This month has seen some interesting developments in relation to the Reef House Resort and other unregistered managed investment schemes of Mr Mark Ronald Letten and his companies, which collapsed in early 2010.
First and foremost, on 7 October 2011, Justice Gordon handed down judgment in ASIC v Letten (No 13) FCA 1151. This was an application by the receivers of the Reef House Resort Scheme for directions, primarily as to whether the receivers were justified in refusing to pay Mirvac Hotels Pty Ltd (Mirvac) a termination fee of over $0.5m, to which Mirvac claimed to be entitled under a hotel management agreement, as an expense of the receivership of the company. (The company in question being Firbank Arch Pty Ltd.) Her Honour’s answer was yes, the receivers were justified in refusing to pay the termination fee as an expense of the receivership. In effect, the receivers were held entitled to terminate the contract pursuant to its termination clause, without incurring personal liability to pay the termination fee. However it should be noted that some particular aspects of this case are likely to limit its broader application (see below).
In June 2010, orders had been made by Gordon J empowering the receivers to sell the Reef House Properties (see ASIC v Letten (No 4)). The orders included directions to apply the proceeds of realisation in a specified manner, including first to pay all fees and reasonable expenses associated with the sale, and to also deduct from proceeds the receivers’ reasonable fees and expenses of getting in, preserving and realising the Reef House Properties, before payment of the proceeds to any secured lender, the balance to be paid into a bank account.
On 11 November 2010, pooling orders were made, which included further directions that the receivers were justified in paying the following amounts out of the proceeds of sale of each asset in a set order of priority, the first of which was “priority receivership costs”, defined to include the receivers’ fees, costs and expenses of getting in, preserving or realising a relevant asset.
On 17 December 2010, further orders were made by Gordon J directing that the receivers were justified in settling contracts of sale that had been entered into with respect to the Reef House Properties (see ASIC v Letten (No 8 ) ).
At the time when the receivers were appointed in February 2010, Mirvac held a hotel management agreement (HMA) with the trustee company which owned the Reef House Resort. Under the HMA, the trustee company could terminate the agreement at any time without cause on three months notice, but a termination would trigger a termination fee under clause 15.4. 
After the receivers were appointed, Mirvac wrote to them requiring payment of outstanding amounts due in respect of the Reef House Resort for salaries and wages, Mirvac management fees and Mirvac services . The receivers wrote back on 6 April 2010. They trod a careful line. They write that they acknowledged the existence of the HMA, but that as it was executed prior to their appointment, it had not been adopted by them and personal liability was excluded to the extent possible by law. They wrote that while they had not formally adopted the HMA, they did “acknowledge its existence” and would provide payment with respect to fees Mirvac would ordinarily be entitled under it, relating to the period from their appointment to the date of termination. They also stated that under no circumstances would they the receivers be responsible for any termination fees should Mirvac elect to cancel the HMA . Her Honour held that the contents of this letter did not amount to an “adoption” by the receivers of the HMA, which was a point of some significance in this case. Note that her Honour also held that a termination fee was not a fee to which Mirvac would “ordinarily be entitled” [16-17].
Following the court order permitting the sale of Reef House Properties in June 2010, the receivers put the Reef House Resort on the market. Mirvac continued to manage the resort up to the time of sale. The Resort was marketed with the HMA in place and Mirvac’s position as manager was highlighted prominently as a feature. The information memorandum referred to Mirvac’s position as manager in greater detail [19-20]. In October 2010, the ultimate buyer of the Reef House Properties advised the receivers that a condition of its purchase was vacant possession. In the end, as this was a precondition of the best offer available, the receivers determined that termination of the HMA was desirable. On 16 November 2010 they entered into a contract of sale and caused Firbank Arch to serve a notice of termination on Mirvac under cl15.8 of the HMA. Mirvac claimed entitlement to its termination fee, but the receivers refused.
One point to note here is that the receivers in this case were not appointed by the secured creditor nor were they appointed for the purpose of enforcing a charge. Rather, they were appointed by the Court and for a broader purpose – to wind up the unregistered management investments scheme and realise the assets for the benefit of the stakeholders . As can be seen from the discussion below, this became a point of fact of relevance to her Honour’s decision on a number of the arguments mounted by Mirvac.
Before embarking upon an analysis of the issues, Gordon J highlighted the following aspects of the case before her, citing the key authorities –
First – the Receivers were Court-appointed. They took possession of the Reef House Properties on identified bases. Their appointment was made subject to the rights of prior interests including that of the Secured Lender .
Second – property does not vest in the receiver .
Third – a receiver does not become liable on contracts made by the company prior to their appointment, unless they act to assume liability. Unless they do so, receivers are free to complete a contract entered into by the company before the appointment without becoming personally liable on the contract .
Her honour then considered Mirvac’s six bases for entitlement to payment of the termination fee in priority to payment to the secured lender [from 35].
Mirvac failed on all of them, some as they were not supported by the proven facts, some failed on matters of law, some on both. As noted above, the fact that the receivers had been appointed by the Court, not by the secured lender Westpac, undermined a number of the arguments Mirvac sought to mount [see, for example, her Honour’s analysis at 35-46].
One argument Mirvac ventured, based upon the Toshoku principle, was that the termination fee should be regarded as an expense of the receivership even though it arises out of a pre-receivership contract (the hotel management agreement) because it “would be just and equitable in the circumstances to treat the [fee] as if it were an expense of the [receivership]: In re Toshoku Finance UK plc  UKHL 6;  1 WLR 671 at [25-29]. Gordon J considered the House of Lords’ decision, and its treatment by Finkelstein J in 2009 in one of the Timbercorp decisions, and reflected upon the scope of this principle [from 47]. Her Honour concluded that at its core, the principle in Toshoku is one which governs the interpretation of “expenses” under the Insolvency Rules 1986 (UK), and is of limited (if any) assistance in this case . Her Honour observed that it was unnecessary to decide if it could be of broader application, to receiverships in Australia, because there was no underlying equitable reason why the termination fee should be regarded as an expense of the receivership in any event, because –
1. At no point did the Receivers personally adopt the hotel management agreement, indeed they expressly disclaimed such adoption; and
2. The bases upon which the secured lender was to be responsible for, or subject to, the obligations under that agreement were limited. Westpac neither appointed a receiver over the company’s assets, nor did it take action for default under the mortgage .
In relation to some of Mirvac’s other arguments, her Honour held that s 419 of the Corporations Act 2001 (Cth) did not apply as the Receivers were not appointed nor did they take control of property for the purpose of enforcing a charge [from 57]. There was no new contract between Mirvac and the Receivers  nor was there any adoption of the contract by the Receivers .
Finally, Mirvac argued that the Moodemere and GDK Financial Solutions principles supported a finding by the Court that the termination fee ought be paid in priority to the secured lender. Gordon J rejected that argument also [73-79]. Her Honour crucially observed that while the catalyst for termination of the hotel management agreement was the contract of sale of the property, any liability to pay the termination fee derived from a pre-appointment contract, not from caring for, preserving and realising the Reef House Properties. The fact that the secured creditor was not a party to the proceedings in which the Receivers were appointed was another factor pointing against application of those principles here. There was also nothing to suggest unconscientious conduct on the part of the secured creditor. The rule in Ford, also discussed in GDK Financial Solutions, did not assist Mirvac here as it had not taken any action, or incurred any cost, of benefit to the fund as a whole.
Gordon J’s judgment contains an excellent distillation of a number of key legal principles, and is highly recommended reading. I would caution, however, against assuming her Honour’s decision is of broad application to all cases where receivers terminate pre-receivership contracts, given the particular facts of this case.
There have been further developments following this decision, which will be updated in subsequent posts.