Statutory Powers of Sale

In 2023, we saw an increase in both voluntary administration and receivership appointments in Australia. In the context of Australia's economic climate this was unsurprising — debtor companies were grappling with volatile markets, supply chain disruptions and uncertain economic conditions, and secured lenders were invoking either or both of these regimes as a means of protecting their investments.

Receivers and administrators in Australia are each afforded a power of sale under the Corporations Act 2001 (Cth) ("Corporations Act"). However, insolvency practitioners owe differing duties to the stakeholders of the debtor company depending on the nature of their appointment — receivers owe a primary duty to their secured creditor appointor, while administrators owe duties to the creditors of the debtor company as a whole. It is for this reason that the duties and considerations an insolvency practitioner must adhere to in exercising a power of sale will depend on the capacity in which they are appointed.

As debtors, investors and insolvency practitioners alike look to preserve the value of viable Australian businesses, it is worth reflecting on the statutory powers of sale afforded to both voluntary administrators and receivers in Australia and the accompanying statutory duties that these insolvency practitioners must adhere to when exercising their power of sale.

Receiver's Power of Sale

A receiver's power to sell assets of a company to which they are appointed is set out in section 420 of the Corporations Act or otherwise in the instrument appointing the receiver. In exercising a power of sale, section 420A imposes a duty on the receiver to take "all reasonable care" to sell a company's property for:

1. not less than market value if, when it is sold, it has a market value;¹ or,
2. the best price that is reasonably obtainable having regard to the circumstances existing when the property is sold.²

Australian courts have consistently held that these two limbs operate to the exclusion of one another.³ That is, where an asset has an ascertainable market value (for example, securities traded on a securities exchange), that asset must be sold for not less than its market value. Alternatively, where there is no ascertainable market value for an asset, an appointee must obtain the best price reasonably obtainable. In determining whether the duty has been discharged, the common law position is clear that it is the process followed by the receiver, rather than the ultimate price obtained, that is relevant.

Some examples of steps taken by a receiver that were relevant to a court finding that the duty had been discharged are as follows:

1. conducting a comprehensive sale process seeking "expressions of interest" and involving an "indicative offer phase" and a "best and final offers" phase;⁴
2. seeking one or more valuations from reputable valuers and achieving a sale price in line with those valuations. However, merely because a sale price differs from a valuation obtained does not mean the court will automatically find the sale process was deficient;⁵
3. where dealing with a niche or highly specialised asset, seeking out purchasers within the relevant specialist market for that asset;⁶
4. seeking advice of lawyers and experts in the relevant field⁷; and
5. having regard to the receiver's own knowledge and experience.⁸

There is no "one size fits all" approach to discharging the duty under section 420A — the nature of the property being sold and the relevant industry or sector in which it sits will be relevant in informing the receiver of the process to be adopted. Put simply by a unanimous bench of the Victorian Court of Appeal, "the relevant question for the purposes of s 420A is whether the controller has failed to do what a reasonable and prudent person would do, or has done what a reasonable or prudent person would refrain from doing in the circumstances."⁹

Administrator's Power of Sale

Section 437A(1)(c) of the Corporations Act affords voluntary administrators a broad power to "terminate or dispose of all or part of [the company's] business, and [to] dispose of any of [the company's] property." However, the duties imposed on a voluntary administrator in exercising that power are different from the duties imposed on a receiver — the most pronounced difference being that there is no equivalent to section 420A applicable to voluntary administrators. Instead, there are a range of considerations a voluntary administrator must have regard to — in particular, his or her duty to have regard to the interests of all creditors of the debtor company.

Some key principles in relation to a voluntary administrator's power of sale as distilled by the courts are:

1. the power of sale in section 437A(1)(c) extends to the whole of the company's property;¹⁰
2. the power afforded to administrators is a discretionary power, the exercise of which is, generally speaking, not subject to court approval;¹¹
3. administrators do not have a duty to obtain "the best possible price" for property that is the subject of any sale and are "entitled to take into account a wide range of considerations";¹²
4. the exercise of the power of sale requires administrators to make business and commercial judgments, which courts are generally reluctant to interfere with.¹³ That said, the court may give directions to an administrator approving a decision with respect to a sale where there is potential for issues of propriety or reasonableness;¹⁴ and
5. in exercising any power under section 437A, an administrator must of course have regard to the object of Part 5.3A — including that if it is not possible for the company or its business to continue in existence — to provide for the property of the company to be administered in a way that results in a better return for the company's creditors and members than would result from an immediate winding up.

In exercising a power of sale, the fact that a voluntary administrator must necessarily make a commercial judgment having regard to the above principles and in particular, the object of Part 5.3A, makes the power of sale a useful tool in preserving maximum value in the company. Interestingly, there are a number of examples of voluntary administrators using their power of sale to preserve value by offering transaction certainty to a purchaser of the business ahead of the statutory "second meeting" of creditors (at which creditors are asked to decide the fate of a company — typically, either the entry into a deed of company arrangement (known as a "DOCA") or liquidation). This was the case in the administration of Virgin Australia, where the voluntary administrators exercised their power of sale to sign a binding agreement for the sale of the business to Bain Capital, with completion of the sale to occur either by execution of a deed of company arrangement (if approved by creditors) or the terms of an asset sale agreement.

Conclusion

While receivers and administrators each have statutory powers to effect a sale of property of a company over which they are appointed, their duties when exercising that power differ markedly. Lenders, investors and sponsors (and indeed debtor companies who may be considering their options when trading through a period of financial distress or who are otherwise faced with a liquidity shortage) should have particular regard to these duties when formulating and implementing distressed sale and purchase transactions in Australia.

Madeleine McCloy (White & Case, Associate, Sydney) contributed to the development of this publication.

_{1 Section 420A(1)(a) of the Corporations Act 2001 (Cth).
2 Section 420A(1)(b) of the Corporations Act 2001 (Cth).
3 In the matter of Australasian Barrister Chambers Pty Ltd (in liquidation) [2017] NSWSC 597 at [39].
4 In the matter of Austral Alloys Pty Limited (2021) 152 ACSR 635 at [29].
5 Ibid at [29]-[30].
6 In the matter of Metal Storm Ltd (subject to Deed of Company Arrangement) [2015] NSWSC 1698 at [7].
7 CIP Group Pty Ltd v Watters in his capacity as receiver and manager of GGPG Pty Ltd [2023] FCA 329 at [126].
8 Ibid.
9 Boz One Pty Ltd c McLellan (2015) 105 ACSR 325 at [158].
10 Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 8) [2020] FCA 1344 at [25].
11 Patrick Stevedores Operations No 2 Proprietary Limited and Others v Maritime Union of Australia & Others (1998) 195 CLR 1 at [60]-[62].
12 Hausmann v Smith [2006] NSWSC 682 at [10].
13 Robit Nominees Pty Ltd v Oceanlinx Limited (in liq) (Receivers and Managers Appointed), in the matter of Oceanlinx
Limited (in liq) (Receivers and Managers Appointed) (2016) 111 ACSR 427 at [188].
14 Re Ansett Australia Ltd (No 3) (2002) 40 ACSR 433 at [66].}

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