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High Court of Fiji |
IN THE HIGH COURT OF FIJI
AT SUVA
CIVIL JURISDICTION
CIVIL ACTION NO. 183 OF 2001
Between:
ILAITIA BOILA and CHIRK YAM
as Receivers and Managers for
VALEBASOGA TROPIKBOARDS LIMITED
First Plaintiffs
And
FIJI DEVELOPMENT BANK
Second Plaintiff
And
MERCHANT BANK OF FIJI
Third Plaintiff
And
BAHADUR ALI s/o Jamal-Ud-Dean
MUKTHAR ALI and NIWAZ ALI both sons of Bahadur Ali
Defendants
Mr. J. Apted for the 1st Plaintiffs
Mr. D. Sharma for the 2nd Plaintiff
Mr. H. Nagin for the 1st Defendant
DECISION
This is the 1st defendant’s (hereinafter referred to as Ali) motion dated 6 July 2001 seeking the following Orders:
In support of motion, Ali has filed three affidavits sworn 6 July, 30 July and 2 August 2001; another affidavit, sworn 3 August by Mohammed Mansoor, a joiner, was filed. The first plaintiffs have filed four affidavits; and the second plaintiff has filed three affidavits.
The affidavits that have been filed and the written submissions made in this case have become voluminous. A large number of authorities have been cited and relied upon by the parties to the action.
As ordered, all three counsel have made written submissions. I have found these very comprehensive and helpful in the determination of the issues before me.
The issue essentially involves consideration of law pertaining to the appointment and removal of a receiver and manager as well as discussing his rights, duties and liabilities.
Background history of case
The issue has to be determined in the light of the background to the case. I therefore set out below, inter alia, the facts and the provisions of the debenture under which the second plaintiff Fiji Development Bank (hereafter referred to as the ‘Bank’) acted and appointed Ilaitia Boila and Chirk Yam as Receivers and Managers (hereafter referred to as "Receivers") for Valebasoga Tropikboards Limited (the ‘Company’). One of the directors of the Company is Bahadur Ali (hereinafter referred to as ‘Ali’).
Mr. Apted has set out the relevant facts very well in his written submission and I adopt them here and they are inter alia, as follows:-
The Mortgage Debenture
The Company was incorporated on 7 April, 1993. On 13 August, 1993 it gave the Fiji Development Bank a mortgage debenture to secure a loan of $3,070,000 (and further advances and other accommodation).
The very first paragraph provided -
"The Company will pay to the Mortgagee the said sum of $3,070,750.00 and all further advances UPON DEMAND".
Similarly, paragraph 2 provided that interest on outstanding principal and advances at the rate of 11% (or such rate as varied by the Fiji Development Bank) was payable at the periodic intervals set out in the Debenture or "UPON DEMAND".
By paragraph 3, the Company agreed –
"The Company HEREBY CHARGES with such payment all its undertaking and all its property stock-in-trade book and other debts whatsoever and wheresoever present and future including its uncalled capital with the benefit of the securities for the same".
By paragraph 4, it appointed the Fiji Development Bank and every Receiver that it might appoint to be the Company’s Attorney and in paragraph 5, it agreed -
"For the consideration aforesaid the Company hereby appoints the Mortgagee to be its attorney in its name and on its behalf in the event that the principal interest and other moneys for the time being hereby secured shall have become immediately due and payable under any of the provisions of this Debenture and notice in writing requiring payment of the said moneys shall have been served on the Company and the Company shall have made any default after such service in payment of such principal interest and other moneys or any part thereof to do all or any of the acts matters and things which the Mortgagee or any Receiver is by this security empowered to with respect to the assets of the Company subject to this Debenture and also to sell or concur with any person in selling the said assets or any of them or any part thereof either at one or several time subject to such terms and conditions as may be thought fit with power to vary any contract for sale and to buy in at any auction or to rescind any contract for sale and to re-sell without being responsible for any loss occasioned thereby and to make and sign such transfers, applications for new deeds or documents and generally in relation to any assets real or personal to do such acts and things as are necessary for effectuating any such sale and no purchaser shall be bound to see or enquire whether such default as aforesaid has been made or has happened or has continued or whether any notice has been served or given or otherwise into the propriety or regularity of any such sale and the Company hereby covenants to ratify and confirm all acts and things that the attorney acting under and in pursuance of this clause may do under or in pursuance of the powers and authorities hereinbefore contained." (emphasis mine)
Other conditions
The Debenture had other conditions endorsed, including the following-
Paragraph 10:
"The moneys hereby secured shall become immediately payable on the happening of any of the following events: -
Paragraph 14:
"The Company shall not during the continuance of this security without consent of the Mortgagee first had and obtained and then only subject to such conditions as the Mortgage may impose issue any of the unissued capital of the Company or permit the transfer of any share or shares." (emphasis mine)
Appointment of Receiver and Manager
Most importantly for the present purposes, paragraph 15 provided -
"At any time after the moneys hereby secured become payable the Mortgagee may appoint in writing any person to be a Receiver or Receiver and Manager (hereinafter called "Receiver") of the mortgaged premises and may remove any such Receiver and appoint another Receiver in his place and may fix the remuneration of any such Receiver PROVIDED ALWAYS that every such Receiver shall be the agent of the Company and the Company alone shall be responsible for his acts and defaults and such Receiver so appointed shall without any consent on the part of the Company have power -
The Loan
As a result of various requests by the Company, and various accommodations granted by the Fiji Development Bank, by 1 March 2001 the amount secured by the mortgage debenture amounted to $9,703,904.91.
The Court has been given various accounts of the history of the loan.
At paragraph 45 of his Affidavit of 30 July, 2001, Mr. Ali claims never to have defaulted on his loan.
However, at paragraph 55 onwards of his Third Affidavit of 17 August, Mr. Yam (Receiver) gives the comparative history of loan repayments made by the Company disclosed by the Company’s own accounts which discloses numerous defaults.
Mr. Yam’s figures appear to differ, however, from the records of the Fiji Development Bank whose history of the loan is set out in great detail in paragraph 4 of the Affidavit of Salote Tavainavesi filed on 17 August, 2001. Any difference may be due to payments being made by others on behalf of the Company.
The short point, however, is that there has been a continuous history of default by the Company, and sympathetic accommodation by the Fiji Development Bank. (see paragraph 47 of Chirk Yam’s Second Affidavit).
It is also important to note that during the year 2000, when Mr. Ali claims the Company suffered difficulties due to inclement whether and the political crisis, the Company’s accounts show sales of $5,207,786 between May 2000 and October 2000 ( when a six month re-payment moratorium was in force) (see paragraphs 49 of Chirk Yam’s Second Affidavit and paragraph 85 of his Third Affidavit).
Notwithstanding these sales, prior to the moratorium, as at 31 July, 2000, the Company was in arrears of $316,362. (see paragraph 4(5) of the Affidavit of Salote Tavainavesi of 17 August, 2001). Furthermore after the moratorium ended, the Company did not resume its agreed payments of $128,495 per month from November 2000 and made only 2 payments in December 2000 and January 2001 amounting to $75,015.00 (see paragraph 49 of Chirk Yam’s Second Affidavit) such that $783,000 in arrears had accumulated by the time the Second Plaintiff decided to exercise its rights to realise the security provided by its mortgage debenture.
It is also to be noted that a cheque of $25,000 in January 2001 was dishonoured.
The Demand
In view of this loan history, on 7 March, 2001, the Fiji Development Bank served a demand notice demanding payment of all of the principal and interest then due amounting to $9,703,904.91 and further interest of 10.5% per annum from 1 March, 2001.
The Demand (which is Annexure "Q" to the Affidavit of Salote Tavainavesi of 2 May, 2001) further notified the Company that -
"AND FURTHER NOTICE that if the abovementioned moneys are not paid within 30 days from the date of your receipt of this notice the power of sale and all other rights, powers and remedies conferred on the Mortgagee in such cases and by law will thereupon be exercisable without further notice to you.
TAKE FURTHER NOTICE that if any money paid by you in partial payment of the money owing hereunder will be received without prejudice to this notice and the receipt of any such money shall not be construed as a withdrawal or waiver thereof."
Further Defaults
Following this a further cheque in the amount of $181,900 given in April 2001 was dishonoured. In addition a promise of $200,000 also in April produced a cheque on 19 April 2001 which was also dishonoured (see paragraph 47 of Chirk Yam’s Second Affidavit).
The Appointment of the Receiver and Manager
In view of the Company’s failure to meet the terms of the Demand Notice (or to even meet its other promises) the Fiji Development Bank on 1 May, 2001 appointed the Receivers by Deed to be the Receivers and Managers of the Company. The Deed is annexed marked "T" to the Affidavit of Salote Tavainavesi of 2 May 2001.
It is emphasised that this appointment was in accordance with the Fiji Development Bank’s contractual rights under the Mortgage Debenture freely agreed to by the Company.
The relevant provisions of the Deed state -
5) This appointment is made without prejudice to and with full reservation of all rights of the Bank under the Debenture or otherwise to remove or replace the Receiver/Manager and as to the powers, authorities and directions of the Bank.
6) The Receiver/Manager shall from time to time report to the Bank as the Bank shall request on the affairs of the Company and the activities of the Receiver/Manager in connection with his appointment hereunder (emphasis mine)
So much for the factual background to the case. I shall now set out the submissions made by counsel for their respective parties.
First plaintiffs’ submissions
It is submitted by Mr. Apted for the first plaintiffs that injunction had to be obtained against Ali when the Receivers attempted to take possession of the company’s assets in accordance with the Deed of Appointment of Receivers. It is alleged that the Receivers were physically assaulted by Ali and his men. As a result the current substantive action was instituted; further litigation by Ali in these proceedings and in a further separate action in the name of the Company and through other solicitors followed, but these have been discontinued.
Mr. Apted sets out in his written submission in detail the conduct of the Receivership upto the time of the present application outlining the state of Accounts. He disputed Ali’s submission that the Court has ‘inherent jurisdiction’ to remove a privately appointed receiver and in this regard he referred to the following passage from Hubert Picarda in the book Law Relating to Receivers, Managers and Administrators 2nd Ed:
"The Court may in exercise of its inherent jurisdiction remove a privately appointed receiver in a proper case. An application to the Court to achieve that end would be brought by the person or persons who appointed him."
It is therefore Mr. Apted’s submission that the Court has no inherent jurisdiction to remove a receiver on the application of a mortgagor Company or on the application of a single Director or minority shareholder.
Mr. Apted has further stated that Ali has no locus standi on his own as a Director to bring this action and has referred the Court to a number of authorities on the subject and particularly to the case of Deangrove (infra).
Mr. Apted submits that Ali seeks the dissolution of the Plaintiffs’ interim injunction and its replacement by an interim order in favour of Ali. He submits that in the case of receivership and the exercise of mortgagee’s rights the special rule is that a Court will not grant an interlocutory application for an injunction to restrain a receiver and manager because this would deprive the mortgage debenture holder the benefits of its security. He says that even in the exceptional case where such relief is granted, the Court usually protects the secured creditor by requiring the applicant to bring into Court an amount sufficient to meet the secured debt.
Counsel submits that Ali has not given the necessary undertaking as to damages to FDB nor has he offered to pay the money into Court. On the other hand FDB would be able to meet damages against them. He says that on this ground alone the application for injunctive relief should be denied.
Counsel submits that if Receivership is revoked as deposed in Mr. Yam’s affidavit (a) there is no guarantee that it will receive its payments from the Company particularly in view of its numerous past defaults, (b) there is a danger that the Company would trade at a loss and reduce the value of the second plaintiff’s security; and (c) there is a danger that other creditors will take action against the Company.
Therefore he says that the balance of convenience clearly lies in the Bank’s favour.
On the substantive ground Mr. Apted submits that the debenture itself is an ‘on demand’ one and in this case the whole amount became due and payable. The plaintiffs now hold all of the Company’s assets for the full amount owed and not just pre-existing arrears. He says that it is nonsense for Ali to suggest that the gross receipts were available to meet the arrears.
He says that the Receivers and Managers cannot be discharged because of their remunerations and expenses. The Company willingly accepted payment of remuneration when it gave the Bank the mortgage debenture.
On the defendant’s allegation on ‘clog on the equity of redemption’ counsel submits that the mortgagor’s equity of redemption is his right to repay the whole amount owed not, just the arrears prior to the mortgagee’s demand, and that it is not a clog for the mortgagee to insist on being paid the full debt before it allows the mortgagor to redeem the property the subject of its security. He says Ali still has his equity of redemption, which he can exercise by paying the Bank the whole amount, and there is nothing to prevent him from doing so.
For the reason given in his submission Mr. Apted says that the allegation of misconduct on the part of Boila (a Receiver) be disregarded as he has given a satisfactory explanation.
In conclusion Mr. Apted says that for the reasons given by him in his submissions the remedies sought by Ali be denied and the application be dismissed with costs on an indemnity basis.
Second plaintiff’s submission
Counsel for the second plaintiff (the ‘Bank’) states that Mr. Ali says that the Receivers should be removed on the ground that they have collected $2.5 million and this is sufficient collection to pay off the arrears owed to the Bank; and that Mr. Boila has acted unlawfully in employing Mansoor Ali on his property at Tamavua, Suva.
Mr. Sharma submits that this is not a proper case where the Court should exercise its inherent jurisdiction to remove the Receivers. He says that Mr. Ali has no ‘locus’ in this action on the authority of case of Deangrove Pty Ltd (Rec. & Mgrs. Aptd) v Commonwealth Bank of Australia [2001] FCA 173 (6 March 2001). Mr. Ali as a director can make an application on behalf of the company in Receivership but he must first comply with the following requirements: (a) the action must be commenced in the name of the company, (b) the director must obtain leave from the Receivers to commence the action, (c) if a Receiver refuses leave, then the director must obtain leave from the Court to commence this action, and (d) in obtaining leave from the Court, the director must provide sufficient indemnity to the Court.
Mr. Sharma submits that, Mr. Ali not having fulfilled the requirements as stated in Deangrove, he does not have the locus to make this application. The management cannot be handed back to Mr. Ali as a person. Counsel says that the assertion by Ali that an interested party may make an application to remove a Receiver can only be made in certain circumstances and that is not the case here.
As far as the granting of injunctive relief is concerned, Mr. Sharma says that the balance of convenience lies in continuing with the injunction orders granted by this Court on 2 May 2001; also the damages are an adequate remedy for Ali if he succeeds in his claim against the Bank, and the Bank is in a financial position to pay any damages that may be awarded against it.
Mr. Sharma submits that Ali has not come to this Court with clean hands and he has intentionally and deliberately sworn false affidavits to mislead the Court and to portray an incorrect picture to obtain the Orders sought by him. He has shown the signs of a desperate man who will go to any extent to lie to achieve his goals.
Counsel further argues that the Bank has not put any clog on the Company’s equity of redemption. He says that the Bank has time and again advised Ali either to pay all the outstanding debt or to pay a substantial part of the debt with the servicing of the remaining balance assured to the Bank’s satisfaction to remove the Receivers. Until such time as this is done, the Bank has the legal right to continue with the appointment of the Receivers. He says that Ali cannot insist on the Bank to accept the arrears of payment and remove the Receivers. Once a default is made in any one payment the Bank has the right to demand the payment of the total outstanding debt. If the total outstanding debt is not paid then the Bank can exercise all its rights under the Debenture as is being done here.
Mr. Sharma submits that the Court will not interfere with the rights of the mortgagee unless the mortgagor pays the amount claimed by the mortgagee into Court (Inglis v Commonwealth Trading Bank of Australia [1972] A.L.R. 591 at 592).
He says that Ali’s application should be dismissed with costs on an indemnity basis.
Submission of first defendant (Ali)
Mr. Nagin for the first defendant submits that the Court may in the exercise of its inherent jurisdiction remove a privately appointed Receiver in a proper case. Mr. Nagin says that Mr. Ali in his capacity as a director and shareholder has a right to make an application for discharge of the injunction and ask for removal of the Receivers. Counsel submits that proper parties are before the Court and therefore this action is a proper one in which the application has been filed to revoke the appointment of the Receivers.
Mr. Nagin submits that the Receivers have now collected some $2.5 m and this is more than enough to pay off the arrears. He alleges that it is the Receivers who are the ones fighting very hard to stay on when they should be neutral, and they appear to want to run the company to the exclusion of Ali. He says that because of Receiver Boila’s conduct in regard to Mansoor Ali and getting workers from Labasa to work on his house in Suva and bringing company’s machines ‘speaks volumes about the man and there is no way that he can be allowed to continue as a Receiver’.
Counsel asks the Court to take judicial notice of the events of 19 May 2001, namely, the coup, and the problems it created for business people and in this case caused the company not to be able to meet its repayments. He asks the Court in equity to assist the Company that strict legal rights of the debenture holder are not allowed to prevail.
In concluding his submissions Mr. Nagin says:
The company has an equity of redemption on debenture as well and there should not be clogs on this equity of redemption. By insisting on full repayment of the loan a clog is being put on the equity of redemption. It is totally unreasonable at this time to insist on full payment.
The arrears have all been covered by the collection done by the Receivers. If any arrears remain then the First Defendant undertakes to repay the same immediately. Also the First Defendant undertakes to make the payment of $130,000.00 per month. The First Defendant is also happy to have a Fiji Development Bank’s representative on its Board of Directors or an FDB appointed Financial Controller and a co-cheque signatory (as FDB has done for Tokatoka Resorts). This will be a most just and equitable way of dealing with this case and it is respectfully submitted that an order be made revoking the appointment of the Receivers.
In reply to the Bank’s contention, Mr. Nagin argues that Ali has the locus to apply for discharge of receivers in this same action and that the case of Deangrove (supra) does not assist the Bank in this case.
In response to Receivers’ submissions, Mr. Nagin does not doubt that there was arrears of $783,000.00 and that the Bank has the right to appoint Receivers. But the downward trend in business was due to the coup and bad weather at the relevant time. In equity the directors can come and ask for the discharge of the receivers. Mr. Nagin says that Ali has given assurance in all his affidavits that he will continue to make the monthly instalment payment. If there is a breach then recovery action is again possible. Ali has also said that a representative of Fiji Development Bank be appointed director on the Board and someone be appointed in the management of the Company. This will ensure that payments are made on due dates. Mr. Ali says that the Receivers should give the Company proper account of income and expenditure; he says that that has not been done. Mr. Nagin concludes by saying:
In the absence of receipts and expenses account by the Receivers the court is entitled to assume that the collection of over $2.5m has resulted in the repayment of all arrears of the Company. In the circumstances, it would be equitable for the company to be returned to the rightful owners without full payment of the account being made because the events of last year was a force majeur and conditions were war-like because of the attack by the State’s enemies on the Government.
Mr. Boila’s conduct has not been properly explained and leaves much to be desired. The Court is well aware that many businesses have gone down the tube because of the receivership. This is a case where a Court has an opportunity to salvage a company and in equity the Court must assist to ensure that justice is done.
Determination of the issues
In deference to the very many voluminous and detailed statements of accounts, and also to the very comprehensive and lengthy written legal submissions, I had no alternative but to set out hereabove in considerable detail the facts and circumstances surrounding this case and the arguments put forward by all three counsel for their respective parties. I must say that these submissions, the last of which was filed on 13 September 2001, have been of great assistance to me in considering the issues which are not of everyday occurrence in Fiji.
The matter does raise a number of legal points covering the whole gamut of law relating to the ‘appointment and termination of receivers’ and ‘receivers and managers’ including their ‘rights and liabilities’. As a result in dealing with these matters, the decision is likely to become lengthy, a situation which is unavoidable.
In this case, as can be seen from the arguments put forward by the first defendant, Ali has very little understanding relating to the appointment and function of Receivers. He thinks that, as in this case, now that the Receivers have collected a certain sum, that they should now be relieved of their duties and that the operations of the Company be returned to it. For this reason I am forced to outline what is involved in Receivership and then finally state whether in all the circumstances of this case the appointment of the Receivers can be revoked or not as prayed for by Ali.
As in this case, as already stated hereabove, most debenture deeds contain a power to appoint a receiver at any time after the principal sum secured by the debenture becomes payable, or after the security constituted by the debenture becomes enforceable. Different consideration apply in the (a) the case of a receiver appointed as in situation stated above and (b) in the case of a receiver appointed by the Court.
Where a receiver is appointed by the Court, he is an Officer of the Court; interference with him in the exercise of his duties may constitute a contempt of Court (Kerr on Receivers 9th Ed., p196). He does not become an agent of the Company, nor is he an agent for the debenture holders, but he owes duties to both (Moss S.S. Co. v Whinney [1911] UKLawRpAC 38; [1912] A.C. 254). The receiver has to account to the Court, but he is at the same time, entitled to an indemnity out of the business in respect of all liabilities properly incurred: see Owen & Co v Crank ([1895] 1 Q.B. 265, at p.271)
But a receiver appointed under a power in a debenture is in an entirely different position. The Receivers in this case have been appointed under the said debenture with their duties, rights and liabilities set out therein as stated in considerable detail hereabove. The receiver is really an agent - an agent with very wide powers usually, by virtue of the conditions of the debenture, but an agent nevertheless; and as such he is usually not personally liable, and the liability for his acts falls upon his principal. As to who in his principal is to be found in the correct construction of the power of appointment contained in the debenture.
I find that on the affidavit evidence before me, under the said debenture the Receivers had been properly appointed on 1 May 2001 because the Company had defaulted in payment of loan. The Bank demanded payment of the sum of $9,703,904.91 together with interest at the rate of 10.5% per annum from 1 March 2001 until full payment.
I am not convinced on the evidence that the Bank represented to Ali that the Receivers will be removed after the Company has paid the arrears of the account. The affidavits state that Receivers will be removed only upon full recovery of the debt outstanding or a substantial debt reduction with the servicing of the remaining balance assured to the Bank’s satisfaction.
Locus standi of the first defendant
Both Mr. Apted and Mr. Sharma have raised an interesting point and that is the locus standi of Ali to make this application for the removal of Receivers. I think this aspect should be dealt with first by me before considering the substantive issues. In this respect I agree with what both counsel for the plaintiffs have to say. I do not agree with Mr. Nagin that the case of Deangrove in this respect does not assist the Receivers.
In this case Ali is a minority shareholder and only one of the directors of the Company. The Company is the debtor to the Bank, not Ali, and only the Company’s assets are subject to receivership. When the Company is under Receivership all the powers are vested in the Receivers to the exclusion of the Board of Directors. (M. Wheeler & Co. Ltd v Warren [1928] Ch. 840 at 844 and 846).
In the situation such as the present the proper course would have been for the directors to initiate proceedings in the name of the Company subject to certain strict limitations. The principle in my view has been well enunicated in Deangrove (supra). There Sackville J in the Federal Court of Australia stated, after reviewing case law, at paragraph 40 of his judgment thus:
"In my view, the authorities clearly support the proposition that, where a company in receivership has a claim against the debenture holder and the receiver declines to pursue the claim, the directors are entitled to initiate and maintain proceedings in the name of the company, provided the directors offer the company a satisfactory indemnity against costs. The latter requirement is designed to ensure that the interests of the debenture holder, qua debenture holder, are not prejudiced: O’Donovan, Company and Receivers and Administrators (2nd ed, 1992), at [8.30]. The entitlement of the directors reflects the fact that, as Street J observed in Hawkesbury Development, at 210, it borders on the absurd to contemplate that a receiver would institute proceedings in the name of the company challenging the very debenture to which he or she owes office. It is almost as absurd to contemplate the receiver instituting proceedings against the debenture holder or chargee claiming damages for misleading and deceptive conduct or breach of duty. In any event, an action conducted by the receiver against his or her appointor is likely to encounter a variety of practical difficulties: Kerr on Receivers (2nd Cum Supp to 17th ed, 1997) at 77.
At paragraphs 46 he continued -
As Mr. Speakman pointed out, orders have been made in some cases restraining directors of companies in receivership from conducting proceedings in the name of the company without first indemnifying the company and providing security for that indemnity: Charmae Investments v ANZ Bank at 52,003-52,004; NEC Information Oysters v Lockhart. In Phillips Oysters v NAB, Lockhart J dismissed the proceedings because the corporation was "hopelessly insolvent" and neither director had any assets to meet an indemnity against costs.
And at paragraph 47 he said:
In my view, the governing principle is that those giving instructions on behalf of Deangrove, in order to continue the proceedings, must demonstrate that "nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders" (Newhart Developments, at 821). Had there been evidence that Mr.Jeans has sufficient resources to satisfy an indemnity, it might not be necessary for any security to be provided in support of the indemnity. But no such evidence has been adduced. Nor is there evidence as to Deangrove’s financial position. In these circumstances, it seems to me that Mr. Jeans should provide appropriate security to support his indemnity to Deangrove if the company is to pursue its claim against CBA."
In the New Zealand case of Edwards v Singh [1990] 5 NZCLC 66,770 the High Court held that a shareholder could not bring an action against the debenture holder or the receiver for misconduct, but that such an action had to be brought by the Directors in the name of the Company under their residual powers.
A number of principles are to be noted. First, a reserve power is vested in the Board as a whole or possibly the Company in a general meeting not an individual director or an individual shareholder. Mr. Ali is only one director and a minority shareholder and has provided no sworn evidence that he is authorised by the Board. Nor is there any evidence of authority from other shareholders in a general meeting.
Furthermore, the action must be bought in the name of the Company itself not the individual director or the Board. This action is in Mr. Ali’s own name and not that of the Company.
In addition, in any case, even if an action had been brought in the Company’s name, the Board must give the Receivers and Managers an indemnity for any costs that may be awarded against the Company and if impecunious, as is the case here, a security as well.
The action to be taken by the Directors must not threaten the interests of the debenture holder, and where it does the Directors must in addition give the debenture holder further security or pay the amount of the debt as well.
None of these pre-conditions for general actions have been fulfilled in this case. Mr. Ali therefore has no locus to seek the orders that he does.
The consideration of the aspect as discussed above in regard to Ali’s locus standi in this action should actually be sufficient to dispose of the issue before me without having to deal with the substantive issue raised by Ali. However, it is perhaps desirable to say something about the main issue without intending to delay its determination. I would in the interest of justice consider the matter as if action has begun in the name of the Company with the sole purpose of determining whether this is a proper case of revoking the appointment of the Receivers.
Substantive issue
I shall now consider the substantive issue. In this application Ali’s main argument is that since the ‘receipts’ have exceeded the arrears of payment by the Company the Receivers should be discharged. As I said before this assertion shows his ignorance of law on the subject of Receivership particularly as to when they can be discharged and what their rights and liabilities are.
As I have already stated hereabove the whole amount under the debenture became due and payable. The amount was $9,703,904.91 together with interest at the rate of 10.5% p.a from March, 2001. Under the Debenture the Company had charged its whole undertaking, property etc. as security for that amount. Upon their appointment the Receivers become the Receivers and Managers of the whole of the Company’s property, undertaking and assets. Therefore, in this case the Receivers now hold all of those assets etc in equity for the full amount owed, not just pre-existing arrears.
This case is clearly akin to one where a mortgagee has taken steps to exercise its power of sale under a mortgage. The Bank has been given powers under the Debenture dated 19 August 1993 to appoint Receivers and Managers. There was this firm agreement between the Company and the Bank. There cannot be any dispute as to what the contract is between the parties. The Bank is therefore within its rights to receive about $10,000,000.00 in the manner in which the contract provides. But Ali wants the Court to make an order that the Company be allowed to repay the said sum in the manner he chooses. This view of the matter on the part of Ali arises from the misunderstanding of the duties of a receiver, and to give a clear picture of the Receivers’ position, I refer to the following passage from the judgment of Sir Raymond Evershed, M.R. in Re B. Johnson & Co. Builders Ltd 1955 2 All E.R. C.A. 775 at 783:
"the substance, the gist, of the charge (expanded in the points of claim, which I will mention in a moment) is that the receiver had a duty to the company and its contributories to preserve the goodwill and business of the company. In my judgment, that allegation rests on a fundamental misapprehension. There was not in this case, and there is not in similar cases, any such duty on a mortgagee or a receiver appointed by a mortgagee for the purpose of realising the mortgagee’s security. I have no doubt that the plaintiff in this case is greatly disappointed. He has said that the transactions that the company entered into were of the happy sort that you cannot lose on them; but, unfortunately, the plaintiff and the company depended on the goodwill of Barclays Bank, which provided the whole of the money for the company’s speculations. The bank (says the plaintiff) became altogether unduly alarmed at the effect of the Town and Country Planning Act, 1947. Whether they did or whether they did not, it is not necessary for me to determine; but the moral (as it seems to me) of the matter is this, that if you do depend, and depend exclusively, on borrowed money for the business you propose to carry on, you must at all costs retain the confidence of your lender. In this case, further, in so far as the charges against the receiver involve the proposition that the receiver did not get the best price he could have got and should have got, equally those charges, in my judgment, rest on a misapprehension of the elementary principle that a mortgagee, or a receiver exercising the mortgagee’s powers of sale, is under no such duty to the mortgagor to obtain the best possible price for the property charged".
Receiver and manager for debenture-holder
In the context of this case, let me now look at the meaning and the distinction between the phrase ‘manager of a company’ and ‘receiver and manager for debenture-holder’. This is how Jenkins L.J. stated this aspect in Re B. Johnson (supra at 790) and this is quite appropriate to the facts and circumstances of this case:
"the phrase "manager of the company", prima facie, according to the ordinary meaning of the words, connotes a person holding, whether de jure or de facto, a post in or with the company of a nature charging him with the duty of managing the affairs of the company for the company’s benefit; whereas a receiver and manager for debenture-holders is a person appointed by the debenture-holders to whom the company has given powers of management pursuant to the contract of loan constituted by the debenture and as a condition of obtaining the loan, to enable him to preserve and realise the assets comprised in the security for the benefit of the debenture-holders. The company gets the loan on terms that the lenders shall be entitled, for the purpose of making their security effective, to appoint a receiver with powers of sale and of management pending sale, and with full discretion as to the exercise and mode of exercising those powers. The primary duty of the receiver is to the debenture-holders and not to the company. He is receiver and manager of the property of the company for the debenture-holders, not manager of the company. The company is entitled to any surplus of assets remaining after the debenture debt has been discharged, and is entitled to proper accounts. The whole purpose of the receiver and manager’s appointment would obviously be stultified if the company could claim that a receiver and manager owes it any duty comparable to the duty owed to a company by its own directors or managers".
His Lordship goes on to say in regard to duty owed by receiver and manager to the Company:
"In determining whether a receiver and manager for the debenture-holders of a company has broken any duty owed by him
to the company, regard must be had to the fact that he is a receiver and manager - i.e., a receiver, with ancillary powers of management - for the debenture-holders, and not simply a person appointed to manage the company’s affairs for the benefit of the company.
Further, on duties of a receiver and manager, and this is pertinent to this case, His Lordship states:
"The duties of a receiver and manager for debenture-holders are widely different from those of a manager of the company. He is under no obligation to carry on the company’s business at the expense of the debenture-holders. Therefore he commits no breach of duty to the company by refusing to do so, even though his discontinuance of the business may be detrimental from the company’s point of view. Again, his power of sale is, in effect, that of a mortgagee, and he therefore commits no breach of duty to the company by a bona fide sale, even though he might have obtained a higher price and even though, from the point of view of the company, as distinct from the debenture-holders, the terms might be regarded as disadvantageous.
In a word, in the absence of fraud or mala fides (of which there is not the faintest suggestion here), the company cannot complain of any act or omission of the receiver and manager, provided that he does nothing that he is not empowered to do and omits nothing that he is enjoined to do by the terms of his appointment. If the company conceives that it has any claim against the receiver and manager for breach of some duty owed by him to the company, the issue is not whether the receiver and manager has done or omitted to do anything which it would be wrongful in a manager of a company to do or omit, but whether he has exceeded or abused or wrongfully omitted to use the special powers and discretions vested in him pursuant to the contract of loan constituted by the debenture for the special purpose of enabling the assets comprised in the debenture-holders’ security to be preserved and realised."
Termination of receivership
Bearing in mind the above principles and the nature and duties of ‘receiver and manager’, the Receivers on the facts and circumstances of this case as stated by Ali, cannot be removed. It follows therefore that the Bank which appointed the Receivers under the Debenture cannot be removed for their alleged misconduct or just because sufficient arrears have been collected by the Receivers.
It is abundantly clear from what I have stated hereabove that the Receivers and Managers appointed out of Court in this case had a defined object, namely, to secure the repayment of the sum owing to the Bank which appointed them. Once that goal is reached the Receivers will want to be discharged from their responsibilities.
In this case the parties themselves determine the receivership. ‘The most obvious and frequent circumstances is where the receiver’s job is done and his appointor, expressly or tacitly, discharges him’ (Hubert Picarda in The Law Relating to Receivers, Managers and Administrators 2nd Ed. p.250). The court may also ‘in the exercise of its inherent jurisdiction’ remove a non-administrative receiver in a proper case’ (Picarda p.251).
Conclusion
To sum up, for these reasons the relief sought by Ali, a director of the Company, that the appointment of the Receivers be revoked and that management of the Company be handed back to it cannot happen on all the facts and circumstances of this case.
The said Director has to cross the first hurdle, and that is his locus standi to bring this application by way of motion. This he has failed to do and the principles laid down in Deangrove is applicable here. My treatment of locus aspect in actual fact should be sufficient to dispose of the application. However, in view of the allegations against Receivers and in deference to the lengthy affidavits and voluminous annexures including accounts filed on the motion, I considered it necessary to dwell at some length on the facts and law relating to Receivers so as to bring home to all concerned what in law are the rights and liabilities of the parties in this case. I have done this more so because this perhaps is a rare case in Fiji where Receivers and Managers have been attacked in this manner in relation to assets under their control allegedly worth over thirty million dollars.
As to what Ali’s or the Company’s cause of action, if any, is against the Receivers for any complaints he or it may have, it is not for this Court to advise him on. Ali has his own counsel to do this, suffice it to say for the present purpose, to put it bluntly, that the present proceedings/application by Ali is misconceived on the authority of Deangrove (supra) and further I have to say that if Ali desires to pursue his journey, he must go by another route. To enable the court to deal with Ali’s allegations about maladministration and malpractice of Receivers they have to be brought to the Court’s attention in the manner allowed by law but not as Ali has done single-handedly as a Director of the Company. Ali has seriously misinterpreted the remedies or rights which he thinks he has against professional Receivers who were appointed under the debenture. I should, however, at this stage sound a warning that the Bank which appointed the Receivers cannot and will not be allowed to escape liability for the Receivers’likely misconduct and their mismanagement, if any, during the course of Receivers’ performance of their duties provided of course the matter of complaints is before the Court in the manner allowed by law. If there is any truth in the allegation about a particular Receiver using Company workers on his own property in the circumstances alleged, that has to stop immediately for misuse or abuse of power cannot be allowed to continue. When Receivers do not conduct themselves properly, it is the Company which is affected. The devastating effect that Receivership has on a company has been stated thus by Stephen Aris, the author of an article titled "The Corporate Undertakers" in The Times of Wednesday 27 March 1985. He said:
"Insolvency is a highly emotional subject. Months, even years after the event many of those who have passed through the hands of the receiver still bear the scars."
He goes on to say:
"Receivership is of its nature a very sudden and brutal business. Overnight people who have spent their lives building or working for a company are stripped of all title and power".
I have already set out hereabove in detail the provisions of the debenture in relation to the appointment of a receiver, but it is to be noted, as the said author stated:
"Legally the receiver’s prime duty is to the bank. It is invariably the bank that appoints him under the terms of the debenture, and it is the bank’s money that he is obliged to recover. Whether he does it by closing the business or by selling it off in whole or part is up to him. Once installed, the receiver is virtually impregnable. He is the boss and his decisions are almost always final.
Theoretically the receiver can be sued by the company for maladministration or malpractice; but as the directors or the liquidator acting on their behalf have to find the money to mount such an action in practice this rarely happens".
Since Ali’s second prayer is that ‘all injunction Orders granted against the First Defendant be dissolved’ I should not leave this aspect without some mention of the events which took place as soon as the Receivers entered the Mill premises of the Company. There have been allegations of physical assaults on the person of the Receivers resulting in reports having been made to police. These assaults it is alleged were at the instigation of Ali and his ‘workers’. Consequently, to enable the Receivers to perform their duty they had to knock the door of this Court and obtain injunction orders against Ali, his servants and agents and this was granted.
It may be that this is the first taste by Ali of what Receivers do particularly to a Company in which he spent millions to build up. The said author Stephen Aris has summed up very well the scene of Receiver’s activities when he said this and which Ali witnessed and which he did not envisage:
"Professional receivers plan takeovers with military precision. On the day a big company goes into receivership there are suddenly accountants everywhere. The receiver usually moves into the managing director’s office; the finance director is given a thorough grilling; teams burrow through the company’s books, and men are posted at all entrances to make sure nobody makes off with anything of any value.
"It is essential", says Bill Mackey, of Ernst and Whinney, in his guide to receivership. "to man all points of entry to the factory or works. Wherever possible the receiver must use his own staff."
Since the appointment of Receivers was a proper exercise of power vested in the Bank under the Debenture, the Receivers will have to continue with their work as Receivers until such time as the Bank requires them to do or until their appointment is terminated or they are removed.
On the evidence before the Court and the improper procedure adopted to make the application the grounds put forward are insufficient
to enable the court to consider terminating the Receivership and to hand back the Company’s operations to Ali. A huge amount
is owed to the Bank and no mortgagee or debenture-holder will let go the property back to the Company in the present state of affairs
without fully realizing its security. As a suggestion no doubt the better course for Ali would be to pay off the Bank and get out
of the quagmire and take back the reins of the Company or alternatively, as I emphasized a few times before that Ali assist the Receivers
in the running of the Mill as he has the know-how and knows his customers well. This way the revenue will flow in and that will help
towards
reducing the Bank’s debt and in due course the whole business could be handed back to the Company. At this stage of Receivership
the Manager’s chair and that is what Ali wants is out of his reach and may be for a while yet.
For these reasons the first defendant’s motion for the relief sought is dismissed with costs to counsels for first plaintiffs and the second plaintiff in the sum of $1000.00 each to be paid within 14 days.
D. Pathik
Judge
At Suva
2 November 2001
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