Appointing a receiver to resolve internal quarrels within an Association

Receiverships usually arise from a secured creditor exercising their rights under a loan contract or mortgage following a default. But even where no default occurs, the Supreme Court of New South Wales has jurisdiction to appoint a receiver to preserve the property of an association pending the resolution of a dispute about the management of the association’s property.

 

Jurisdiction

In addition to the Court’s inherent equitable jurisdiction, sections 23 and 67 of the Supreme Court Act 1970 NSW provide a jurisdictional foundation for the appointment of a receiver and manager to both incorporated and unincorporated associations.

The jurisdiction to appoint a receiver is one of equities oldest remedies and as such is able to be moulded to the particular needs of the situation in the context of enabling the management of a charitable organisation to be returned to constitutional order: Attorney General v Schonfeld [1980] 1 WLR 1182 at 1186-1188 per Megarry VC (Schonfeld). In Schonfeld, the headmaster of a London Grammar School was unwell and due to retire. Under the articles of the school, the general governance of the school – including the power to appoint a headmaster – rested with the governors, many of whom could not be found. Dr Schonfeld was one such governor who strongly opposed any attempt to lessen his control of the school and in particular, to any appointment of a replacement headmaster, save by his agreement. This deadlock was resolved by Sir Robert Megarry V-C by appointing a receiver prior to the imminent departure of the retiring headmaster to make “a clean sweep of all who are or claim to be foundation governors so as to remove uncertainties and to put into office eight foundation governors whose title is derived from an order of the Court”.

A more recent exposition of the Court’s equitable jurisdiction, in the context of a need to restore a charitable organisation to sound management can be found in Sengthong v Lao Buddhist Society of NSW Incorporated [2016] NSWSC 1408 (Sengthong) in which Lindsay J held that the principles relating to the preservation of property pending litigation apply as much to charities as to other bodies, where there is either:

  1. such dispute between the known officials themselves that they cannot carry on the business of their organisation in a proper manner; or
  2.  that their identity is for any reason in dispute, so that it is not known for certain who is entitled to act on behalf of the body they should be managing.
In such cases, the court will interfere by the appointment of a receiver and, if required, a manager, pending the resolution of such disputes, or the ascertainment of the identity of the proper officials, to enable the business of the organisation to be properly conducted in the meantime.

Principles

The Court’s discretion to appoint a Receiver where it is ‘just or convenient’

Section 67 of the Supreme Court Act 1970 (NSW) enables the Court to appoint a receiver by interlocutory order in any case in which it appears to the Court to be “just or convenient” to do so. The observations of Johnson J in McLean v McKinlay and Ors [2004] WASC 2 that “it can be seen that the jurisdiction is quite general and, in its terms, unlimited” were adopted by Lindsay J in Sengthong (at [186]). This being the case, the words "just or convenient" do not confer an arbitrary or unregulated discretion on the court: Harris v Beauchamp Bros [1894] 1 QB 801 at 809. The power to appoint a receiver is to be exercised judicially and with due regard to authorities which are binding on the court: Parker v Campden London Borough Council [1986] Ch 162 per Donaldson MR, at 173 and 179.

Great care must inform the Court’s discretion

The Court’s discretion to appoint a receiver to an association will be exercised with great caution and circumspection, after full consideration of the facts of a particular case and the interests of all parties concerned, for a reason strongly appealing to the judge to whom the application is made (National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] VicRp 31).

The Receivers duty of fair dealing

In determining whether it is appropriate to appoint a receiver in any set of circumstances, the Court will have regard to the role which the receiver is to play. In the context of appointment to an association, the receiver’s position is quite different from that of receivers appointed pursuant to contractual arrangements or pursuant to other statutory provisions. With respect to an association, the role of a receiver is to take possession of the property as the Court's officer with the duty of dealing with it fairly in the interests of all the parties to the proceedings: Re Newdigate Colliery Ltd [1912] 1 Ch 468 at 478. The receiver's responsibility is to the Court. He or she is not the agent of, or the trustee for, any of the parties, nor subject to their control: Co-operative Farmers' & Graziers' Direct Meat Supply Ltd v Smart [1977] VR 386, at 391.

Alternatives to receiverships

Section 55 of the Associations Incorporation Act 2009 (the Act) provides that the Commissioner of NSW Fair Trading may appoint an administrator to administer an association’s affairs if:
  1. the association has persistently failed to comply with the requirements of this Act or the regulations, and
  2. having regard to those circumstances, the Secretary is satisfied that it is in the interests of the association’s members or creditors for an administrator to be appointed.
The considerations that may be relevant to an appointment under s55 of the Act have been set out in a policy document dated September 2016 published by Department of Finance, Services and Innovation:
  1. are the issues of significant public concern or potential detriment (a factional feud within an association is not likely to meet this criteria)?
  2. is the association in receipt of government funding that may be placed at risk if the association continues to operate without intervention?
  3. are there other options available to members or creditors that are more appropriate than intervention by the Commissioner, for example actions available to creditors to recover monies owing, the association applying for voluntary cancellation and utilising dispute resolution procedures;
  4. are there other more appropriate compliance actions that are warranted (for example directing an association to cause the whole or any specified part of its financial records to be audited)?;
  5. the probable length and expense of the administration and if it is likely the association will be able to meet the expenses of administration out of its resources.
Section 63 of the Act sets out a number of grounds in which one may seek an order for the winding up of an association, which include insolvency (63(c) of the Act), pecuniary gain to members (63(d) of the Act) and where the committee of the association have acted in affairs of the association in the interests of the committee or the committee members rather than in accordance with the association’s objects, or in any other manner that appears to the Court to be unfair or unjust to the association's members (63(f) of the Act).

Where an Association has property to be preserved and an independent party is needed to resolve conflicts which seriously prejudice the operation of the organisation, a Court-appointed receiver may prove to be a flexible and appropriate remedy to restore the Association to sound management.

Contributors

Benjamin Brady Associate