Sale of property subject to a security – s420B Corporations Act

Section 420B of the Corporations Act 2001 is a little used section of that Act. In certain circumstances, it permits a court to confer significant powers on a receiver and manager.

A receiver and manager may be authorised to sell property of a corporation, notwithstanding the existence of a higher-ranking security over the property than that held by the receiver’s appointor. In other words, the receiver and manager may be authorised to sell through a higher-ranking security.

Although s420B is little used in practice, it is important to be aware of it, particularly when a lawyer is called on to act for a receiver and manager, or for a prior security holder.

Section 420B

Section 420B(1) provides that the court may authorise a managing controller to sell, or in some other specified way dispose of property, even though the property is subject to a security interest that has priority over the security interest that the controller is enforcing.

‘Managing controller’ is defined in s9 of the Act to include a receiver and manager of the property of a corporation.

Section 420B(2) provides that the court “may only make an order” if it is satisfied of the matters set out in that subsection; that is, that:

(a) apart from the existence of the prior security interest, the controller would have power to sell, or to so dispose of, the property, and

(b) the controller has taken all reasonable steps to obtain the secured party’s consent in relation to the prior security interest to the sale or disposal, but has not obtained that consent, and

(c) sale or disposal of the property under the order is in the best interests of the corporation’s creditors, and of the corporation, and

(d) sale or disposal of the property under the order will not unreasonably prejudice the rights or interests of the secured party in relation to the prior security interest.

Section 420B was inserted into the then Corporations Law in 1992 by the Corporate Law Reform Bill 1992. That Bill enacted recommendations made by the Australian Law Reform Commission’s report No.45, the General Insolvency Inquiry, commonly known as the Harmer Report.

The Harmer Report’s concern that led to the recommendation that s420B be enacted was summarised in the Corporate Law Reform Bill 1992 Explanatory Memorandumas follows:

[408]    The Harmer Report observed that a charge under which a receiver is appointed will often embrace all, or nearly all, the assets of a company. However, there was the possibility that another secured creditor may have security in priority to the chargeholder over a crucial part of the property of the company. In such a case, the receiver could be effectively prevented from disposing of all of the saleable property of the company, particularly the business of the company as a going concern, at the most favourable price.

Protection of rights of prior security holder

Both the text of s420B itself, and the explanatory memorandum, make it clear that the court is to ensure that the rights of prior security holder are adequately protected.

In particular, s420B provides that the court:

(a) would have to be satisfied that the sale or disposal of the property under the order would not unreasonably prejudice the rights or interests of the secured party in relation to its prior security interest (s420B(2)(d));

(b) is to have regard to the need to protect adequately the rights and interests of the secured party in relation to its prior security interest (s420B(3)), and

(c) may make any order subject to conditions, which may include conditions that the net proceeds of sale or a specified part thereof be applied in payment of specified amounts secured by the prior security interest (s420B(6)). Subsection 420B(6) was included to “further protect the position of the holder of the prior charge”: paragraph 414 of the explanatory memorandum.

Obtaining an order in practice

In an application under s420B, the real dispute will likely centre on whether the applicant has satisfied the elements of s420B(2)(c) and (d); that is:

(a) whether the sale or disposal of the property under the order is in the best interests of the corporation’s creditors, and of the corporation, and

(b) whether the sale or disposal of the property under the order will not unreasonably prejudice the rights or interests of the secured party in relation to the prior security interest.

The evidence necessary to satisfy those subsections may overlap. They require a comparison to be made between the likely effect on the corporation’s creditors (as a whole) and the corporation, along with the secured creditor, if the sale which has been proposed by the receiver and manager proceeds, as opposed to the likely effect on those parties if the proposed sale does not proceed.

This will often require scrutinising any sale process that has taken place so as to determine whether the market has been fully tested, and whether the price obtainable has been maximised. Resolution of these questions will often depend on expert valuation evidence.

Importantly, subsection 420B(2)(d) requires the applicant to establish that the sale will not unreasonably prejudice the rights or interests of the secured party in relation to the prior security interest. This suggests that the court may make an order under s420B even if it prejudices the prior security holder’s interests. The question for the court to determine is whether any prejudice caused is unreasonable. That will often be assessed by reference to the value of the prior security holder’s security interest.

As the explanatory memorandum foreshadowed, s420B will often be engaged where a receiver has power to sell most assets of a corporation, but where a prior security holder holds security over a crucial part of the corporation’s property (the disputed property).

Where the receiver seeks to sell the disputed property together with other property, s420B(4) provides that the court may have regard to:

(a) the amount by which it is reasonable to expect that the net sale proceeds of the other property, if sold without the disputed property, would be less than so much of the net proceeds of selling all the property together as would be attributable to the other property

(b) the amount by which it is reasonable to expect that the net sale proceeds of the disputed property, if sold without the other property, would be greater than so much of the net proceeds of selling all the property together as would be attributable to the disputed property.

This is also likely to require expert valuation evidence, concerning the likely sale price of the disputed property and the corporation’s other property if sold separately, and if sold together.

Order may be made subject to conditions

Section 420B(6) provides that an order under s420B may be made subject to conditions, including a condition to the effect that the net proceeds of sale or a specified part thereof be applied in payment of specified amounts secured by the prior security interest.

In Melsom v Rowena Nominees Pty Ltd [1999] WASC 277, the court made orders under s420B authorising a receiver to sell property, but the following “protective conditions” were attached to the order, requiring the sale proceeds to be dealt with as follows:

(a) in payment of the receiver’s reasonable remuneration, costs and expenses relating to or arising from the disposal or sale of the property

(b) in payment of the claim of any registered mortgagee upon the land

(c) the receiver and manager was required to hold the balance of the sale proceeds, and not dispose of it other than in accordance with an order of the court, with liberty to apply.

Kylie Downes QC is a member of Northbank Chambers and the editorial committee of Proctor. Philippa Ahern is a Brisbane barrister and member of Northbank Chambers. The third edition of Back to Basics columns is now available.

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