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Focus: Receivers' examination powers upheld as constitutionally valid

28 March 2012

In brief: A recent WA Court of Appeal decision has affirmed the constitutional validity of a court's power to conduct public examinations of a corporation in receivership and where property of a corporation is in the possession of a mortgagee. Partner Philip Blaxill (view CV), Senior Associate Corey Steel and Law Graduate Miranda Cummings report on a case of interest to secured creditors and receivers across Australia.

How does it affect you?

  • Receivers and managers, as well as agents of mortgagees in possession, can take comfort from the fact that the WA Court of Appeal has held their role to be sufficiently analogous to that of a liquidator so as to validate their ability to conduct public examinations under section 596A of the Corporations Act 2001 (Cth).
  • This case is likely to reduce the scope of objections to examinations conducted in a receivership and limit the prospect of parties avoiding summonses for public examinations
Background

BankWest holds various securities over the assets of three companies: Newport Securities Pty Ltd, Mayport Nominees Pty Ltd and Seaport Pty Ltd. The appellant, Mr Saraceni, is a director of each of the companies.

BankWest appointed the respondents as receivers and managers over all the assets of Mayport and part of the assets of Newport and Seaport. In addition, BankWest had appointed agents of the mortgagee in possession of certain real property owned by Newport.

The respondents sought and obtained orders from the WA Supreme Court for the issue of examination summonses to the appellant under s596A of the Corporations Act.

The appellant applied to set aside the examination summonses. His appeal was premised on the constitutional invalidity of ss 596A and 597, arguing that they confer a non-judicial power on a court. This constitutional issue was referred to the Court of Appeal for determination.

Public examinations under ss 596A and 597 had previously been held to be constitutionally valid, but only in the context of court-ordered or voluntary winding-ups, or where a company was subject to a deed of company arrangement. No appellate court had considered such examinations in the context where a receiver had been appointed to part or all of its assets, or where property of the corporation was in the possession of a mortgagee. The question addressed by the court was therefore whether the external administration of a company by a receiver is sufficiently analogous to the winding-up of a company to characterise the power of examination applicable to receivers as an exercise of judicial power.

The court held unanimously that the examination power was constitutionally valid in this context.

Justice McLure's reasons

Court of Appeal President Justice McLure (with whom Justice Newnes agreed) held that the power to issue summonses for public examination was sufficiently analogous to powers historically conferred upon courts because:

  • the subject matter of the current examination power is no wider than that historically conferred in relation to a company in liquidation;
  • the nature and extent of the court's powers of control and supervision of receivers and liquidations are substantially the same. In any event, a receiver is in the identical position as a privately appointed liquidator in a voluntary winding-up;
  • the purpose of the exercise of the court's powers in aid of investigations by external administrators are relevantly the same;
  • there is very substantial overlap between the statutory powers and duties of a receiver and liquidator;
  • the examination power facilitates the proper and timely performance of the winding up or other form of external administration of the corporation; and
  • the extension of the examination power to corporations in receivership is simply a reflection of developments in the law regarding modern forms of external administration in the same way historical examination powers in bankruptcy were extended.

Justice McLure made the same conclusions in respect of the situation of the agent of a mortgagee in possession. She held that the differences between the regulatory framework for receivers and agents of a mortgagee in possession were not material for the purpose of determining the matter.

Chief Justice Martin's reasons

Chief Justice Martin agreed with Justice McLure. However, he also concluded that, regardless of any historical analogy, the examination powers exercised by the court involved the exercise of judicial power, or powers incidental or ancillary to the exercise of judicial power, and are therefore constitutionally valid in any event. His Honour supported a broad, rather than narrow, approach being taken to the characterisation of judicial power.

His Honour identified numerous similarities shared by all 'species' of external administration set out in Chapter 5 of the Corporations Act and concluded that, because the direction, supervision and control conferred upon courts in relation to all forms of external administration was undoubtedly the exercise of judicial power, the examination power of a corporation under external administration (including in the case of receivers or mortgagees in possession) was therefore also within the scope of judicial power, or at least incidental or ancillary to that power.

Conclusion

This case establishes the constitutional validity of examination powers in Part 5.9 concerning corporations in receivership or where the property of a corporation is in the possession of a mortgagee. This decision reduces the likelihood of examinable officers being able to avoid examinations by raising constitutional arguments, and (subject to any High Court challenge) brings to an end the uncertainty around whether receivers may avail themselves of the opportunity to seek public examinations into the affairs of the corporations under their control.

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