The Authors of this article are Brent Norling and Anna Cherkashina (who were also successful Counsel in the decisions analysed below).
Receivership is a process in which a secured creditor appoints a receiver to collect and sell the debtor’s assets over which the secured creditor has a security.
A private receiver (as opposed to a Court appointed receiver) cannot be appointed unless there is a contractual power to do so. Such contractual power is generally set out in the security agreement which creates security over all or some of the debtor’s assets. The security agreement would also prescribe when and in which circumstance such power can be exercised.
Only the occurrence of the default specified within the security agreement will give the right to the secured creditor to appoint a receiver. Failure to make payments on time is the most common default after which secured creditor appoint receivers in New Zealand.
Once receiver is appointed, the receiver will take control over the assets subject to the security, will run the business (if business is subject to the security), and will sell the assets to repay the secured creditor from the proceeds. In New Zealand, receiverships are conducted under the Receiverships Act 1993.
In this article, we address the Court’s power to intervene in the secured creditor’s exercise of power of appointment of the receiver through the issuance of an injunction. Injunctions in the context of a private receivership can be sought to:
- Preclude appointment of a receiver. Such injunction being appropriate where no receiver has been appointed yet, but there is risk of appointment; or
- Restrain the actions of the receiver in a receivership. Such injunction being appropriate where the receiver has already been appointed.
Court’s power to issue injunction
Injunctions can be permanent or interim. A permanent injunction is sought to permanently preclude actions, whereas the interim injunction is sought to preclude actions on an interim basis until the substantive proceeding (i.e. the main dispute) is resolved. Depending on the type and complexity of the proceeding, the substantive proceeding could take 12 months or more to be resolved. In such circumstances, it is necessary to seek an interim injunction to preserve status quo in the meantime.
In the context of receiverships, most commonly interim injunctions are sought. This is to preserve the assets over which a receiver has been appointed, or is about to be appointed, while the substantive dispute (e.g. determination whether there has been a default, whether the security agreement is defective, or a declaration be made that the receiver was appointed invalidly) is underway.
When the Court determines whether to issue an interim injunction, there are three stages to the consideration of the application, being:
- The application must establish that there is a serious question to be tried in the substantive proceeding.
- The balance of convenience must be considered by the Court, which requires consideration of the impact on the parties of the granting of, and the refusal to grant, an order.
- An assessment of the overall justice is required as a check.
Further, prior to the issuance of the interim injunction, the Court will need to be satisfied that the applicant has provided a sufficient undertaking as to damages sustained through the injunction.
Injunction to preclude appointment of receiver
Application to Court can be made to stop the secured creditor from exercising its power of appointment in the following circumstances:
- Where the security agreement does not provide for a power to appoint a receiver or there is a challenge as to validity/enforceability of the agreement, however, the secured creditor threatens to appoint a receiver.
- Where the event of default which would have triggered the appointment of the receiver under the security agreement has not occurred or not all necessary pre-requisites for appointment under the agreement have been complied with (e.g. notice of default with the right to remedy the default has not been issued but required to be issued under the agreement), however, the secured creditor threatens to appoint a receiver.
One of the recent examples where an application was made to Court seeking an interim injunction to preclude the appointment of the receiver was subject to the proceeding in Greenfield Global Ltd v MKAH Ltd  NZHC 1298 where we were successful in restraining the powers of a creditor who wished to appoint a receiver.
In Greenfield Global Ltd v MKAH Ltd, the secured party made a number of threats to appoint a receiver over all assets of various companies unless payment was made. There was a dispute between the parties as to the calculation of the debt. In the secured creditor’s view, funds were still outstanding. However, the companies’ position was that the debt had already been paid in full. The companies proposed informal resolutions, including appointment of an independent accountant to resolve the dispute with calculations (and in the interim, deposit funds equal to the disputed amount into a trust account), however, the secured creditor still demanded immediate payment or there would be a receivership.
At the time, the companies employed over 50 staff, whose jobs could be lost if the companies went into receivership, and a permanent harm to the companies’ reputation and goodwill would have been caused. As a result, the companies commenced proceedings in Court seeking a declaration that no debt was owed and as such, there was no default which would have entitled the secured creditor to appoint a receiver. A without notice application was also made seeking an interim injunction precluding the secured creditor’s right to appoint the receiver.
The Court agreed that it was appropriate to issue the interim injunction and made orders. The Court also awarded costs against the secured creditor on the basis of unreasonable conduct which resulted in the application being necessary.
Injunction to restrain actions of receiver
Application to Court can be made to restrain all or specific actions of the receiver in a receivership in the following circumstances:
- Even though the receiver has already been appointed, the power of appointment or the occurrence of the default which could trigger the appointment is challenged in the substantive proceeding.
- A particular step undertaken by the receiver within the receivership is considered to be outside of the scope authorised under the security agreement.
One of the recent examples where an application was made to Court seeking an injunction to restrain the actions of the receivers was subject to the proceeding in Alpine South Fishing Ltd (in Rec) v Kim  NZHC 2579.
In Alpine South Fishing Ltd (in Rec) v Kim, the secured party, Mr Kim, appointed a received over the assets of Alpine South Fishing Ltd (in Rec) (“Alpine South”) due to non-payment of debt.
Alpine South, and its director, Mr Choi, commenced proceedings seeking a declaration that the security agreement was a nullity and the appointment of the receivers was invalid. Mr Choi argued that due to limited English he did not understand the meaning of the security agreement at the time of execution and also maintained that Mr Kim represented the meaning of the agreement to him differently. Mr Kim denied that Mr Choi’s level of English was inadequate to understand the agreement, and in any case, Mr Choi was advised in native language by Mr Kim’s solicitors, and provided with opportunity, to seek legal advice prior to execution. Mr Kim also denied that he misrepresented the meaning of the agreement to Mr Choi.
An application was also made by Alpine South and Mr Choi seeking an interim injunction restraining the receivers from taking further steps pending the determination of the substantive proceeding. Mr Kim opposed the application on the basis that no serious question to be tried had been established, the balance of convenience lied in favor of Mr Kim, and it was inappropriate to restrain the receivers from taking further steps without adequate security (secured funds pending resolution or adequate undertakings).
The Court agreed that based on the evidence presented to Court, the prospects of Alpine South and Mr Choi succeeding in the substantive proceeding were low, however, the Court was not prepared to make a finding that there was no serious question to be tried (as further evidence could be introduced at the trial). However, the Court found that the balance of convenience lied with Mr Kim and that the interim injunction would not be appropriate. Accordingly, we were successful in defending the application for injunction and the application was dismissed.
Appointment of receivers is a draconian remedy and it can destroy the company’s business, reputation, credit rating and goodwill. Unsurprisingly, receiverships often result in the companies going into liquidation.
It is important for the secured creditors to verify, before appointing a receiver (or before making threats to do so), that the security agreement provides:
- for a right to appoint the receiver and that the agreement is valid;
- that there is a default or event that triggers the right to appoint a receiver;
- that default or event has occurred and that appropriate procedure has been undertaken prior to the appointment (if the agreement prescribes a compulsory procedure, for example, the issuance of the notice of default).
It is also prudent to explore options and alternatives to ensure receivership is the most appropriate course of action.
Otherwise, an application for an injunction stopping the appointment of receiver, or the continuance of the receivership, could be made, and a cost award could be ordered against the secured creditor.