No "Pooling" of assets allowed

David Smillie

July 2013... A recent High Court case in Christchurch provides useful information for Receivers of companies.

A Receiver is often appointed in respect of a company’s business and assets when that company defaults in its payment obligations to a lender and the lender then enforces its security to try and recover the outstanding money owed to it by the borrower company. That security is commonly in the form of a General Security Agreement which states that if the borrower defaults then the lender may (as one option) appoint a receiver to essentially manage the company.

The case of DB Breweries Ltd v Hyndman involved a situation where DB lent money to four separate companies which operated bars in Christchurch. The companies were related by some common shareholders however Mr Hyndman only had an interest in one company known as Fish and Chip Shop Limited (FCS). The circumstances were complicated by the fact that all four companies had entered into a “cross-guarantee” with DB which meant that each company guaranteed all money owed by the other companies.

The companies all fell into arrears with DB and so DB appointed receivers to three of the companies including FCS, the appointment in respect of FCS being made by a separate document to the other two companies. The receivers were appointed in June 2009 and they then traded the three businesses through to December 2009 at which point the businesses were all sold in one sale to a single purchaser. The trading receipts of the businesses were not dealt with separately and the receivers “pooled” that income and the sale proceeds all together with the result that none of the money could be accounted for separately as between the three companies.

DB subsequently pursued Mr Hyndman personally for money it claimed was still owed to DB. That resulted in the High Court first having to determine whether the receivers had the power to sell the businesses of the three borrower companies in one lot. The Judge decided that the receivers did not have that power under either the General Security Agreement or the Receiverships Act 1993. He noted that the Receivership Act does not make any express provision for pooling of assets, unlike the regime in the Companies Act which allows pooling in limited circumstances for liquidations and administrations. He also noted that the receivers’ appointment in respect of FCS was separate to the other two companies and that it did not matter that the other two companies were also in receivership with the same receivers. There was also a clear statutory obligation under the Receiverships Act to keep the monies of FCS separate from other monies.

The Judge concluded by noting that if the receivers considered it was advantageous to sell the businesses of the three companies together in one lot then they should have first sought the agreement of the shareholders and directors of those companies and obtained separate valuations. They then should have divided the proceeds of sale proportionately in accordance with the valuations and applied the sale proceeds to only paying off the individual liabilities of that company.

This judgement provides clear advice to receivers of companies that pooling of assets is not permitted under the Receiverships Act. The Judge also noted it is not clear whether or not parties can contract out of the provisions of the Receiverships Act – though his view was that the tenor of the Act suggests contracting out is not permitted. It will therefore be interesting to see if any lenders look to revise their security documents in light of this judgment.