In the matter of Primebroker Securities Limited (Receivers and Managers appointed) In liquidation); Paul William Kirk and Kathryn Warwick [2011] FCA 86, Justice North provides a concise and useful summary of the circumstances in which a Receiver and Manager might apply to the Court for directions pursuant to section 424 (1) of the Corporations Act 2001 (Cth). The case is a timely reminder of the limits on the "directions" power in the Corporations Act.
The Receivers entered into an agreement to settle litigation against a company named Bruval. It was a term of the settlement that the Receivers would obtain directions from the Court that they were justified and/or were acting reasonably in entering into the settlement. The Receivers filed affidavit material deposing to their concerns regarding an associated challenge to the validity of their appointment by the liquidator of PSL. The Receivers were concerned that the liquidators might challenge the reasonableness of their decision to enter into the terms of settlement.
His Honour referred to the starting proposition that the power given to the Court under Section 424 (1) should be construed “liberally” but he went on to observe that the section will not ordinarily be invoked by the Court to judge the commercial prudence of a transaction entered into by a Receiver appointed privately. There must be something more involved than the making of a commercial or business decision. There must be an issue calling for the exercise of legal judgment involving questions of power, propriety, reasonableness or contested issues of legal principle or procedure.
His Honour considered a letter from the liquidator’s solicitor stating that his client did not “support or oppose” the application. Accordingly His Honour found that the evidence did not establish that the Receivers were in need of any protection from the Court.
The decision also has implications for legal practitioners. When drafting terms of settlement, practitioners should be wary of making agreements conditional on external administrators applying to the Court for approval. In the absence of any specific threat or potentially contentious legal issue, practitioners should avoid imposing on their clients the burden and expense of an unnecessary Court application.
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