+ Receivers’ duties and the case of Florgale Uniforms

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Receivers’ duties

And the case of

Florgale Uniforms

2 September 2005

Prepared and presented to the ICAA Study Group

  by Leigh Adams of

Leigh Adams Lawyers

Suite 904 Level 9,

83 Mount Street

NORTH SYDNEY NSW 2060

Phone: 9964 0022

Introduction

In Florgale Uniforms Pty Limited –v- National Australia Bank Ltd (2004) 22 ACLC 1,580,  the Victorian Supreme Court gave detailed consideration to S420A of the Corporations Act 2001.

One of the issues in the case was whether the receiver breached his duty under S420A in realising the specialised stock by auction, rather than by sale to the existing customers of the business.

FACTS

The Plaintiff’s business operated in three related segments:

1. Hospital and medical uniforms and linen

2. Corporate apparel

3. Sporting apparel

By 1998, the Florgale Group was experiencing financial difficulties and liquidity problems. Its liability to the NAB was approximately $1 million.

Concerned about liability for insolvent trading, on 29 October 1998 the Florgale Group's directors resolved to appoint a voluntary administrator to each of the companies in the Florgale Group.

The NAB (a secured creditor)   heard about the appointment of the administrator, served its demands and on 5 November 1998, the NAB appointed its receiver and manager.

Receiver’s Report

The report referred to a budgeted net loss of $43,000 for the period from 11 November1998 to 30 November1998, if the company were to continue to trade to 30 November1998.

The report stated that "Given the size of the expected loss in the budget period a decision has to be made on whether to continue to trade. “

It continued: "I recommend that the operations of the group should cease. I consider that any profitable work in progress completed. Stock on hand will be offered to customers at the best obtainable price provided this price is above the auction realisation price. All unsold stock and plant and equipment will be sold by auction".

The plaintiffs alleged that the receiver breached his duty in realising specialised stock by auction, rather than by a large discount sale to the existing customers of the business.

In the light of the history of sales, losses and other features of the trade-on period, his Honour concluded that the receiver’s decision was appropriate.

The Plaintiffs contended that the receiver should have individually notified the Florgale Group's entire customer base (over 400 companies) of the impending auction of stock.  768 advertising flyers were sent out advertising the auction to `uniform businesses, clothing retailers, market buyers, clothing manufactures and other companies in Victoria, New South Wales and South Australia'.

Only one of the 11 customer witnesses learned of the auction.

His Honour concluded that:

(i)        where major interested parties have already been approached in relation to the possible sale of the business, the extent to which auction leaflets were distributed to potentially interested parties was ultimately a "matter of judgment".

(ii)       in circumstances where a strategy of sales at a discount to customers had already been adopted, the receiver's duty did not include the individual notification of customers or the inclusion of the customer list in the mail-out.

The plaintiffs  further alleged that the receiver's failure to accept immediately  an advantageous offer made by Yakka Pty Ltd to purchase Coles corporate uniform stock which was subsequently withdrawn, constituted a breach of duty.

His Honour found that in circumstances where the offer was subject to conditions, including the identity of the stock, physical inspection, and availability for collection in good order and condition, it was unrealistic to contend that the receiver was culpable for failing to accept, within the space of a single working day, an offer stated to be open for an entire week.

He said: ” In my opinion, "reasonable care" on the part of the receiver in such circumstances would not require the receiver to send an acceptance immediately or to ascertain stock levels and take steps to arrange a physical inspection within the space of a single working day.”

Breach of Section 420A

Incisively, His Honour notes that breach of s.420A is not established merely because market value (where it exists) or the best price reasonably obtainable is not achieved. Rather, a breach of s.420A requires, in terms, a failure by the receiver to take all reasonable care to sell the property for not less than market value or the best price that is reasonably obtainable having regard to the circumstances existing when the property is sold.

It is necessary for the Court to determine whether the property has a market value in order to determine which limb of s.420A(1) to apply.

Conclusion

The special purpose stock in the present case was property which had no market value in the sense of that term in s.420A(1)(a).

The Florgale Group stock was very specialised and there was no evidence of comparable sales which would permit market value to be readily determined. The property indisputably had a narrow or "niche" market.

No breach of s.420A   was established. The plaintiffs did not establish that the receiver failed to use all reasonable care to obtain market value, or the best price reasonably obtainable in the circumstances then existing.

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