When must a receiver perform a pre receivership contract?

Date: Sep 02, 2011
Document Type: Article
A Receiver enjoys a unique position in modern corporations law. While a receiver is appointed as the agent of a corporation, the receiver’s primary purpose is to act in the interests of their appointer in realising the assets of the corporation for the benefit of a secured creditor who has usually appointed the receiver under a contractual right in a debenture.
Generally, a Receiver is not liable to perform contracts which pre-date their appoint unless such contracts are positively adopted by the Receiver: Parsons v Sovereign Bank of Canada [1913] AC 160. Unlike other agency relationships, the receiver owes no fiduciary duty to the corporation that they are controlling. Accordingly, in acting in the interests of their appointer, a receiver can cause the corporation to commit breaches of contract, exposing the corporation to claims for damages. As most often the assets of the corporation will be subject to assets charge, a claim for damages against the corporation is likely to result in the corporation’s insolvency.
The position was articulated by McPherson J in Re Diesels and Components Pty Ltd (1985) 3 ACLR 555, where his Honour said:
“What is meant by saying that a receiver has power to 'adopt' a pre-receivership contract is that he may refrain from repudiating it. If he repudiates the contract he renders the company liable in damages for the breach of contract involved in that repudiation. Because the chargee who appoints him has the benefit of a security over the assets of the company, the consequences of rendering the company liable in damages are in practice felt only by the company and through it its unsecured creditors, and not by the holder of the charge.”
However, as was recognized by Master White in Cater-King Pty Ltd v Westpac Banking Corporation [1990] WAR 225, a receiver’s ability to repudiate a pre-receivership contract is not unfettered. It is incorrect to consider that a receiver has a special power or entitlement to repudiate pre-receivership contract of the corporation at will. Master White observed: 
“To refer to a receiver as being "entitled" to repudiate certain contracts but not others, is, I consider, a misnomer.”
Instead, Master White made a distinction between contracts that would attract equitable relief, and those the breach of which sounds in damages only: 
“In the case of a contract in respect of which equitable relief is given, the "repudiation" by the receiver is of no avail and cannot prevent the grant of the appropriate relief by a Court. In the case of contracts which do not attract equitable relief, the result of the "repudiation" is to give rise to a common law claim for damages against the company.”
However, the circumstances in which a court will order specific performance of a commercial contract are not clear. Consistent with to the doctrine of efficient breach, the common law embodies the principle that it is uneconomic to insist on specific performance of a contract, and that parties to a breached contract should be free to look to the market. Accordingly, the common law will often be slow to find that damages will not be an adequate remedy.
Nonetheless, it has been suggested that Courts are increasingly prepared to restrain a party from breaching a negative covenant through use of negative injunction: Aitken, Lee. 'Squeezing the Lemon Dry' - the Receiver, the Administrator, and the Specific Performance of the Company's Contract, (2007) 4 MJBL 1 at 14. For example, in Land Rover Group Ltd v UPF (UK) Ltd (in Administrative Receivership) [2002] EWHC 303, Land Rover had contractual arrangements with UPF for the exclusive supply of a unique chassis product. Upon the appointment of receivers to UPF, UPF indicated that it would not continue to supply Land Rover with the chassis unless a large sum securing 12 month supply was paid. The Court considered that the contract between the parties was of a nature that made specific performance of the contract appropriate. Accordingly, the Court was prepared to grant a mandatory interlocutory injunction preventing UPF from repudiating the contract. 
The principles applied in arriving at the conclusion that the contract attracted equitable relief is not immediately apparent. It has been suggested that the decision in Land Rover may be confined to its own facts, and attention has been drawn to the fact that the decision was interlocutory: Goode, Roy, Principles of Corporate Insolvency Law, 2nd Edition, Sweet & Maxwell, 2000 at p.290. However, it would appear that the ordinary principles of determining whether damages will be an adequate remedy are to apply: Astor Chemicals Ltd v Synthetic Technology Ltd [1990] BCLC 1.
Further, it has been suggested that the principle in De Mattos v Gibson [1858] 4 De G & J 276 may have some application to receivership. In Swiss Bank v Lloyds Bank [1979] 1 Ch 548 at 573, Browne-Wilkinson J considered that De Mattos v Gibson
“is an authority binding on me that a person taking a charge on property which he knows to be subject to a contractual obligation can be restrained from exercising his rights under the charge in such a way as to interfere with the performance of that contractual obligation: in my judgment the De Mattos v Gibson principle is merely the equitable counterpart of the tort [of interference with contractual relations]”.
However, it would appear that the principle in De Mattos is of limited application as absent some stipulation in a contractual agreement as to how a corporation subject to receivership may deal with its property, merely not performing a contract is unlikely to be concerned interference with contractual relations.
Additionally, it might be noted that the appointment of a receiver does not prevent an aggrieved party to a contract from raising a set-off against a receiver for any debts that may be owed to the corporation prior to the appointment of a receiver: Parsons v Sovereign Bank of Canada [1913] AC 160. 
For assistance with insolvency law, contact Julian van Leer of Craddock Murray Neumann on 8268 4000.
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