Exercising the judgment of Solomon Law Reporter

Can directors bring proceedings on behalf of a company that is in receivership? – It appears in certain circumstances yes

Once a company is placed into receivership, or is placed in liquidation, it is unusual for the directors to have any further real authority vested in them. Usually the receiver and manager, or other administrator, will be given the task of administering the company and pursuing rights on behalf of the company. However, from time to time, it may be necessary for directors to bring action on behalf of a company if the circumstances warrant it. Sackville J in the case of Deangrove Pty Ltd v The Commonwealth Bank of Australia (2001) 19 ACLC 595 provided an interesting example of where the court was prepared to have 'a bob each way' as they say. The facts of the case are taken from the headnote of the CCH Law Report. In January 2000, receivers and managers were appointed over the affairs of Deangrove pursuant to rights exercised by the Commonwealth Bank under an equitable mortgage given by it to the bank. In October 2000, Deangrove and its sole shareholder, Jeans, commenced proceedings against the Commonwealth Bank. The solicitor representing those parties acted on instructions from Jeans and the sole director of Deangrove, a Ms Rupe. The receivers and managers did not agree to the commencement of these proceedings on behalf of the company.

It was alleged by Deangrove and Jeans that the Commonwealth Bank had engaged in misleading and deceptive conduct and that each had suffered a loss as a result of that conduct. In their Statement of Claim before the court they alleged among other things, that Deangrove had been induced to purchase property and to execute the equitable mortgage over its assets in favour of the Commonwealth Bank. When a company is placed into receivership of course, it is usually deemed to be in financial difficulty if not insolvent. In these circumstances, Jeans offered to provide an indemnity in respect of any costs or expenses of the company and in relation to the proceedings. The Commonwealth Bank did not argue that because the indemnity had been offered by Jeans rather than the director that this was inappropriate. But, the Commonwealth filed a motion seeking an order dismissing the proceedings. It argued that only the receiver and manager had power to bring or defend proceedings in the name of the company. In its view the solicitor said he was acting on behalf of Deangrove and that Rupe could not be validly retained.

Sackville J provided a "judgment of Solomon". He stood the proceedings over to allow Jeans the opportunity to provide appropriate security rather than simply providing an indemnity. In doing so, Sackville J agreed that when a company is placed in receivership that the directors could in certain cases bring proceedings against the receiver who had placed the company into receivership as long as appropriate security was offered. This was to ensure that the interests of the security holder were not prejudiced. Therefore, Rupe had the power and authority to give instructions for the institution of proceedings provided security was offered. Section 424 of the Corporations Law, which dealt with the relevant issue, provided that the controller of a company could apply to the court for permission for actions to be brought. The controller would include a director in the appropriate circumstances. Sackville J was satisfied that as long as security could be offered by Jeans the proceedings would be allowed to continue. He was not satisfied that, without the relevant security, there would be sufficient resources available to the plaintiff to ensure that the action would not prejudice the Commonwealth Bank.

This is an unusual result but never-theless one that clearly indicates flexibility on the part of the court in dealing with this rather unusual area.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.