Directions sought by a controller under section 424

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4 March 2011

Last month, the Federal Court published its reasons in Re Primebroker Securities Ltd (Receivers and Managers) (In Liquidation) [2011] FCA 86.

The case concerned an application by the receivers and manager of Primebroker Securities Ltd (PSL) for directions under section 424 of the Corporations Act 2001 (Cth) (Act).

The court’s decision confirms that section 424 will not be invoked by the court to judge the commercial prudence of a transaction entered into by a receiver appointed privately. Whilst the power given to the court by section 424 is construed liberally, certain limits have been recognised.

SECTION 424 OF THE ACT

Section 424 provides that a controller of property of a corporation may apply to the court for directions in relation to any matter arising in connection with the performance or exercise of any of the controller’s functions and powers as controller. In effect, section 424 allows a court to sanction, and therefore give limited protection to, certain decisions taken by a controller.

APPLICATION BY THE RECEIVERS

The receivers of PSL sought a direction from the court under section 424 that they were justified and otherwise acting reasonably and appropriately in causing PSL to enter into and perform the terms of a settlement in litigation brought against it by a former client of PSL. That litigation had been conducted against a backdrop of some challenging circumstances facing the receivers, including several legal proceedings already having been instigated against them challenging the validity of their appointment and alleging breaches of duty in the conduct of the receivership.

The settlement was on the express condition that the receivers would obtain a direction from the court pursuant to section 424. The receivers had expressed concern that their decision to cause PSL to agree to the settlement may lead to the suggestion that they had acted negligently or unreasonably.

THE NATURE OF THE DECISION

Justice North of the Federal Court held that the receivers’ application for the direction should be refused.

His Honour’s decision follows and relies on prior authority in which the courts refused to give directions under section 424. Past cases have indicated:

  • that the giving of a direction by a court to make or condone a commercial judgment would supplant the controller’s own primary function;
  • that the courts should refrain from giving a direction which relates to the making and implementation of a business or commercial decision, either committed specifically to a receiver or well within his or her discretion, in circumstances where there is no legal issue raised for consideration or attack on the propriety or reasonableness of the decision; and
  • that there may be circumstances where it is appropriate for a court to give a direction relating purely to the commercial decisions of a controller, but such circumstances must be unusual enough to warrant the limited protection that as a result is granted in respect of the controller’s decision.

In this case, the question before the court was whether the receivers of PSL were seeking the court’s official approval for the commercial decision to settle, or whether there was something more in the nature of a real and practical threat that they would be challenged over their commercial judgment. Ultimately, Justice North held that the evidence did not establish that the receivers were in need of any protection from the court.

Justice North found nothing in the material to suggest that the receivers had acted negligently or in breach of duty in settling the proceeding on the terms agreed, even absent a direction from the court. Bringing the application was viewed by the court as a demonstration of diligence by the receivers, albeit an over cautious approach in the circumstances.

IMPACT OF THE DECISION

The case confirms that the courts will require something more than the making of a business or commercial decision in respect of which a direction is sought pursuant to section 424 of the Act. A calling for the exercise of legal judgment, whether a legal issue of substance or procedure, or an issue of power, propriety or reasonableness, will be required. It is insufficient that the liquidator or administrator feels apprehensive or uneasy about the business decision. A court will not give directions simply to alleviate a controller’s unease in respect of the making or implementation of a business or commercial decision.

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