.
Decision
The appointment of the receivers was held to be invalid both under the general law and under New Zealand’s PPSA.
As to the general law:
“The power conferred on a mortgagee [to appoint a receiver] must be exercised in good faith for the purpose of obtaining repayment and secondly, that,
As to whether some other purpose has to be the sole purpose for which the mortgagee acts;
“it does act in bad faith if, judged objectively, it acts for a predominant purpose which is collateral to … its interests as mortgagee in preserving its security and obtaining repayment of a secured debt.”
That general proposition is qualified in this way:
“a mortgagee does not act in bad faith if the effect of the exercise in its power undertaken for the predominant purpose of securing repayment is that it secures to itself some collateral advantage.”
So far as concerns the New Zealand PPSA, it provides, by section 2,5 that:
“All rights, duties or obligations that arise under a security agreement are… must be exercised… in good faith and in accordance with reasonable standards of commercial practice.”
Section 111 of the Australian PPSA similarly provides as follows:
“All rights, duties and obligations that arise under this Chapter [which is concerned with seizure and disposal or retention of collateral] must be exercised or discharged:
(a) honestly; and
(b) ]in a commercially reasonable manner”
Implications for receivers
Personal Liability
In the event that receivers are invalidly appointed, they can be liable in both conversion for unauthorised dealings with the company’s property and trespass.
Relief from personal liability
Whilst it was not necessary in Fatupaito for the court to consider the matter, it can be concluded that, if there was nothing to put the receivers upon enquiry about the mortgagee’s ulterior purpose in making the appointment, they would have been relieved from liability under s.33 of the New Zealand Receivership Act.
Similar relief would be available under s.1318 of Australia’s Corporations Act. However, the availability of such relief should not obscure the obligation on the part of receivers to satisfy themselves, subject to the limits identified in Fatupaito as to the validity of their appointment.
Indemnity
Beyond the possible availability of relief under the Corporations Act, as the court noted in Fatupaito; “receivers are also able to negotiate an indemnity with the appointing creditor for their fees to cover the eventuality that their appointment is subsequently held to be invalid”. Of course, that indemnity should also extend to any other liability to which the receivers might be subject including as a result of the invalidity of their appointment.
