Receivership and its Implications for Businesses in Contemporary Guyanese Society
In this short paper I have been asked to deliver, I will begin by addressing the meaning of Receivership first, before undertaking the task of trying to determine what are its implications for business in Guyana.
How does a situation of Receivership come about?
Most businesses in Guyana access credit financing through Financial Institutions such as Banks and also through Insurance Companies. Invariably the credit has to be collateralized by some instrument suitable for the purpose, and in cases of Companies, that is usually a Debenture. The term Debenture has always been difficult of definition, it is not a technical term and in one case, the learned Lindley J stated - “Now, what the correct meaning of “debenture” is I do not know. I do not find anywhere any precise definition of it. We know that there are various kinds of instruments commonly called debentures. You may have mortgage debentures, which are charges of some kind of property. You may have debentures which are bonds; and if this instrument was under seal, it would be a debenture of that kind. You may have a debenture that is nothing more than an acknowledgement of indebtedness. And you may have a thing like this, which is something more; it is a statement by two Directors that the company will pay a certain sum of money on a given day, and will also pay interest half-yearly at certain times and at a certain place, upon production of certain coupons by the holder of the instrument. I think any of those things which I have referred to may be debentures within the Act.” C/ British Steam Navigation Company .v. Commissioner of Inland Revenue [1881] 7 Q.B.D. 165, at 172/3. (C/also – Levy .v. Abercorris Co. [1887] 37 Ch.d 260, 264: and Edmonds .v. Blaina Co. [1887] 36Ch.D 215, 219) but it can be said to be “promise to repay a debt”, or an “acknowledgment of indebtedness usually under seal and usually creating a charge over the whole or some part of the Company’s property” (C/The Encyclopaedia of Forms and Precedents; 4th Edition; Volume 6; Page 1097; Paragraph). For the purposes of the Companies Act 1991, a debenture is defined at Section 535 (h). as including - ”debenture stock and any bond or other instrument evidencing an obligation or guarantee, whether secured or not”. In England, an ordinary mortgage of land by a company, income stock certificates payable out of profits and “units” giving a right of participation and guaranteed return of capital in twenty- one years, have been held to be debentures within their Act.
Most debentures contain clauses that are indorsed on the face of it or otherwise annexed, and tend be of the following – (1). A promise by the Company to repay the principal on a certain date or on demand; (2). A promise to pay interest at a certain rate in the meanwhile; (3). A charge on the company’s assets; (4). A provision that the debenture is issued with the benefit of and subject to certain conditions. Bearing in mind that the debenture is a contract under seal, one of the important conditions normally contained in a debenture is a power granted to the debenture holder to appoint a Receiver, and the powers of such Receiver when appointed.
Traditionally the debenture provides that the Receiver shall be the agent of the company, so as to distinguish him from a Receiver appointed by the Court, who is the agent of no one and who formally was thus personally liable for the liabilities incurred by him as Receiver, subject to his right of indemnity against the assets. (C/ Burt, Boulton and Hayward .v. Bull [1895] 1 Q.B. 276) But It is worthy of note that the position of a Receiver whether appointed under a debenture or by the Court, is now somewhat similar in relation to his liabilities, since the Companies Act 1991, makes both now personally liable and entitled to an indemnity (C/Section 281. (1) of the Act). The distinction as to agency does however still exist, and the debenture will also give the Receiver the express power to collect, sell and realize assets and to carry on the business as agent for and in the name of the company.
The Companies Act 1991, further requires that the debenture shall be registered (C/ Section 233. (1) of the Act). This must be done within 28 days after creation of the charge, “or the charge shall be void so far as any security interest it thereby purported to create.” This does not mean however that the contract or obligation for the repayment of the sum secured by the charge is unrecoverable, rather it becomes “immediately repayable” (C/ Section 233. (1) of the Act)
Fertile minds have found the next section in the Act to be of some interest. That section (Section 234) provides that “A debenture not secured by a separate mortgage or charge but which has been duly registered after a notice of the intended registration has been published in the Gazette and one local newspaper not less than seven days previous to the registration, shall be valid and shall rank as a mortgage notwithstanding that it has not been secured by any separate mortgage or charge.” I am urged by some of my fellows that this section is not known to English Company Law, and is capable of producing at least two areas of controversy.
First, the question arises whether the Section promotes the right of opposition by other creditors of the Company, with the usual law and practice relating to oppositions including the opposition rules set out in the Deeds Registry Act Chapter 5:01. Second, whether the Act creates a new type of statutory mortgage different in creation from the conventional Guyanese mortgage, but capable of the same rights vested in the mortgagee. Unfortunately this is neither the time nor the place to enter into a discussion of these matters, though suffice it to say that I know of two cases engaging the Courts in relation to each, from which we should obtain some guidance.
Before I go off the subject of registration of charges, it is the duty of all companies who issue charges over their property to keep a copy of the instrument at their registered office, and record all charges that affect the property of the company, and all floating charges, together with a short description of the property charged and the amount, and the names of the persons entitled thereto. (C/ Section 246 of the Act).
The right to appoint a Receiver of a Company, is a power that is normally vested in the debenture holder under the debenture. As I have previously stated, this power is contractual and differs from the power of appointment under an order of court. It has been recognized by the Act and Sections 271 to 284 0f the Act, regulates some aspects of the relationship between the Receiver and the Company. The important thing to recognize, is that the Receiver may either be a Receiver per se, in which case his duty is to get in the assets of the Company and realize them for the benefit of the debenture holder, or a Receiver/Manager, who may additionally carry on the concern of the Company until such time as it is able to realize the debts due the debenture holder.
Several issues arise in these regards -
First, the appointment of the Receiver suspends the powers of the Directors of the Company, but does not automatically terminate contracts of employment previously made and subsisting between the Company and all its employees. C/Palmer’s Company Law 25th Edition; Paragraph 14.134 and C/Re: Foster Clark Ltd’s Indenture Trusts [1966] 1 W.L.R. 125. As to the Directors of the Company, the Act at Section 275, states that “When a Receiver/Manager of a company is appointed, by the Court or under an instrument, the powers of the directors of the company that the Receiver/Manager is authorised to exercise may not be exercised by the directors until the Receiver/Manager is discharged.” While seeming to speak only of a Receiver/Manager, rather than a Receiver per se, the better view would seem to be that expressed in the case of Moss S.S Co. Ltd .v. Whiney [1912] AC. 254 (HL), Per Lord Atkinson at Page 263; “The appointment of a Receiver and manager over the assets and business of a company does not annihilate the company any more than taking of possession by the mortgagee of the fee in land let to tenants annihilates the mortgagor. Both continue to exist, but it entirely supersedes the company in the conduct of its business, deprives it of all power to enter into contracts in relation to that business, or to sell pledge or otherwise dispose of property put into the possession or under the control of the Receiver and manager. Its powers in these respects are entirely in abeyance.” Some doubt was thrown on this point by the case of Newhart Development Ltd .v. Co-operative Commercial Bank [1978] 2 WLR 636 In which Shaw L.J. is reported at Page 642 as opining that “What of course the directors cannot do, and to this extent their powers are inhibited, is to dispose of the assets within the debenture charge without the assent or concurrence of the receiver, for it is his function to deal with the assets in the first place so as to provide the means of paying off the debenture holder’s claims. But where there is a right of action which the board (though not the receiver) would wish to pursue, it does not seem to me that the right or function of the receiver are affected if the company is indemnified against any liability for costs (as here). I see no principle of law or expediency which precludes the directors of a company, as a duly constituted board (and it is not suggested here that they were not a duly constituted board when they took the step of instituting this action) from seeking to enforce the claim, however ill founded it may be, provided only, of course, that nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders.” In that case, the Court of Appeal upheld the right of the Directors to commence action against a bank for breach of contract, even though the bank were in fact the debenture holder. The reasoning in that case was not supported by a following case of Tudor Grange Holdings Ltd et al .v. Citibank NA and another [1991] 3 WLR 750. and doubt was cast on its reasoning by Sir Nicholas Browne-Wilkinson VC, he said at Page 759 - ”I have substantial doubts whether the Newhart Case was correctly decided in any event. That may have to be looked at again in the future. The decision seems to ignore the difficulty which arises if two different sets of people, the directors and the receivers, who may have widely differing views and interests, both have power to bring proceedings on the same cause of action. The position is exacerbated where, as here, the persons who have been sued by the directors bring a counterclaim against the company. Who is to have the conduct of that counterclaim which directly attacks the property of the company?” In our jurisdiction, the former case (Newhart’s case) was examined by the Honourable Mr. Justice Oswell Legall in the matter of Mohamed’s Radio and Electronic Limited and another .v. The National Bank of Industry and Commerce Limited and another, Action No. 105-M of 2000; decision of 13/3/2001. And while the Court did not seem to have the benefit of the Tudor Grange case, the judge had this to say - “But clearly their Lordships in Moss did not specifically state that where a receiver is appointed the directors could not bring an action on behalf of the company to protect the company’s interest and for the benefit of its creditors, as was the case in Newhart. It seems to me that though the general principle is that the appointment of a receive manager supersedes or puts in abeyance the powers of the company in the conduct of tis business, bearing in mind the decision in Newhart, and the language of Sections 275 an 279 of the Companies Act 1991, the company may still bring an action in Court which is in the company’s interest and benefit, provided that the action does not interfere with the receiver’s function of getting in the company’s assets or prejudicially affecting the debenture holders by imperiling the assets or in any way threatening the interest of the debenture holders.” The matter rests there for the time being awaiting the determination of four other actions I know of where more or less the same point has been raise and is to be determined by our Courts. In passing, it must be remembered that the Directors do still retain some residuary powers or at least duties. For example, they will still have to prepare the annual returns to the Registrar of Companies, and have the annual audit of the company’s accounts carried out. They will also have to call the annual general meeting at the usual times, and have election of directors and the appointment of the auditor, passed at the meeting.
Second, the securing of a charge on the property of the company provides security against other creditors who are not prior in time to the debenture holder. The recent case of Christol Grant .v. Hotel Tower Limited and another, Action No. 3835 of 1993; decision of Legall J. dated 18/10/2001, shows the effect of that reasoning “The general principle emanating from these cases seems to be that where goods are seized by a marshal on a writ of execution to satisfy a judgment and those goods are covered by debentures under which a receiver was appointed, the rights of the holders of the debentures prevail even as against the judgment or execution creditor, at least before the sale of those goods by the marshal.” (C/ also Davey .v. Williams [1898] 2 QB. 194).
Third, the Receiver under Section 278 of the Act is directed to “(a). act honestly and in good faith. (b). deal with any property of the company in his possession or control in a commercially reasonable manner.” What this means has to some extent been explained in the case of Downsview Ltd .v. First City Corporation Ltd.[1993] 2 WLR 86 PC. At 96 Per Lord Templeman - “It does not follow that a receiver and manager must immediately upon appointment seize all the cash in the coffers of the company and sell all the company’s assets or so much of the assets as he chooses and considers sufficient to complete the redemption of the mortgage. He is entitled but not bound, to allow the company’s business to be continued by himself or by the existing or other executives. The decisions of the receiver and manager whether to continue the business or close down the business and sell assets chosen by him cannot be impeached if those decisions are taken in good faith while protecting the interest of the debenture holder in recovering the moneys due under the debenture, even though the decisions of the receiver and manager may be disadvantageous for the company.” These matters were further explained in the case of Medforth .v. Blake and others [1999] 2 BCLC 221 CA, Per Sir Richard Scott VC at Page 237. - “A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption. The duties include but are not necessarily confined to, a duty of good faith. The extent and scope of any duty additional to that of good faith will depend on the facts and circumstances of the particular case. In exercising his powers of management the primary duty of the receiver is to try and bring about a situation in which interest on the secured can be paid and the debt itself repaid. Subject to that primary duty, the receiver owes a duty to manage the property with due diligence. Due diligence does not oblige the receiver to continue to carry on a business on the mortgaged premises previously carried on by the mortgagor. If the receiver does carry on a business on the mortgaged premises, due diligence requires reasonable steps be taken in order to try to do so profitably.”
In Guyana today, thee have been many instances of the appointment of Receivers by Financial Institutions. The property market has been besieged by the advertisement and sale of valuable properties in and around Guyana. The Courts have been the subject of a lot of skirmishes and in some cases serious intervention. Much of the law is still in flux and the parameters of a Receivership are being actively drawn by the Courts. We await their formalisation.
In the light of the above, I can envisage many different implications in the current scenario of business failures and pro-active action by institutional Creditors.
1. Businesses will have to be more realistic and thorough in their approaches to Creditors for financing. The proposals will have to be better researched, cash flow projections will have to be more conservative. Greater consideration will have to be given to other forms of financing, such as Equity financing, joint-ventureship, public bond issue, hypothecation, pledging, and public issues on the Stock Market. The old concept of the family business carefully kept clutched to the chest will have to be rethought and in some cases done away with.
2. The practice of relying on cash transactions and hiding the receipt of moneys from the sale of produce and goods, will have to be stopped. Transaction documents such as letters of credit, must be put to greater use so that control of financing can be monitored by the Creditors. Accounting practices will have to be improved, particularly in the timely presentation of audited accounts, so that the true financial position of Companies can be known and dealt with appropriately.
3. A new culture of openness will have to be created, particularly where the Stock Exchange is concerned. As a by-product, there will be a need for more financial expertise in the sense of a larger body of accounting firms rather than the traditional 6 or 8 that exist today. A whole new sector involving specialist in Stock Exchange transactions will have to be born. Creditors who specialize in long term financing such as Merchant Banks, are about to become formalized. Trade in paper securities will be the norm, and encourage better forms of paper collateral.
4. Companies or partnerships specializing in Receiverships with all the various facets that go into such a venture will be required. Perhaps a Commercial Court with an experienced Judicial Officer will have to be formed, as the pressures and necessities for quick decisions in the interests of Commercial probity may be imminent. Better practices by the Court administration in the handling of executions will be required. In fact the time has probably been reached where execution process should be handled by private individuals rather than Registry officers. In the light of the large amount of properties on the market, the Financial Institutions will have to be given the power to buy in properties and hold or develop them for a longer period of time than exists now.
There are many more ideas that come to mind, but I must leave them to the light of another day.
Ladies and Gentlemen thank you for giving me the opportunity to address you on this topic.
Dated 6th April 2002. ……………………………….
Robin M. S. Stoby SC.