In Florgale Uniforms Pty Ltd (Receiver and Manager Appointed) (In Liquidation) v Orders (2004) 51 ACSR 699, the Supreme Court of Victoria considered the issue of the duties owed by a receiver to a company and the guarantors of the company’s debts in respect of special purpose assets of the company.

Background

Florgale Uniforms Pty Limited (Florgale) and its associated companies were manufacturers and wholesalers of special purpose clothing, including uniforms and corporate apparel, and had conducted this business since World War Two.

In 1998, Florgale experienced financial difficulties.  The directors of Florgale appointed a voluntary administrator to the company.

Florgale owed its financier, National Australia Bank Ltd (NAB), approximately $1 million.  NAB appointed Mr Orders as receiver and manager on 5 November 1998 pursuant to a mortgage debenture held over the undertaking of Florgale and its associated companies.

Mr Orders conducted the business of Florgale and attempted to find a purchaser for the business on a ‘going concern’ basis.  Stock was sold on a discounted basis to existing customers of Florgale.

Mr Orders examined the cost and risk associated with continuing to conduct the business and concluded that the business could not be sold on a ‘going concern’ basis.  Mr Orders decided to close Florgale’s business on 25 November 1988 and auction Florgale’s remaining stock.  Some of the stock was in the nature of ‘special purpose stock’.

The auction occurred 15 December 1998 and realised approximately $74,000.  Not all of the stock was sold at auction.  The total value received for all of the stock of the company including auction sales was approximately $100,000.

The stock had been valued by the company at approximately $1.3 million for finished goods and approximately $670,000 for work in progress.  This was subject to a 20 per cent discount in the companies’ books.

Criticism by directors and guarantors

The directors and guarantors of Florgale commenced proceedings in the Supreme Court of Victoria, alleging, among other things, that:

·               Mr Orders had breached his duties by conducting a sale of the special purpose stock by auction rather than by conducting a ‘closing down sale’ over a period of six weeks; and

·               Mr Orders had breached his duties (through his agents) in the preparation of lots of garments for sale at the auction which were inappropriate and unattractive to potential purchasers.

The Court dismissed each of the allegations.

Law

Pursuant to s420A of the Corporations Act 2001 (Cth) (the Act), a receiver must take all reasonable care to obtain ‘market value’ or ‘the best price reasonably obtainable’.

The Court reviewed the law relating to the duties of receivers and, in particular, special purpose assets to which it is difficult to ascribe a market value.  The Court observed that s420A(1) is curious in its drafting in that it provides that a receiver:

…must take all reasonable care to sell the property [of a corporation] for:

(a)        if … it has a market value not less than that market value; or

(b)       otherwise the best price reasonably obtainable, having regard to the circumstances existing when the property is sold.

The concept of an absence of market value is a difficult one to grasp.

The Court held that s420A of the Act should be interpreted in accordance with the judgments in Skinner v Jeogla (2001) 37 ACSR 106 and GE Capital Australia v David [2002] NSWSC 563; BC2000203504.  According to these decisions, s420A contemplates a range of value that may be ascribed to an asset.  This range extends from a ‘definite value’ (an example being a small parcel of shares in a liquid listed company) through to a ‘determinable value’ (property for which the number and nature of comparable sales make the value ‘determinable’), and subsequently to property the nature of which is so unique that a value cannot be readily ascribed at all.

The effect of s420A on the general law duty of receivers is, of course, tempered by the fact that the duty is to ‘take all reasonable care’.

Application to facts

Method of sale

The Court held that the garments held by Florgale had no market value in terms of s420A.  The stock was very specialised and had a niche market.  Mr Orders was required to sell the stock at the best price reasonably obtainable. This avoided the necessity of deciding between the various valuations of the stock put forward by the parties.

Given the inherent ambiguity in the concept of ‘best price reasonably obtainable’, the Court focused on whether the steps taken by Mr Orders to sell the property were reasonable.

The factors found to be relevant were:

·               the overall process of evaluating and balancing the competing costs and benefits and associated risks of various methods of sale available;

·               the scale of the receivership;

·               the value and nature of the property involved;

·               the receiver’s expertise in relation to the type of property;

·               expert advice received; and

·               the trading history and marketing of the company.

In the circumstances of Florgale, and despite the disparate values ascribed to the stock in question.  Mr Orders was found not to have breached s420A in conducting an auction as opposed to a closing down sale.

The auction

The same factors as were relevant to the method of sale were held to be relevant to the sale itself.

The plaintiffs were unable to establish any breach on the evidence put forward by them (which the Court found to be unreliable and unpersuasive).

Conclusion

When assets have a readily determinable market value the issue of whether reasonable care was taken to obtain market value would not seem to be a difficult task.  Assets of a special or unique nature raise the issue of what price should be obtained for them. Valuations ascribed by the parties and their experts were of little assistance to the Court.  In the absence of being able to determine a market value for the assets, the Court will only be able to decide the issue by regard to the conduct of the receiver in realising the assets.

Simon Lipp is a solicitor at Gadens Lawyers, Sydney, specialising in insolvency law.