20.08.2021

Injunctions & Receiverships:  A high hurdle for directors to prevent the sale of a business in receivership

The principal role of a receiver is to realise secured assets for the appointing creditor. 

This often involves selling the business as a going concern.  Frequently, directors or guarantors attempt to stall that process to preserve the possibility of regaining control of the business by filing an interim injunction application. 

Mason v Mckay [2021] NZHC 1794 (Mason) is the most recent example of the Court’s refusal to grant an interim injunction preventing the sale of a business where that business has been placed in receivership.  The case follows Clayton v Jackson [2020] NZHC 2666 (Clayton) and illustrates the very limited circumstances in which the Court will grant injunctive relief.

Background

In Mason, the director, Mr Mason, alleged the sale arranged by the receivers was made at a gross undervalue, as it did not consider the companies’ long term and renewable contract with a major US client.  Mr Mason applied for an injunction in an attempt to allow further time to solidify the contract with this client and rescue the business from insolvency.

Similarly, the director in the Clayton case applied for an injunction to prevent the sale in order to advance his own interests.  Mr Clayton wished to purchase the failing businesses as they were his “life’s work”.  He made two purchase offers but it was sold to a third party for $1m less than Mr Clayton’s offer.  Mr Clayton applied for an injunction to prevent the sale and keep his purchase prospects open.

An interim injunction application must address three elements:

  • Whether there is a serious question to be tried;
  • Where the balance of convenience lies – in preserving the status quo or permitting the sale process to proceed; and
  • Where the overall justice lies.

A serious question to be tried

To have a seriously arguable claim, there must be a real prospect of success at trial.  In the context of a receivership, the Court has indicated it will not grant an injunction because a director disagrees with decisions made by a receiver.  A receiver simply needs to have made decisions that are commercially defensible.

Ordinarily, an applicant will be required to prove that the receiver has breached a statutory duty, for example a failure to adequately market the property or business in question. 

Mr Mason in Mason was successful in showing there was a serious question to be tried.  The Court accepted the transaction organised by the receivers was of a commercial nature, and therefore open to scrutiny.  Accordingly, the Court considered Mr Mason’s allegations would be more appropriately decided at trial. 

In Clayton, the director (and guarantor) of the Claymark businesses argued that in selling to a third party for $1m less than his own offer to purchase, the receivers were in breach of their duties under sections 18 and 19 of the Receivership Act 1993.  The duties alleged included to:

  • Obtain the best price possible for the sale;
  • Properly consider Mr Clayton’s offer; and
  • Properly consider the interests of Mr Clayton as guarantor.

Mr Clayton’s injunction application was refused.  The Court held the additional terms of Mr Clayton’s offer (other than the headline purchase price) resulted in a net value of $5m less than the offer accepted by the receivers.  The fact Mr Clayton knew the business better than anyone else was not relevant. 

The Court also noted that the requirement of a receiver to have “reasonable regard” to a guarantor’s interests does not equate to preferential treatment.  The receiver is required to consider an offer made by a guarantor to the same extent it would consider any other.  The Court here concluded there was no serious question to be tried.

Balance of Convenience / Overall Justice

When balancing interests, the Court will ask if refusing an injunction would be harder on a plaintiff who is successful at trial, than granting an injunction would be on a successful defendant.

In Mason, the director claimed to have a prospective investor capable of clearing the companies’ liabilities and sought an injunction to allow for pursuit of this opportunity.  The Court balanced this against the commercial uncertainty that would result for several third-party entities should the sale be delayed.  The Court concluded that something “more weighty” than an “open ended and unsubstantiated expression” from a potential investor was required to offset the balance in the director’s favour. 

Mason reinforces the notion that an injunction is intended to protect a plaintiff against irreparable harm that cannot adequately be compensated in damages.  The threshold is high and will require more than a marginal investment prospect to succeed.

Our Comment 

Once in receivership, it is the receiver and not the director that is in control.  Following the appointment of a receiver, a director will have few means of influencing major transactions other than monitoring the receivers’ compliance with their duties.  The circumstances where an injunction will be granted are limited; simply arguing that a better commercial decision should have been made by the receiver is unlikely to be sufficient.  Instead, something akin to a breach of a statutory duty will be closer to the mark.

The Court in Mason additionally made it clear that the threshold to offset the balance of convenience is high, and that the hardship suffered needs to be both likely to eventuate and incapable of being rectified by damages alone.  Accordingly, these cases serve as a sharp reminder for parties to resolve financial issues prior to receivership wherever possible.  Last ditch attempts to wrestle back control through an injunction post appointment will be a difficult task.

If you have any questions about injunctions, receiverships or other aspects relating to the insolvency of a commercial entity, please get in touch with our Insolvency and Restructuring Team or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

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Kerry
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