Hall v Sherman [2001] NSWSC 810
In the Equity Division of the Supreme Court of New South Wales, Austin J dismissed a receiver's originating process against liquidators, holding that his powers of possession under the Corporations Act and the deed of charge were restricted to books the companies in receivership owned, or possibly had a proprietary interest in, that were charged property [53], [54], [56], [57], [87]. His Honour also held that books those companies merely possessed were not books "of" the corporation open to the receiver's inspection under section 431 [76], [77].
What the court decided
On 6 June 2001 Lucent appointed the plaintiff receiver and manager of the Network Group of One.Tel subsidiaries only [14]. The defendants, administrators from 29 and 30 May 2001, became liquidators of most One.Tel companies on 24 July 2001 [13]. The defendants said that they gave the receiver access to documents belonging to the Network Group or of uncertain ownership, but withheld those of other companies [31], [32], [33], [34].
The receiver sought a declaration that he was entitled to possession of all books, as defined in the Corporations Act 2001 (Cth), in the Network Group's possession on his appointment [1]. Alternatively he sought to inspect all Network Group books, including those it possessed on 6 June 2001 [64]. Prayers 3 to 6 sought a regime for classifying all One.Tel Group books [2].
Under section 530B a secured creditor's entitlement to possession ranks ahead of the liquidator, and no proprietary interest is needed [47]. The power in section 420 depended on the documents being "property of the corporation" [51]. His Honour held that the receiver's right was restricted to documents a Network Group company owned at the relevant date, leaving open those in which it had a proprietary interest [53], [54]. Prayer 1 was too broad in two respects [55]. First, he had no entitlement to books a Network Group company possessed without owning them or having a proprietary interest [56]. Second, the deed limited the power in section 420(2)(a), so that property excluded from the charged property was outside it [57]. That definition excluded property, including documents, situated in an Australian state on 1 July 1999, absent a later oral notice [57]. His Honour held that the liquidators' approach correctly reflected the parties' entitlements to possession of documents [59].
A narrower declaration would have no practical value and would not resolve the practical problem [58], [61]. His Honour accepted the defendants' submission that it would not be a "judicial determination" under Bass v Permanent Trustee Co Ltd, because the real controversy was how to classify the documents and who should pay [62]. A declaration as sought in prayer 1 would therefore be futile [63].
On inspection, the receiver argued that books "of" the corporation in section 431 included books the company possessed on his appointment [68]. His Honour applied Re Jet Corp of Australia Pty Ltd (in liq); Hunter v Touche Ross & Co [69], [71]. That case concerned section 329A of the Companies (Victoria) Code, which is indistinguishable from section 431 [69]. There Gobbo J said the plain meaning was that the books must belong to the company [70]. Austin J accepted Gobbo J's reasoning and conclusion, and would have been disposed to apply it even if not fully convinced [71]. He accepted that Re Jet Corp had not decided the possession question, but held its reasoning was inconsistent with the receiver's argument, and saw no distinction between a liquidator and a third party [72], [73]. Books over which a person has a merely possessory right are not books "of" that person for the purposes of section 431 [76]. Prayers 2 and 7 therefore sought inspection wider than section 431 allows [77]. A narrower declaration would be futile, and the liquidators would not be made to trawl through the documents [77]. The liquidators had given access to documents of uncertain ownership beyond the receiver's entitlement under section 431 [78].
The classification regime wrongly assumed a right to inspect all the books of the One.Tel Group [80]. Sections 424, 1321 and 1324 gave no basis for extending the receiver's rights [81]. Any discretion would be declined because the receiver was now the agent of Lucent, which was entitled to his information and was a proposed litigant against One.Tel Ltd [82], [83]. His Honour declined to design an inspection regime, finding the liquidators had on the whole acted reasonably and correctly [86]. The matter stood over for submissions on costs [88].
Why it matters
The decision ties a receiver's right to possess documents to section 420 and the terms of the charge, so that ownership by a charged company, within the charged property, was the test on this deed [56], [57]. Whether a lesser proprietary interest suffices was left open, and the statutory right of inspection does not reach documents merely possessed [54], [76]. A receiver's solicitors should establish which documents the charged companies own and whether they are charged property, noting that the futility finding turned on these liquidators accepting the principle, so that the real dispute was the practical one of classification and cost.
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