16.08.2022

Retaining the Harvest: the right of receivers to withhold surplus funds to defend litigation

The recent decision of the High Court in Fistonich & Anor v Gibson & Ors [2022] NZHC 1422 considered whether receivers have a right to retain surplus funds to meet the cost of defending actual or forecast claims against the receivers.

Background 

The case involves the sale of the business and land associated with Villa Maria winery, which was owned and operated through Villa Maria Estate Ltd and established 60 years ago by Sir George Fistonich.  FFWL Ltd was the holding company of Villa Maria Estate Ltd.

In 2020, Sir George Fistonich agreed to a sales process, but refused to agree to a proposed sale of the business and its assets for $172.5m and $75m for the surplus land, a sale that ANZ Bank and Rabobank deemed to be acceptable.  The company was placed into receivership in 2021.  Brendon Gibson and Neale Jackson were appointed as receivers and sold the business for $190m and the surplus land for $75m.  The sale price was disputed by Mr Fistonich on the basis that it was alleged better prices would have been obtained if the receivers had been prepared to entertain sales to overseas persons.  

Proceedings were then commenced against the receivers.

A surplus of $40m remained after the repayment of the bank debt.  The receivers advised this money would be paid to Mr Fistonich, less $5.16m to be retained to cover estimated receivers and legal fees expected to be incurred in defending claims brought or to be brought against them. 

Issue

Mr Fistonich and FFWL sought orders that the receivers were not entitled to retain surplus funds to meet the cost of conducting their legal defence.  They also challenged the reasonableness of the sum the receivers proposed to retain.

The High Court acknowledged the well-established principle that a receiver is ordinarily entitled to an indemnity and lien in respect of costs incurred in carrying out of their duties as a receiver.  The Court further noted that it was commonly accepted that receivers will not be entitled to an indemnity for claims occurring from neglect, default, or breach of duty.  This principle was enacted into legislation by s 20 of the Receiverships Act 1993 (the Act). 

The Court considered the key issue to be at the intersection between s 20(b) of the Act and the principle that a receiver is ordinarily entitled to an indemnity and lien in respect of their costs incurred in the carrying out of their duties as receiver. 

Decision 

Justice van Bohemen ruled that the receivers were entitled to hold $5.16m from surplus funds in the receivership as a retention to defend the claims being made against them. 

The Court considered Australian case law decided under the equivalent legislation.  In Australian Securities Investment Commission v Lanepoint Enterprises Pty Ltd [2006] FCA 1493 it was held that ss 199A(2) and (3) of the Corporations Act 2001 of Australia did not preclude the application of the general principle that a receiver is ordinarily entitled to indemnity and lien in respect of their costs incurred in carrying out duties as a receiver.  The right to indemnity is only determined when liability is established.  If the receiver is not found liable, they are entitled to be indemnified for their costs.  If they are found liable, they have no right to indemnity.  Until liability is established, the receiver has an indemnity and an entitlement to a lien over the company’s assets and is entitled to retain sufficient funds to defend proceedings brought.

The Court concluded the same analysis should apply in New Zealand.  This decision stands in contrast to the decision in Taylor v Bank of New Zealand [2011] 2 NZLR 628 (HC), where it was found that s 20 of the Act precluded a receivers’ right to indemnity where there is an alleged breach of duty in s 19, to obtain the best price reasonably obtainable at the time of sale.  The Court declined to follow the decision in Taylor, finding that the analysis conducted in that decision did not pay sufficient attention to the language of s 20.  It was fundamental to the application of s 20(b) that a breach of the duty in s 19 occurred.

The Court held it would be contrary to well-established principles “if the right of a receiver to secure the liability to indemnity could be abrogated simply by an allegation of a breach of duty” for which if the analysis in Taylor was correct, a receiver would be required to fund their own defence to any allegation of a breach of duty, and run the risk that if it was an unsubstantiated claim and the company had no funds, the receiver couldn’t recover costs from the receivership exercise. 

The Court did not consider it had sufficient evidence before it to make any findings on the amount of the sum proposed to be retained.  It therefore limited its finding to the question of a right to withhold a retention to defend claims against the receivers. 

Comments

The decision provides important clarity as to the scope of s 20(b) of the Act.  Receivers are entitled to retain surplus funds for the purposes of defending legal action.  Section 20(b) of the Act only applies to established breaches of receivers’ duties, and it is only once such a breach has been established that the preclusions in that section will be engaged.

If you have any questions about this case or receivers’ obligations more generally, 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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