Ashurst Restructuring Roundup

Receivers Beware: Not all Onerous Contracts can be Repudiated

Bluewaters Power 1 Pty Limited v Donnelly, IMO Griffin Coal Mining Pty Limited [2024] FCA 596 ("Griffin Coal")

The decision in Griffin Coal involved an application for an inquiry into the alleged misconduct of a receivership.

Griffin Coal operated a coal mine. It had undertaken contracts to supply coal to electricity companies for the operation of their generators. Those agreements were unprofitable. In addition to being in receivership, the company was also in liquidation. Bluewaters claimed that with a view to terminating the obligations of the company under those coal supply contracts the receiver sought to encourage the liquidators to disclaim the contracts as unprofitable contracts by exercising their powers under s 568, Corporations Act.

The complaint made against the receivers was that their encouragement of the liquidators to pursue that course involved a breach of their duty.

It is accepted that, "[I]n the context of receivers in the control of the business or undertaking of a company, in general, the receivers are under no obligation to bring about the company's performance of obligations under an existing contract with a third party. As a consequence of the receivers' position as agent of the company, the company, and not the receivers, would be liable to the third party for any breach of an unperformed contract." [81], Griffin Coal

However, there may be "circumstances in which ignoring existing contractual obligations, and thereby jeopardising the company's goodwill, would not be a proper exercise of a receivers' powers, at least in the case of a court appointed receiver." [82], Griffin Coal

So far as concerned the duties of a court appointed receiver, reference was made to In re Newdigate Colliery Limited [1912] 1 Ch 468 the effect of which was summarised as follows; "it was not appropriate for the receivers and mangers to destroy the company's undertaking in circumstances where that formed part of the secured property the receiver had been appointed to manage." [82], Griffin Coal

Whilst in Griffin Coal, the court did not decide, on a final basis, whether an inquiry into the conduct of the receivers was justified, it did address the duties of the receivers in the context of the security arrangements before the court so far as they touch the coal supply contracts.

In relation to those supply contracts, the secured obligations of the company included not only an obligation to satisfy its outstanding liabilities to the receivers' appointor but included:

(a) its continuing obligations to supply coal to the electricity companies; and

(b) the step in-rights of the electricity companies under those supply contracts in the event of a default by the mortgagor.

In those circumstances the court concluded:

"Having regard to these general principles [as explained In re Newdigate Colliery], the terms of the [security arrangements] make it plain that the Receivers are not entitled to ignore Griffin Coal's obligations under the [coal supply agreements]. Therefore … the [security arrangements] and the terms of the receivers' appointment, remove any doubt about whether the receivers can, consistently with the performance of their duties, sacrifice the interests of Bluewaters Power by ignoring Griffin Coal's obligations under the [coal supply agreements]." [84], Griffin Coal.

This suggests that in the case of privately appointed receivers, they cannot prefer the interests of one class of secured creditors over another class of secured creditors.

Author: Richard Fisher, AM.