Vol 1 (2004) - Issue 2

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Ernst & Young (Reg) v Tynski Pty Limited (ACN 008 162 123) (Receivers and Managers Appointed) [2003] FCAFC 233: Directors versus Receivers: the Battle Continues!

Introduction

The appointment of a receiver or receiver-manager has been described as having an ‘anaesthetizing effect upon the management structures of the corporation.’ In effect, the powers of the directors will be suspended. By contrast to the rather limited role that this visual image provides, it is equally well recognized that receivership will not necessarily terminate the entire managerial capacity of the directors. The conflicting nature of these positions sought to rationalized and made coherent by Street J. in Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd.

Receivership and management may well dominate exclusively a company’s affairs in its dealings and relations with the outside world. But it does not permeate the company’s internal domestic structure. That structure continues to exist notwithstanding that the directors no longer have authority to exercise their ordinary business management functions. A valid receivership and management will ordinarily supersede, but not destroy, the company’s own organs through which it conducts its affairs. The capacity of those organs to function bears a direct inverse relationship to the validity and scope of the receivership and management.
Conceptually, this relationship between the receiver and the directors is understandable. The practical primary role of the receiver will be to ensure that the interests of the chargee are in no way prejudiced – the fact that directors may continue to have a say in how the company is managed may well not be inconsistent with this function. ‘The real question is whether the directors ... can [exercise any powers] without prejudicing the legitimate interests of the receiver and the secured creditor in the realization of the assets.’ Practically, however, the broad nature of modern debenture documents has seen any residual power of the directors severely and bluntly circumscribed. Despite this, common law courts have held steadfast to the idea that directors may retain some rights. This has included the right to challenge, in the name of the company, the appointment of the receiver, or to pursue the chargee for wrongful appointment. It has also been held that the directors may act to wind up the company, or to have an administrator appointed. Notwithstanding these small incursions, the contemporary balance was articulated by Owen J. in Re Geneva Finance Ltd (Receiver and Manager apptd):

The question is not who has the higher duty, as between receiver and directors, in relation to assets which are subject to the security and which the receiver has in his possession and control.