Inquire Or Not To Enquire - Is That The Only Question?

In the decision of CIP Group Pty Ltd v Watters in his capacity as receiver and manager of GGPG Pty Ltd [2024] FCAFC 5, the Federal Court of Appeal upheld a decision to decline an order for an inquiry into the conduct of a receiver under section 423 of the Corporations Act (Act).

This case involved a series of complaints raised by a shareholder of a company who was seeking to have the Federal Court order an inquiry into the conduct of the company’s receiver under s423 of the Act. The primary judge dismissed the application finding that the receiver’s conduct did not warrant an inquiry and that the application was primarily seeking to vindicate private rights, which is not what s423 of the Act is concerned with.

The matter went on appeal and the Court of Appeal concluded that the decision at first instance was not attended by sufficient doubt to warrant its reconsideration by an appellate court. In its findings the Court of Appeal provides clarification as to the purpose of s423 of the Act and also on a second  question as to whether refusal may otherwise give rise to any substantial injustice.

Background facts

The matter related to a property development in Queensland.

Mr Watters of Hall Chadwick (Receiver) was appointed the receiver over certain secured property comprised in the development.

The applicants sought orders for an inquiry into the Receiver’s conduct under s423 of the Act.  Some of the shareholding entities subsequently commenced oppression proceedings against certain other entities associated with the development. In those proceedings leave was also granted to the agitating shareholding entities to commence derivative claims to recover damages (Derivative Proceedings).

Under s423 of the Act, the court or ASIC may inquire into the conduct of a controller if:

• the controller has not or is not faithfully performing their functions, or has not or is not observing a requirement of:
  • the instrument or order of their appointment; or
  • the instrument under which the controller enters into possession or take control of property; or
  • the court; or
  • the Corporations Act, regulations or the rules; or
• a person complains about an act or omission of a controller of a corporation in connection with the performance of the controller’s functions.

Under s423(3) of the Act, the court may order a controller to answer questions regarding their control of a corporation or be examined about the performance or exercise of the controller’s powers and functions; or direct an investigation into the controller’s books.

The primary judge approached the application for an inquiry in 3 stages:

1. whether an inquiry was required;
2. the conduct of the inquiry;
3. the determination of what, if any orders, should be made in relation to the Receiver’s conduct.

In each instance the primary judge’s approach was to determine whether each of the alleged acts and omissions of the Receiver warranted an inquiry. In each case the judge concluded that no inquiry was warranted finding the complaints raised were:

• made primarily to vindicate private rights, which could be and were pursued in other proceedings;
• not in the public interest to pursue because they concerned the conduct of a particular receivership;
• matters for the Receiver’s discretionary commercial judgments made in circumstances which were factually and legally complicated and which were, as a result, not matters disclosing a sufficient basis to warrant an inquiry; and
• matters which lacked utility for the court to inquire into.

Therefore there was no need to consider how any inquiry would be conducted or make any consequent ancillary orders.

The decision on appeal

The Court Of Appeal noted at the outset that a decision to order an inquiry under s423 of the Act is a discretionary power of the court.

In order for leave to appeal to be granted, the appellant must satisfy the appeal court on two limbs; namely that the decision below is attended by sufficient doubt to warrant reconsideration and further that substantial injustice would result if leave were refused, assuming the decision to be appealed was wrong.

The only express pre-condition to the court exercising its discretion to order an inquiry into a matter under s423(1)(b) of the Act is simply that a person has complained to the Court or ASIC about an act or omission of a controller. The threshold test to satisfy the court that it should exercise its discretion is that the basis of the complaint must be ‘something sufficient’ for the Court to consider an inquiry is warranted. The Court of Appeal noted that the matters that the Court will take into consideration include (but are not limited to):

• the strength and nature of the allegations;
• any answers offered by the controller;
• other available remedies;
• the stage to which the administration has progressed;
• the likely amount of money involved;
• the availability of funds to pay for an inquiry;
• the likely benefit to be derived from it and the legitimate interest of the applicant in the outcome.

Turning solely on its facts and the grounds of appeal advanced, the appeal on the primary grounds failed, and the appeal court  did not consider it appropriate to interfere with the discretions exercised by the judge at first instance.

Substantial Injustice

What is particularly interesting is that whilst the primary court’s decision below was not attended by sufficient doubt to warrant reconsideration by the appeal court, the appeal court nevertheless still considered whether they would otherwise, not have granted leave on the basis that the applicant would not suffer any substantial injustice by a refusal of leave.

In the appeal court’s view, the applicants did not establish that they would suffer any substantial injustice if leave to appeal were not granted for the following reasons.

1. If the applicants wished to pursue their complaints for public interest purposes they could seek to pursue this course through ASIC under s423 or by liquidator in a public examination.
2. The applicants claims for loss alleged to be attributable to the conduct of the receiver could be advanced in the Derivative Proceedings.
3. The receivership is nearly completed and the receiver is, in effect, no longer a receiver of any property. This was not a case in which the applicants’ interests were affected by decisions made by the receiver in the conduct of receivership. To the extent that breaches of duty by the receiver might not be uncovered because of the absence of any inquiry, any substantial injustice would potentially fall on the creditors and members of other companies to which the receiver might be subsequently appointed.
4. The receiver provided substantial explanations for his conduct the subject of the complaints in his  affidavits that he  filed in the proceedings. The applicants have the benefit of a comprehensive explanation, on oath, of the decisions that the receiver has taken in the course of the receivership. It could reasonably be expected that these explanations would materially assist the applicants in deciding, what, if any, further potential causes of action they might have against the Receiver, beyond those already advanced in the Derivative Proceedings.

Lavan comment

This case serves as an important reminder of the approach the court will take, when deciding whether or not to order an inquiry into a receiver’s conduct and whether in all the circumstances, any substantial injustice arises if an inquiry is refused.

If you have any questions about receivership or this decision, the experienced Lavan team is here to help.