Newtronics Pty Ltd (Recs and Mgrs Apptd) (in Liq) v Atco Controls Pty Ltd (in Liq)

[2008] VSC 566

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(Decision by: Pagone J)

Newtronics Pty Ltd (Recs and Mgrs Apptd) (in Liq)
vAtco Controls Pty Ltd (in Liq)

Court:

Judge:
Pagone J

Subject References:
Contract
Contract not to enforce security and provide financial support
Letters of comfort and support
Whether promissory or merely representational
Whether circumstances surrounding the letters were sufficient to create legal obligations
Mortgage Debenture
Variation
Demand for repayment
Whether valid
Receiver
Whether valid
Reasonable belief of valid appointment
Whether receiver relieved from liability on basis that conduct was honest and ought fairly be relieved
ss 419(3) and 1318 Cor-porations Act 2001 (Cth)

Legislative References:
Corporations Act 2001 - s 419(3); s 588H; s 1318

Case References:
-

Hearing date: 26-27 November, 1-4, 9 December 2008
Judgment date: 17 December 2008

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Decision by:
Pagone J

[1] The plaintiff ("Newtronics") sues its parent company, the first defendant ("Atco") on what it maintains is Atco's contractual obligation to provide financial support and not to call upon secured debts to the detriment of unsecured creditors. Newtronics also sues the second defendants (as well as Atco) in conversion. Atco is the parent company of Newtronics and had a mortgage debenture in its favour ("the mortgage debenture") as security for loans it made to Newtronics. On 21 December 2001 O'Loughlin J gave reasons for judgment in Federal Court proceedings against Newtronics commenced on 12 February 1998 by Seeley International Pty Ltd ("Seeley"). On 21 December 2001 Atco demanded the immediate repayment by Newtronics of all money owing to Atco ("the demand") secured by the mortgage debenture. On 8 January 2002 Atco appointed the second defendants as joint and several receivers and managers ("the receivers") over all of the undertaking and assets of Newtronics secured by the mortgage debenture. Newtronics contends in these proceedings that the appointment of receivers was void and of no effect. On 26 April 2002 the receivers sold the business and assets of Newtronics to Atco Electronic Controls Pty Ltd for a sum of $13,075,000 subject to adjustments realising $13,161,064. The purchase price was satisfied, in effect, by reduction of the debt due from Newtronics to Atco and was reflected in book entries. One consequence of Atco's enforcement of its security was that the amounts owing to Seeley on the judgments entered in the Federal Court proceedings could not be paid by Newtronics. On 21 December 2001 O'Loughlin J had found that Seeley was entitled to judgment for $8,901,708.02. On 18 January 2002 Seeley entered interim judgment against Newtronics for $8,901,726.02. On 31 January 2002 his Honour awarded Seeley interest on the judgment in the amount of $5 million and ordered Newtronics to pay Seeley's taxed costs. On 26 February 2002 James Henry Stewart was appointed liquidator ("the liquidator") of Newtronics.

[2] A fundamental aspect of Newtronics' contractual claim against Atco is a series of "letters of support" written to Newtronics' auditors in several years between 1994 and 2001. The case, however, is not brought only upon the letters of support. The written submissions for Newtronics asserts that the case brought "does not concern a letter designed to provide comfort to a bank" in "the original classic context of a "letter of comfort"" and that "[n]o generalised or simplistic proposition about "letters of comfort" should be relied on". Rather, what Newtronics relies upon, is the existence of a contract between it and its parent company of which the terms of the obligations critical to this dispute are to be found in the letters of support.

[3] The elements necessary to establish a contract have long been established and are well known. In Ermogenous v Greek Orthodox Community of SA Inc1 it was said in the joint judgment of the majority:

It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty" ... To be a legally enforceable duty there must, of course, be identifiable parties to the arrangement, the terms of the arrangement must be certain, and, unless recorded as a deed, there must generally be real consideration for the agreement. Yet "[t]he circumstances may show that [the parties] did not intend, or cannot be regarded as having intended, to subject their agreement to the adjudication of the courts."2

In this case Newtronics seeks to rely upon one of two contracts each of which, however, is said "partly to be inferred and partly to be implied". The difficulty for a party seeking to rely wholly upon inference and implication for the existence of a contract may be seen in the observations of Tadgell J in Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd . 3 It is Newtronics which has the burden of demonstrating that there was such a contract or agreement as alleged.4

[4] The first pleaded contract is described as "the financial support agreement". It is said to have been made on a date "not known to Newtronics" but some time on or before 30 April 2001. The essence of the financial support agreement was that in consideration of Newtronics continuing normal business activity after 1 May 2001 Atco agreed that it:

(a)

would not call upon or collect or exercise any rights against Newtronics before 30 April 2002 in respect of amounts owing by Newtronics to Atco to the detriment of unsecured creditors;

(b)

would provide, amongst other things, funds to Newtronics to ensure that it could meet its current trading obligations that had been or would be incurred in the period 1 May 2001 to 30 April 2002 ("the 2002 financial year"); and

(c)

would provide written confirmation of (a) and (b) to Newtronics, its directors, and its auditors, in connection with an audit by its auditors, Pitcher Partners:

(i)

to enable Newtronics' financial statements to be prepared on a "going concern basis";

(ii)

to enable the directors of Newtronics to declare that the accounts for the 2001 financial year gave a true and fair view in accordance with the accounting policies described in the financial statements and that in the opinion of the directors there were reasonable grounds to believe that the company would be able to pay its debts as and when they became due and payable; and

(iii)

to enable Newtronics' auditors to form an opinion about whether Newtronics' financial statements for the 2001 financial year could be prepared on a going concern basis and to express an audit opinion that the 2001 financial statements were in accordance with the provisions of the Corporations Law, including giving a true and fair view of the matters required by the Corporations Law to be dealt with in the financial statements and comply with accounting standards.

The alternative contract pleaded by Newtronics is described as "the continuing support agreement". It too is alleged to have been made on a date not known to Newtronics but, in this case, prior to 30 April 1997. The terms of the continuing support agreement are in substantially similar terms to those of the pleaded financial support agreement which I have described, except that the obligations alleged to have been assumed by Atco were not pleaded as limited to 30 April 2002 or to the provision of funds for trading obligations incurred in the 2002 financial year. Thus the terms of the continuing support agreement were, in effect, that Atco agreed, without temporal limitation, that it:

(a)

would not call upon or collect or exercise any rights against Newtronics in respect of amounts owing to Atco to the detriment of unsecured creditors;

(b)

would, amongst other matters, provide funds to Newtronics to enable it to meet its current trading obligations that it had or would incur; and

(c)

would, provide written confirmation of the matters in (a) and (b) to like effect as pleaded about the financial support agreement.

[5] There is no doubt, there is no dispute, and the evidence is clear, that Atco provided substantial funds to Newtronics to enable it to meet its then current obligations for many years, and that it did not call upon or collect or exercise any rights against Newtronics until it made the demand on 21 December 2001. There is also no doubt, no dispute and the evidence makes clear, that in several of the financial years between 1994 and 2001, Atco enabled Newtronics' financial statements to be prepared on a going concern basis and supported Newtronics so that its directors were able to declare that its financial statements gave a true and fair view of its financial position, and were able to form the belief that it would be able to pay its debts as and when they became due and payable. Atco also enabled the auditors to form an opinion that the financial statements could be prepared on a going concern basis and to express an independent opinion that the financial statements were in accordance with the provisions of the Corporations Law including that they gave a true and fair view of the matters required by the Corporations Law to be dealt with and also complied with the relevant accounting standards. The critical issue, however, is not whether Atco did things which secured those ends, but rather whether, on the balance of probabilities, it is sufficiently established that there was a legally enforceable contract between Atco and Newtronics obliging the former not to make demand upon the mortgage debenture when it did and to continue to provide funds to meet Newtronics' obligations including, in effect, the debt which became the Seeley judgment debt.

[6] It may be, as counsel for Newtronics assert in their written closing submissions, that this case does not concern a letter designed to provide comfort to a bank in "the original classic context" of a "letter of comfort" or, as they also assert, that "[n]o generalised or simplistic proposition about "letters of comfort" should be relied on" (whatever that might mean). The decided cases concerning letters of comfort, however, are relevant and important to the issues raised in this proceeding. Indeed, they were relied upon in the written submission by counsel for Newtronics in the very paragraph in which the assertions I have quoted appear. The considerations underlying the outcomes in those cases are similar to those with which I am confronted in this case.

[7] The issue of enforceability of letters of comfort turns on whether the words used in them are "promissory and not merely representational".5 The recurring question arising in connection with letters of comfort and support, and essential to this proceeding, is whether the provider assumed a legal responsibility, or merely a moral responsibility, towards the beneficiary.6 That question has been resolved differently in different cases. In Gate Gourmet Australia Pty Ltd (In Liq) v Gate Gourmet Holding AG, 7 on facts broadly similar to those before me, Einstein J held that the terms of letters of comfort clearly indicated "a promissory intent to be bound in terms of legal relations".8 In that conclusion his Honour appears to have been persuaded that, when regard was had to the implications for directors of the parent company of contravention of the insolvent trading provisions of the Corporations Law, the objective intention of the letter was to convey a contractual promise.9 Similarly, in Banque Brussels Lambert SA v Australian National Industries Ltd, 10 Rogers CJ held that a letter from the principal shareholder of a company to its bankers had contractual force.11 A different conclusion was reached by the Court of Appeal in Kleinworth Benson Ltd v Malaysia Mining Corporation Berhad12 and Commonwealth Bank of Australia v T.L.I. Management Pty Ltd13 and Australian European Finance Corporation Ltd v Sheahan . 14

[8] Many of the facts and circumstances relied upon by Newtronics are equivocal and insufficient in themselves to establish the existence of an enforceable agreement with Atco. Thus, for example, I draw no sufficient inference in favour of Newtronics' claim that Atco may (if it did) exercise control over Newtronics' operations in the manner submitted. Nor, in my opinion, is the balance tipped either way only by the fact that Atco undoubtedly supported Newtronics by providing a large amount of money over a long period of time. Such circumstances on their own are, in my view, as consistent with the assumption of legally enforceable obligations as they are with a desire to fund as much or as little as the parent might consider appropriate in its own interests. Similarly, I do not find much assistance from such statements as the evidence given by Mr Bruce (the General Manager of Newtronics at the relevant time) that Mr Gjergja (a director of both Newtronics and Atco at the time) "called the shots" as a pater familias allegedly saying that "Atco as the parent company would always look after its children".

[9] What I do find more persuasive are the circumstances in which the letters of support were created and the legal and commercial consequences that their provision secured for both Atco and Newtronics. I accept the contention for Newtronics that the letters of support are not the sole basis of the contract between it and Atco but that they were an integral part of the circumstances from which the contract may be seen and in which its terms are reflected. The actual provision of financial support by Atco to Newtronics is one of those circumstances, and achieved particular significance by the consequent ability of Newtronics to continue trading without being insolvent. This is not simply a case of Atco indicating that it would not enforce its entitlements under the mortgage. Newtronics could not have continued to trade without a significantly escalating increase in the amount of money lent by Atco to Newtronics over several years. Newtronics owed Atco $200,000 in the 1994 year. Between 31 May 1995 and 30 June 1996 Newtronics' debt to Atco had risen to $419,600 and fallen to $153,080. By 2001, however, the amount owing to Atco had risen to $18,017,827.00.

[10] Newtronics' accounts were prepared on a going concern basis at least until the year ended 30 April 2000. The explanation in the accounts that Newtronics' financial reports were prepared on a "going concern" may have differed in some respect from year to year but in each case the accounts prepared on that basis contemplated continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. Fundamental to the preparation of the accounts on that basis was the fact of continued support by Atco during the financial periods in which the support was given, and the commitment to do so which was represented to the auditors and to the directors of Newtronics, and which was relied upon by Newtronics' directors and Newtronics. In the 1997 accounts that was made clear in the notes to the accounts by the express statement that the going concern assumption was "dependent upon the continued support" (my emphasis) of Atco in conjunction with the company continuing to retain adequate sources of finance. In the 2000 accounts, the notes regarding the going concern basis of the financial reporting contained a sentence that Newtronics' parent company had "provided an undertaking to assist the company to meet its debts as and when they [fell] due" (my emphasis).

[11] It was the directors of Newtronics, not the auditors, who prepared the financial statements for Newtronics. It was they who declared, amongst other things, that the accounts gave a true and fair view of the financial position of Newtronics for the financial periods in question and, further, and importantly, it was they who declared that in their opinion there were "reasonable grounds to believe that the company [would] be able to pay its debts as and when they [became] due and payable". The letters of support may have been sent by the directors of Atco to Newtronics' auditors rather than to the directors of Newtronics (although each of the letters was signed by a director of Atco (in that capacity) who at the time was also a director of Newtronics), but whether or not the letters of support were physically sent to the directors of Newtronics is of little significance. The fact is that the directors of Atco must have taken into account the fact of financial support as reflected in the letters of support if they were to present the financial accounts of Newtronics in the way in which they did. In my view it is plain from the accounts presented by the directors of Newtronics that they could only have made the declarations that they did in reliance upon Atco promising continuing support in the terms reflected in the letters of support. If that had not been the case, Newtronics could not have continued to trade. It was also the case that each letter of support on behalf of Atco to the auditors of Newtronics was signed by an Atco director who at the time was also a director of Newtronics authorizing the latter's accounts.

[12] The facts and circumstances in this case do not disclose (as they might have done) an intention on Atco's part to limit its promises, apart from their limitation to the financial period in which the letters of support and the actual support was given. The letter of support from Atco (signed by Mr Kenery, who at the time was also a director of Newtronics) to Newtronics' auditors dated 20 July 2001 read:

NEWTRONICS PTY. LTD -- LETTER OF SUPPORT

Atco Controls Pty Ltd, being the holding company of Newtronics Pty Ltd, hereby confirms the following:

1.

That the amount owing by Newtronics Pty Ltd to Atco Controls Pty Ltd of $14,622,183 as at 30th April 2001 shall not be called upon within the current period to the detriment of all other unsecured creditors.

2.

That if necessary, funds or additional bank security will be provided to Newtronics Pty Ltd or its debit financier to ensure that it can meet its current trading obligations that have, or will be incurred.

The letter on its face purports to confirm something existing apart from the letter. The current period in which the confirmation is given is that from 1 May 2001 to 30 April 2002. The support confirmed was (a) that the debt to Atco would not be called upon within the current period and (b) that Newtronics would be put in a position to meet its then current trading obligations which, as at 20 July 2001, had either already been "incurred' or would be incurred. The promises Atco made, its conduct in supporting Newtronics, and its conduct in relation to the business activities of Newtronics, did not expressly limit the scope of the support other than to the financial period in which the letters were written and in which the support was given. There is nothing which otherwise indicated an intention by Atco to exclude claims of the kind made by Seeley. The letters of support were not expressed to operate narrowly for the purpose of enabling the directors only to finalise the accounts or to enable the auditors to report without qualification. Letters of support may be inherently problematic in steering a narrow path between promise and representation but these letters, in the context in which these were given, went beyond representation and in my view were on their face intended to do so. These letters on their face confirmed an agreement between parent and subsidiary which was well known to both and intended to be relied upon: the letters were not mere representations for limited purposes with a clear intention to that effect. It is no doubt possible, and at times commercially desirable, for letters of support, or letters of comfort, not to have promissory effect, as the cases make clear. Letters of support which do not have promissory effect can be useful in business for a variety of reasons even though they may have no legal effect.15 These letters, however, did more than merely provide non binding comfort to Newtronics' auditors or, even, to Newtronics' directors: they contained the essential terms of an agreement between Atco and Newtronics which was known to both, which was intended to be relied upon and which was relied upon.

[13] The consideration for the contract was that Newtronics continued to trade. That was important to Atco, as can be seen from the extent of funds provided by Atco to Newtronics. Atco exercised control over the activities of Newtronics in various ways. It appointed to Newtronics' board, for Atco's interests, Mr Uren and removed Mr Tisher. Atco exercised financial control over Newtronics (as was only to be expected given the financial losses suffered by Newtronics and the extent of Atco's provision of funds). Atco undertook Newtronics' invoicing and management of debtors, and instructed and received reports from the solicitors defending the Seeley litigation. Atco maintained Newtronics' minute book, deposited into and paid out of Atco's own bank account all moneys of or paid by Newtronics after a certain time, and made strategic decisions to carry on the Newtronics business notwithstanding its lack of profitability.

[14] The relevant terms of the contract are to be found in the letters of support given by Atco to Newtronics' auditors which I find to have informed the directors of Atco when preparing the latter's accounts and which permitted Newtronics to continue trading without being insolvent. Each of the letters of support, in terms, subordinated Atco's debt to the rights of unsecured creditors within the current period referred to in the letters and undertook, if necessary, to provide funds to Newtronics to enable it to meet its current trading obligations that had or would have been incurred. Letters of support were not written in all of the accounting periods between 1994 and 2000 but those which were written were in materially the same terms. There is indirect evidence that a letter of support was provided in late 1994 to facilitate the preparation of accounts for the financial period which had then passed. There is a minute of a meeting of directors of Atco held on 8 November 1994 recording a resolution that Mr Gjergja be approved to sign a letter of support from Atco to Newtronics whereby the amount owing by Newtronics would "not be called upon within the [then] current period to the detriment of all other unsecured creditors" and that "if necessary, funds or additional bank security [would] be provided to Newtronics or its debt financier to ensure that it [could] meet its current trading obligations that [had or would] be incurred". I accept that a letter of support to that effect was signed in December 1994 by Mr Gjergja (who at the time was also a director of Newtronics). It was common ground that "the current period" described in the resolutions and letters of support referred to the financial period in which the letter was written and not to the preceding financial period in respect of which the accounts were prepared. It thus operated as a then current statement about what Atco had agreed to do in the current period about the debt owing to it and its agreement about the provision of further funds to meet current trading obligations which had or would be incurred. Letters to like effect were written by Mr Gjergja to Newtronics' auditors on 31 October 1997, 4 June 1999 and 30 May 2000. A similar letter was written by Mr Kenery to Newtronics' auditors on 20 July 2001.

[15] The Seeley litigation was commenced on 12 February 1998. In that litigation Seeley claimed loss and damage suffered as a consequence of breach of contract, negligence and misleading and deceptive conduct on the part of Newtronics in relation to the design and manufacture of electronic controllers by Newtronics for the use by Seeley in its roof-mounted air conditioners. Whether or not Seeley's claim was properly described as a claim for product liability, it was one fairly to be understood as a "trading obligation" which was "current" in the sense that it was "incurred" when the damage occurred following the breach, tortious conduct or other wrongful act.16 The claim had been made, and was maintained, during periods when letters of support in the terms I have described were operative. The terms of the letters of support were relied upon by the directors of Newtronics, as is plain by their declarations in financial statements for the relevant periods. The assumption by Atco of Newtronics' obligations did not depend upon the crystallisation of Seeley's claim into a judgment debt: the judgment debt confirmed the existence of prior obligations arising from Newtronics' trading. Those obligations were, in my view, encompassed by Atco's promises. Atco had thus promised to subordinate its loan to obligations which included the amounts due to Seeley, and to put Newtronics in funds to ensure that Newtronics would be capable of paying the amount due to Seeley when required.

[16] The quantum of the amount payable by Atco to Newtronics was known on 21 December 2001 when O'Loughlin J gave reasons for judgment holding that Newtronics was obliged to pay Seeley an amount of $8,901,708.02. By 21 December 2001 the quantum of Newtronics' debt during its trading obligations was quantified and known both to Newtronics and Atco. That debt became a judgment debt on 18 January 2002 when interim judgment was entered against Newtronics for $8,901,726.02. On 31 January 2002 it was increased by an award of interest in the amount of $5 million ordered by his Honour to be paid by Newtronics to Seeley on the judgment plus Seeley's taxed costs. Atco was obliged at those dates to honour its previous contract with Newtronics not to call upon its entitlements under the mortgage to the detriment of other unsecured creditors and, further, if necessary to put Newtronics in funds or to secure additional bank security for Newtronics or its debt financier to ensure that it could meet the current trading obligations which had been incurred and by then had been quantified. Atco was, of course, not an "unsecured" creditor, because it had a mortgage debenture in its favour. However, the reference in the letters of support to "other unsecured creditors" is not fairly to be understood as intending the operation of the promise to be dependent upon Atco being itself only an unsecured creditor. The words "all other unsecured creditors" is fairly to be read as seeking to cast as widely as possible the net of creditors whose claims might otherwise have prevented Newtronics to continue to trade without being insolvent; that is, as a company able to pay its debts as and when they fell due. Any narrower construction of those words would not have rendered the letters of support effective even for the narrowest purpose contended for by Atco.

[17] Atco breached its contract to Newtronics by making the demand for payment on 21 December 2001. By that action it triggered its entitlement under the mortgage debenture to the detriment of Newtronics' unsecured creditors, especially Seeley. It also failed to put Newtronics in funds, contrary to its undertaking to do so, and left Newtronics incapable of meeting the debt due to Seeley in the amount quantified by judgment. The amount now pressed for breach of contract is $17,362,031. The Seeley debt is established on the evidence before me to be $15,791,888.69 (being the sum of the judgment debt of $8,901,726.02, interest awarded of $5,000,000 and taxed costs of $1,890,162.67). In addition Newtronics is entitled to maintain on the contract with Atco unpaid employee entitlements of $736,076, the shortfall due to the National Australia Bank on a lease of $36,076 and the sum of other amounts due to unsecured creditors of $796,991. In all I calculate the amount due as $17,361,031.69.

[18] The claim against Atco (as well as the receivers) is also brought in tort for conversion of the assets of Newtronics. The prima facie measure of damage on that basis is the value of the assets converted17 and the quantum claimed on that basis is $18,219,409. The case against the receivers and Atco for conversion is not automatically established by Newtronics' success against Atco in contract. Atco's demand for repayment and enforcement of the mortgage may be a breach of contract but it may not necessarily be ineffective. Newtronics contended that Atco's rights under the mortgage should be seen as having been varied by reason of the contract between Atco and Newtronics. In ANZ Banking Group Ltd v Pan Foods18 Buchanan JA said:

The appellant contended that the debenture was to be considered independently of the facility agreement made in March 1993 and that a creditor in whom a number of rights repose can elect those which will be enforced ... In the present case it is the first proposition which is in question. If the bank did have independent rights arising from the debenture which were inconsistent with its rights under the March agreement, it could enforce those rights. The question is whether inconsistent rights existed. In my opinion they did not. The transaction of March 1993 embraced both the facility and the securities, that is, the terms of the transaction which were to be found in the letter of offer, the documents referred to in the letter and the security documents. When those documents are considered as a whole and the words of the letter are recorded as 'the immediate language and terms selected by the parties themselves for the expression of their meaning' ... it is clear that the sums lent were to be repaid in accordance with the terms of the letter. The parties did not expressly deal with the securities, but it is to be implied that the terms of the debenture, mortgages and personal guarantees were modified so that they conferred on the bank no greater rights than were necessary to secure performance of the terms of the letter.19

I do not think the same conclusion can be reached on the facts in this case. There is nothing in any of the material before me that can fairly support the conclusion that the mortgage debenture was varied or intended to be varied. The most which is established on the evidence is that there was a contract between Newtronics and Atco by which the latter would not exercise its rights under the mortgage debenture inconsistently with the promises made to Newtronics. Indeed, in my view, the very case made by Newtronics establishes the continued existence of the independent rights in the mortgage debenture: those rights were not varied; rather, the contract between Atco and Newtronics created an inconsistent obligation not to exercise the independent rights in the mortgage debenture. Atco continued to have its rights under the mortgage debenture notwithstanding that to exercise them might be a breach of another promise to Newtronics. The demand may have been a breach of the promise to Newtronics but was nonetheless effective to trigger the appointment of the receivers.

[19] The terms of the mortgage debenture permitted Atco to appoint receivers in the event of certain circumstances. One circumstance entitling Atco to appoint receivers was Newtronics' default in the due and punctual payment of any of the moneys secured under the mortgage when the same fell due for payment. On 21 December 2001 Atco demanded repayment of moneys lent to Newtronics and those moneys were not paid. There was then, in my view, a default entitling Atco under the mortgage to appoint receivers. The receivers also rely in the proceeding before me upon the existence of other grounds for their appointment under the terms of the mortgage as they are entitled to do.20 The validity of their appointment can be maintained on any ground which was available at the time of their appointment whether or not Atco had relied upon when making the appointment. One of the other grounds available for the appointment of the receivers was that Newtronics was insolvent from 21 December 2001 without the support of Atco. Atco's demand for repayment of moneys lent signalled that it would no longer provide support to Newtronics. That may have been a breach of its promise to Newtronics but a consequence of that breach was that Newtronics was, in point of fact, as from 21 December 2001, and certainly by the date of appointment of the receivers on 8 January 2002, unable to pay its debts as and when they fell due. In my view the appointment of the receivers was effective and Newtronics' claim against the appointment must fail.

[20] The receivers also submit that, in any event, they ought to be excused from liability under ss 419(3) and 1318 of the Corporations Act 2001. It is not strictly necessary for me to consider those submissions but it is desirable that I should nonetheless express my findings and reasons on the issues.

[21] A court has the power under s 419(3) to order that the receiver be relieved of liability, but only where "it is satisfied that the [receiver] believed on reasonable ground that the [receiver] had been properly [ ... ] appointed." It is, therefore, a necessary precondition to the relief from liability that a court be satisfied both that the receivers believed that they had been properly appointed and that the belief was held on reasonable grounds. In this case there was no challenge to the receivers' evidence that they believed to have been validly appointed. The challenge was about whether that belief was "on reasonable grounds".

[22] Section 419(3) does not yet seem to have received much judicial attention. I was referred to the legislative history of its enactment and to the relevant extrinsic material, but they did not advance an understanding of its purpose or meaning beyond its terms as enacted. The provision is directed to protecting, amongst others, receivers who have not been properly appointed. Its terms must be understood in a commercial context and be given reasonable and practical effect by reference to objective standards encountered in commerce. The pre-condition to the court's exercise of the power (namely, belief on reasonable grounds) is to be determined objectively.21 The provision does not absolve a receiver from enquiring into the validity of appointment.22 However, if a receiver believes on reasonable grounds to have been properly appointed, and a court is satisfied of that fact, the power should be exercised in the receivers' favour. The use of the word "may" in the section does not confer upon the court a broad or residual discretion not to relieve the receiver of liability if satisfied that the receiver "believes on reasonable grounds" to have been properly appointed: "may" is here used in the sense of conferring a power to grant relief once the condition for its exercise is established, rather than conferring a discretion to exercise or not to exercise the power where the conditions for its exercise are satisfied.23

[23] The burden of establishing the facts relevant to the exercise of the power fall upon the receivers. Here they contend that they undertook appropriate checks to determine whether they had validly been appointed, that they had not been alerted to anything which might have put them on notice that their appointment was not valid, and indeed that the liquidator who now challenges the validity of their appointment had never raised any matter causing them to doubt the validity of their appointment until well after the sale of the assets of Newtronics (that is, until after the very act by which their liability would arise).

[24] The case put against the reasonableness of the belief of the receivers that they had been validly appointed depends upon the existence of the contract between Atco and Newtronics which I have considered above. In essence it is said that the appointment of the receivers was not proper because Atco was not entitled to make the demand it made under the mortgage. It is said that the receivers ought to have considered the legal obligation of Atco to Newtronics as revealed by the notes in the accounts, the letters of support, the terms of the inter-company loans, the pattern of support for Newtronics by Atco over the history of trading by Newtronics, and such other contemporaneous material as might have borne upon a conclusion about the ability or inability by Atco to invoke the terms of the mortgage debenture. Thus, for example, it is said that an investigation of the then most recent accounts (subjected to audit but not finalised) would have revealed matters which would or should have caused the receivers to enquire further about the validity of their appointment; that is, to inquire about Atco's entitlement to rely upon the terms of the mortgage debenture pursuant to which the appointment was made.

[25] Mere ignorance of a relevant circumstance will not be sufficient to establish the reasonableness of a belief any more than wilful blindness.24 Ultimately what is reasonable will depend upon all of the facts and circumstances of the individual case25 provided that those facts and circumstances sufficiently relate to, and bear probatively upon, the reasonableness of the belief of valid appointment. One of those circumstances may be that a receiver may be appointed in circumstances of commercial urgency. It is the duty of the court to give the words of a statute the meaning that the legislature is taken to have intended them to have.26 That meaning is informed by the context in which the words chosen by the legislature are intended to operate. The appointment of receivers, and the occasion of the operation of s 419(3), will occur in the context of commercial urgency and business necessity.

[26] Care must be taken to ensure that in considering whether to exercise the power in s 419(3) there is not an elision of the invalidity of appointment with the reasonableness of the erroneous belief about having been validly appointed. In other words, it is essential to recall that the enquiry called for by s 419(3) is not about whether the appointment was valid, but rather, the section operates upon the basis that the appointment was not valid and calls for an enquiry into whether the mistaken belief about being properly appointed was held upon reasonable grounds. In this case I am satisfied that the receivers' belief that they had been properly appointed (assuming it to have been mistaken, contrary to the conclusion I reached above) was believed on reasonable grounds. The primary bases for the belief was the existence and terms of the mortgage, Atco's demand for repayment of moneys due, and Newtronics' non-payment of money upon the demand.

[27] It may well have been prudent for the receivers to have looked at the most recent accounts which had been subjected to audit although not finalised. If they had done so they would have seen notes in the accounts indicating that their preparation on a going concern basis was dependent upon an arrangement with Atco to provide funding and not to call upon outstanding loans. That might have caused the receivers to undertake further enquiries about the possible enforceability by Newtronics against Atco of promises to that effect which might have prevented the latter from enforcing the mortgage debenture. However, these possibilities should be judged against the apparent regularity of the mortgage debenture, the apparent regularity of the demand and the fact of non payment of moneys upon the demand, in the context of a large debt by a company conducting a business needing prompt action and sale. The receivers were not refusing to investigate matters which had been brought to their attention nor were they conveniently omitting to look into matters which the benefit of hindsight, and after lengthy argument, might subsequently seem prudent. What they did do was to look at the matters positively relied upon as the basis of their appointment. They did not seek to exclude matters which could have undermined that basis because nothing they saw caused them to do so. The explanation given in evidence for not being concerned with the then most recently prepared (albeit not finalised) audit accounts was both rational and reasonable.27 Their task was to take control of an asset in the context of a business requiring immediate and efficient action. In that task they inquired into the basis of, and matters relied upon for, their appointment and I do not consider that they had an obligation to search for matters which might have undermined the apparent regularity of their appointment.28

[28] I am not persuaded that the expert evidence of Mr Mentha against the receivers assists my consideration. His evidence was that the receivers should have discovered the notes to the recent accounts and the letters of support, and that if these had come to his attention he would have sought legal advice about the enforceability of the mortgage debenture. So much may be accepted, but the test in s 419(3) is not whether the receivers could or should have done something else but, rather, whether their belief (on the assumption that it was erroneous) was held on reasonable grounds. It will often (if not always) be possible to show that an erroneous belief would not have been held if something had been done other than what in fact occurred. However, care must be taken when evaluating the reasonableness of past conduct with the "benefit" of hindsight lest the certainty of error clouds an objective evaluation of the reasonableness of what actually occurred.29 Mr Mentha's evidence may be helpful in determining how a wrongful belief might have been corrected, but does not assist much in determining whether a belief, albeit wrongful, was nonetheless reasonably held. For his evidence to be of assistance in that regard it must tend to establish that the belief actually held could not reasonably have been held. In other words, that the receivers could not reasonably have not looked at the accounts in question for the purpose of determining the validity of their appointment. In this case there was no reason for the receivers to turn to the accounts to consider the validity of their appointment as receivers under the mortgage debenture. Their task was to be satisfied about their appointment and they did so by looking at the matters which gave the mortgagee an entitlement to appoint receivers and which was the basis of their appointment. Even accepting that the then most recent accounts might have put the receivers on a train of enquiry about Atco's ability to invoke the terms of the mortgage, there was nothing about the appointment of the receivers that would have caused them to look at the accounts for the purpose of satisfying themselves about the validity of their appointment. More importantly, and in any event, the belief they had was one upon grounds which were reasonable.

[29] Finally on this aspect of the matter I should add that, if it had been necessary for me to do so, I would take into account that the liquidator had not formed the view that the receivers had not been validly appointed until after the time of the sale of Newtronics' business in late April 2002. Mr Stewart had been appointed as liquidator to Newtronics on 26 February 2002. The receivers sold the business by agreement dated 26 April 2002 pursuant to a process that involved offers to sell to third parties. Ultimately the purchaser of the business was a company related to Atco but no complaint whatever is made about the process of sale of the Newtronics business and, it seems, that it was conducted efficiently and to the satisfaction of everyone.

[30] Between the date of the liquidator's appointment and the receivers' sale of the Newtronics' business, the liquidator, Mr Stewart, had a duty to investigate the historical records and affairs of Newtronics although it seems that there was some delay to the commencement of those investigations pending the execution of his indemnity with Seeley. Seeley's solicitors had been Thomson Playford and at some point acted also for the liquidator. The receivers enquired of Thomson Playford about whether there was any information known to them affecting the validity or enforceability of the mortgage debenture and consequently of the receivers' appointment. Thomson Playford responded on 6 March 2002 that it would be inappropriate to respond to the enquiry in the circumstances in which the liquidator was currently attempting to obtain all books and records of Newtronics and was undertaking investigations into the circumstances of the creation, registration, existence and amount of the charge held by Atco over the assets of Newtronics. Mr Stewart gave evidence in his witness statement, and orally, that he had instructed Thomson Playford to act for him by 6 March 2002 but subsequently said, through counsel, that he made a mistake in giving that evidence. However, his other evidence was that he did see this correspondence between the receivers and Thomson Playford, and the incontrovertible fact is that he took no steps to challenge the appointment of the receivers until well after their sale of the Newtronics business. That is not to say that he or Newtronics is estopped from contending that the appointment was invalid but, rather, that his conduct provides additional objective evidence (if it be necessary) of the reasonableness of the belief held by the receivers concerning their appointment. From the receivers point of view, by March 2002, they had been acting as receivers to the knowledge of the liquidator whose legal duty included that of investigating the historical records and affairs of the very company whose business was about to be sold. Indeed, the sale of the business was both active and imminent. In that context it was reasonable for them to take some measure of comfort from the absence, when asked, of any foundation for the liquidator to doubt the validity of their appointment. To that may be added that Mr Stewart and his staff had had largely full, free and unsupervised access to the Newtronics records held by the receivers and were allowed to take folders for copying and were otherwise provided with substantial documentation. Mr Stewart had been kept informed about the sale process for the Newtronics' business and was provided with the sale documents before execution. From about 4 or 5 April 2002, he had in his possession at least the 2000 Newtronics' financial statements as well as the 1999 statements and the draft 2001 statements. The folder in which the 2000 statements were contained (marked "Pitcher Partners") had been specifically obtained from the receivers for copying by the liquidator's staff. The liquidator, who had a duty to investigate the historical affairs of the company, appears also to have held the belief that the receivers were validly appointed: he may not be estopped from contending that they were not, but they, in turn, may look to his conduct and belief to support the reasonableness of their own belief at the time.

[31] Newtronics contends that the relevant date to determine the receivers' belief and its reasonableness should be as at the time that liability was incurred from which relief is sought. That may be accepted for present purposes. On that basis the relevant date was submitted by Newtronics to be either the date of entry into the agreement for the sale of business and assets of Newtronics, namely 26 April 2002, or the date of its settlement, namely 29 April 2002: for present purposes nothing turns upon which date is chosen. As at either of those dates the facts and circumstances to which I referred in the proceeding paragraphs bore upon the reasonableness of the receivers' belief and independently satisfy me that their belief was on reasonable grounds.

[32] The receivers also rely upon s 1318 of the Corporations Act 2001 for relief on the grounds that at all times their conduct was honest and that having regard to all the circumstances, they ought fairly to be relieved wholly from any liability. It follows from my consideration of the issues raised under s 419(3) that I would have granted relief under s 1318 if it were necessary to do so. In that context I should perhaps add two additional remarks. The first is that in considering the exercise of the power under s 1318 I would limit any liability of the receivers to that which was strictly caused by their failure. In this case I would find that their conduct in selling the Newtronics business was not shown to have caused identifiable loss. In other words, that as a matter of discretion in all the circumstances they should not be liable for the full measure of conversion damages. The second matter is that one of the circumstances to which I would have regard in granting relief under s 1318 is the conduct of the liquidator between the date of appointment and the sale of the Newtronics business to which I have previously referred.

[33] Accordingly, there will be judgment for Newtronics against Atco in the sum of $17,361,031.69 plus interest, and a dismissal of Newtronics' claims against the receivers. I will hear argument from counsel about the form of orders and costs.