Receiver’s Duties
Cases
Kinsella v. Somers
[1999] IEHC 44
Barr J.
THE DUTY OF THE RECEIVER TO PROVIDE INFORMATION
“25. My understanding of the legal situation with regard to the information which the Receiver was bound to furnish and to whom in the 1980s is based on what Costello J. said in Irish Oil and Cake Mills Ltd and Irish Oil and Cake Mills (Manufacturing) Ltd -v- Donnelly, unreported, High Court, on the 27th March, 1983. The gist of this judgment was that there is no general duty on a Receiver/Manager to account to the Company whose affairs he is managing. A mandatory interlocutory injunction had been sought to compel the Receiver to furnish the Company with certain information. The Plaintiff’s claim to the information was based on the general legal principles which they claimed were applicable and not on any allegation of wrongdoing on the Receiver’s part. It was argued that there was a general duty on a Receiver/Manager to take reasonable steps to secure the best possible price for the Company’s assets and this included a duty to keep the Company appraised as to how the business of the Company was going. Costello J. said that he regarded this as a very far reaching proposition which was unsupported by authority and he rejected this. He added that there may well be special circumstances in which, to ensure that the best possible price is obtained for the assets, trading information since the appointment of a Receiver should be given to the Company’s Directors. But in the absence of special circumstances which might favourably affect the price, a Receiver/Manager is not under any duty of care which involves him in reporting as suggested to the Directors on his management of the business. He made it clear however that a duty to account may arise in a particular case and he said that Smiths Ltd -v- Middleton [1979] 3 All E.R. 842 illustrated this point. In that case an account was ordered after a receivership had come to an end as the Court held that the Receiver as agent was under an equitable obligation to account. Costello J. said that he was gladly refraining from laying down general principles but nevertheless his decision is an helpful authority. I should emphasise that Costello J. was dealing with the extent and nature of the duty and the extent and nature of the accounts which a Receiver must furnish to the directors of the Company. In short, he was dealing with the duty of the Receiver to provide information to the Company and not the duty to give information to individual directors or shareholders.
27. Counsel went on to address the legal position arising under an application under Section 316. The contention of Counsel for the Receiver is that an individual director or shareholder does not have a right to relief under Section 316 as amended. He argues that Section 316 is a procedural provision which gives certain persons access to the High Court for directions and that it is a novel suggestion to say that Section 316 creates rights which are not to be found in existing common law or in statute. In short, it is a fallacy to conceive that there is a new right given to either a director or a shareholder under Section 316 which, on the contrary, is merely a vehicle to assert existing rights. He goes on to submit that even if the novel suggestion is correct, the Applicant in this instance does not satisfy the provisions of Section 316(1A) which reads:-
“… shall be supported by such evidence that the applicant is being unfairly prejudiced by any actual or proposed action or omission of the receiver as the court may require”.
28. Doubts have often arisen as to the powers enjoyed by receivers and the manner in which they should be exercised. In England prior to the Companies Act, 1948 a Receiver appointed out of Court had no means of obtaining the Court’s directions and the practice was to try to persuade the other party to apply. In the Report of the Committee on Company Law Amendment (1945), the Cohen Committee made recommendations as a result of which Section 135 of the Insolvency Act, 1986 enabled the Receiver to make such an application. A Receiver so appointed may apply to the Court for directions in respect of any matter arising in connection with the performance of his functions and on any such application the Court may give suchdirections or make any order declaring the rights of persons before the Court or otherwise, as the Court thinks just.
29. Counsel for the Receiver adopted the statement of the law made by Costello J. at pp. 12-14 of the Irish Oil and Cake Mills Ltd -v- Donnelly:-
“The Plaintiffs advanced a second argument to support the contention that the Receiver is in breach of the duty of care he owes to the Company. It is said that apart from the special facts of this case the general duty on Receiver and Manager to take reasonable steps to secure the best possible price for the Companies’ assets includes a duty ‘to keep the Company appraised of how the business of the Company is going’. This is a very far reaching proposition, unsupported by any authority and I must reject it. There may well be special circumstances in which, to ensure that the best price possible is obtained for the assets, trading information since the appointment of a Receiver should be given to the Company’s Directors. But in the absence of special circumstances which may favourably affect the price, a Receiver/Manager is not under any duty of care which involves him in reporting as suggested to the Directors on his management of the business.
It cannot be said that a Receiver/Manager is under no duty to account to the Company whose affairs he is managing nor did the Defendant so urge in this case. The extent and nature of the duty and the extent and nature of the accounts he must furnish will depend on the facts of each individual case. Smiths Limited -v- Middleton [1979] 3 All ER 842 illustrates this point. That was a case in which an account was ordered after a receivership had come to an end, the Court holding that as agent an equitable obligation to account existed which had not been obviated by statute. But the Plaintiffs (havingperhaps been misled by the head-note to the report) are not correct in finding in that case a general legal proposition to support their contentions in this case. I am not required now to lay down any general principles, and I gladly refrain from doing so. I am merely adjudicating on the claim to the detailed information sought in the letter of 29th February. As I have said a claim to such information is wholly exceptional, and I can find nothing in the evidence to justify me acceding to it on this motion.”
While Holohan -v- Friends Provident and Century Life Office [1966] IR1 established that a mortgagee has a duty of care towards a mortgagor and the court may restrain the disposal of the property at an undervalue, some recent cases in England and Wales indicate the narrow scope of this duty. In Huish -v- Ellis [1995] BCC QB 462, 466 – 467 Judge Raymond Jack said at p. 466:
” In my view the cases which I have cited establish that, provided a holder of security exercises his powers in good faith for the purpose of obtaining repayment, he is free to exercise those powers as he chooses: to quote from the judgment of Jenkins LJ in Re B Johnson & Co (Builders) Ltd [1955] Ch 634 at p. 661, approved by Lord Templeman in Downsview,[Downsview Nominees Ltd -v- First City Corporation Ltd [1993] Bcc 46] [1993] 2WLR 86] the bank had ‘full discretion as to the exercise and mode of exercising those powers’. What may be called the Cuckmere duty of care has a strictly limited ambit of application, namely to the sale itself once the creditor has decided what and when to sell. That is consistent with the facts before the Court of Appeal in Cuckmere and it is established by Tse Kwong Lam and by Downsview. The limited ambit is in particular made plain by Lord Templeman in Downsview at pp. 55-56 in a passage which I have already quoted in full.”
30. This passage was:-
“The general duty of care said to be owed by a mortgagee to subsequent encumbrancers and the mortgagor in negligence is inconsistent with the right of the mortgagee and the duties which the courts applying equitable principles have imposed on the mortgagee … If a mortgagee exercises his power of sale in good faith for the purpose of protecting his security, he is not liable to the mortgagor even though he might have obtained a higher price and even though the terms might be regarded as disadvantageous to the mortgagor. Cuckmere Brick Co Ltd -v-Mutual Finance Ltd [1971] Ch 949 is Court of Appeal authority for the proposition that, if the mortgagee decides to sell, he must take reasonable care to obtain a proper price but is no authority for any wider proposition … The duties imposed by equity on a mortgagee and on a receiver and manager would be quite unnecessary if there existed a general duty in negligence to take reasonable care in the exercise of powers and to take reasonable care in dealing with the assets of the mortgagor company.”
31. In another instructive passage from the Privy Council judgment in Downsview Nominees Ltd & Another -v- First City Corporation Ltd and Another [1993] 2 W.LR. 86. Lord Templeman at p. 99 of the judgment said:
“There is a great difference between managing a company for the benefit of a debenture holder and managing a company for the benefit of shareholders. If the debenture holder is dissatisfied with the policy or performance of his appointed receiver and manager, the appointment can be revoked. A dissatisfied second debenture holder may require the prior debenture to be assigned to him or may put the company into liquidation. A dissatisfied company may raise the money to pay off a debenture holder or put the company into liquidation. But if a receiver and manager decides at his discretion to manage and is allowed to manage and does manage in good faith with the object of preserving and realising the assets for the benefit of the debenture holder, he is subject to no further or greater liability.”
32. Finally a quotation from Jenkins L.J. In re B. Johnson & Co. (Builders) Ltd. [1955] 1 Ch. 634, 662 – 663 may help to clarify the position of a receiver
“In determining whether a receiver and manager for the debenture holders of a company has broken any duty owed by him to the company, regard must be had to the fact that he is a receiver and manager – that is to say, a receiver, with ancillary powers of management – for the debenture holders, and not simply a person appointed to manage the company’s affairs for the benefit of the company ….
The duties of a receiver and manager for debenture holders are widely different from those of a manager of the company. He is under no obligation to carry on the company’s business at the expense of the debenture holders. Therefore he commits no breach of duty to the company by refusing to do so, even thought his discontinuance of the business may be detrimental from the company’s point of view. Again, his power of sale is, in effect, that of a mortgagee, and he therefore commits no breach of duty to the company by a bona fide sale, even though he might have obtained a higher price and even though, from the point of view of the company, as distinct from the debenture holders, the terms might be regarded as disadvantageous.
In a word, in the absence of fraud or mala fides … the company cannot complain of any act or omission of the receiver and manager, provided that he does nothing that he is not empowered to do, and omits nothing that he is enjoined to do by the terms of his appointment. If the company conceives that it has any claim against the receiver and manager for breach of some duty owed by him to the company, the issue is not whether the receiver and manager has done or omitted to do anything which it would be wrongful in a manager of a company to do or omit, but whether he has exceeded or abused or wrongfully omitted to use the special powers and discretions vested in him pursuant to the contract of loan constituted by the debenture for the special purpose of enabling the assets comprised in the debenture holders’ security to be preserved and realised”
33. As for a claim by a company to documents in the hands of a receiver appointed under a debenture as receiver and manager of the company, Gomba Holdings UK Ltd. and others -v- Minories Finance Ltd. [1989] BCLC 115 is helpful. According to the Court of Appeal the claim of the Plaintiff companies to documents in the hands of the receiver was one based on ownership. The ownership of documents in the context of a receivership depended on whether the documents were brought into existence in discharge of the receivers’ duties to the mortgagor, or the debenture holder, or to enable the receiver to carry out his professional duties. It was only documents in the first category to which the Plaintiffs could lay a proprietary claim. Since the Plaintiffs could not show that they had a proprietary claim to any of the documents which they sought from the Defendants, the appeal was dismissed.
……
At pages 115-116 of “The Law Relating to Receivers, Managers and Administrators” (2nd Edition) Butterworths, London, 1990, Hubert Picarda wrote:-
“It is also further established that a receiver owes duties to the company over whose assets he is appointed receiver. Accordingly a mortgagor company in receivership may sue the receiver appointed by the mortgagee if the receiver acts improperly or to the detriment of the company. This means that as the company can maintain any relevant action for breach of duty there is no justification for allowing a derivative action by directors and majority shareholders, because those persons could have procured the company to bring the action on its own behalf.”
36. After dealing with the duty owed by the Receiver to the debenture holder, to the company, other secured creditors and to a guarantor of the company’s debt, he deals with the duty of care to ordinary creditors:
“The question is whether the duty of care is owed to anyone else, and in particular to ordinary unsecured creditors of a company. On this point the position had been stated thus by Sir Neil Lawson in Lathia -v-Dronsfield Bros Limited [[1987] BCLC 321 at 324:-
“On authority, we must look at the context to determine to whom the duties are owed. Primarily [receivers] owe a duty to their debenture holders, and also, as agents, to the company. In my judgment, they do not owe a duty to the general creditors, to contributors, to officers of the company and members. They also owe a duty to guarantors. But that is a secondary liability. It is clear on the authorities, and no authority has been cited to the contrary, that the receivers do not owe a duty to the creditors of the company or to contributors’.”
40. Unless the receiver is the Applicant, the application must be supported by such evidence that the Applicant is being unfairly prejudiced by any actual or proposed action or omission of the receiver as the Court may require. Accordingly the right to apply for directions is rather limited and would seem not to cover an application for clarification of the Receiver’s powers or other general application for directions. If the application is being made by a director or shareholder then it would appear that a prerequisite is that proof is adduced that the Applicant is being unfairly prejudiced by some action or omission on the part of the receiver.
Conclusion
42. I conclude that the Applicant has not proved that the matter comes within the peculiar circumstances in which the Court would consider it just to make an order. There has been a failure to show that the information is required for a specific purpose and there has been a failure to show that the Receiver has not been acting reasonably in refusing to give further information to the Applicant in his capacity as director and shareholder. Indeed, it is doubtful whether even the Company, to whom the Receiver clearly owes a duty to render appropriate accounts in respect of his dealings with the Company’s assets, would be able to make out a case that the Receiver was acting unreasonably at this stage in refusing to delve back into the documents with regard to the sale of the assets conducted more than ten years ago. Different considerations might well apply if the Applicant were able to prove that the refusal to give further information was actuated by bad faith on the part of the Receiver. Counsel for the Applicant has been careful to make it clear that no such allegation of mala fides is being madeagainst the Receiver. Accordingly, the application for directions in respect of the furnishing of the extensive information sought and the order for inspection must be refused. However, I should add that this does not preclude an application being made on behalf of the Company for material information which may be relevant to the directors of the Company in exercising their responsibilities when the management of the Company is being returned to them as their responsibility.”
Hoare & anor -v- Allied Irish Banks Plc & anor
[2014] IEHC 221
Charleton J.
“Similarly, a mortgagee exercising a power of sale, usually a bank, is obliged to act in a provident way with due regard to the rights and interests of the mortgagor. This means taking “all reasonable means to prevent any sacrifice of the property.” A mortgagee in possession must act as a reasonable person would act in selling property; Holohan v Friends Provident and Century Life [1966] IR 1. When a mortgagee enters into possession of premises, it is subject to the equity of redemption. In being obliged to act reasonably, a mortgagee, usually through an agent, must take care to foster the worth of the property to the benefit not only of the mortgagee but also of the mortgagor whose debts stands charged against the land; see Fisher Lightwood – Law of Mortgage (London, 2002) 737-738. In summary, the duty is one of reasonable care.
In the context of a receiver in possession, perfection cannot be the basis upon which legal liability is assessed. Rather, a receiver should act as a careful person to gather together and secure the assets charged in terms of physical protection and insurance, should attempt to gain a reasonable profit out of the assets without unreasonably endangering the assets themselves, should study the market and attempt to see at what point a letting or sale might profitably be made, and should do what is prudent according to the standards of people of business in that regard. Of key relevance to how a receiver should act is the existence of the debt charged on the properties and the need to pay it back and to not unnecessarily incur interest charges over a long period to no good effect. Complaints are often made in litigation that a receiver should wait almost indefinitely for property to recover in value. As against that, countervailing factors must be weighed in the balance. With large unpaid loans, interest accumulates over time in an alarming fashion and this may have the effect of cancelling out any correction in the market or even undermining the debt situation of the person whose assets are charged. State organisations such as the National Asset Management Agency may perhaps be able to take a somewhat longer term view that a commercial organisation which is required in banking terms to maintain a particular level of liquidity. There is no perfect time to sell or let which is predictable accurately. The matrix within which decisions about expending further money have to be made, such as on maintaining property, must also be considered. A person who has real property assets for rental over a period of decades may wish to invest substantial sums in renovation to secure a good return. A receiver in possession of flats may regard a lesser investment in painting and decorating a sufficient use of funds so as to enable short-term letting given that the timescale involved may be very much less. All of this is about taking a commonsense view of the circumstances, pressures and returns as they might reasonably be assessed by a prudent receiver acting diligently. “
In re Edenfell Holdings Ltd.
[1999] 1 I.R. 465
Supreme Court Keane J.
“It is clear that, at common law, a receiver owed a duty of care in relation to the sale of the property, comprised in the charge by virtue of which he was appointed, to any persons interested in the property. That common law duty was given statutory force by s. 316A of the Act of 1963, which was inserted by s. 172 of the Companies (Amendment) Act, 1990, and which is as follows:-
“A receiver, in selling property of a company, shall exercise all reasonable care to obtain the best price reasonably obtainable for the property as at the time of sale.”
Strictly speaking, the application by the receiver might have been dealt with on the basis that, since he was clearly entitled prima facie to sell the property for what seemed to him the best price obtainable, he should be permitted so to do, without prejudice to the rights of any person who might be interested in the property to institute proceedings, claiming either an injunction restraining him from disposing of the property or damages for breach of his common law and statutory duty. Since, however, there was also a motion before the court on behalf of Mr. Barrett seeking an order restraining the receiver from completing the sale and all the parties who might have had an interest in the matter were before the court, it was obviously sensible to decide the substantive issue, as the trial judge did, on the basis of the evidence on affidavit and submissions before her.
….
It is not the function of the court in a case such as this to decide, with the benefit of hindsight, whether it might have been better for the creditors and anyone else interested in the property had the receiver rejected the Astra offer and continued to deal with Anglo ire or anyone else who might be interested. The court was dealing with the matter with the advantage of hindsight: the receiver had to deal with the matter then and there and in the light of the expert advice available to him from a valuer. Having tested the market again, without any response in the form of an unconditional offer, he was entitled, in all the circumstances, to take the view he did, that accepting the Astra proposal was the more prudent course.”
Ruby Property Company Ltd. v. Kilty
[1999] IEHC 50
Mr. Justice McCracken
“SALE AT UNDERVALUE
13. The Plaintiffs allege that the Receiver sold the property at an undervalue, and was in breach of section 316A of the Companies Act, 1963, which provides:-
“A Receiver, in selling property of a company, shall exercise all reasonable care to obtain the best price reasonably obtainable for the property as at the time of sale.”
14. This is simply a statutory acknowledgement of the position at common law, as it has long been decided that a Receiver owes a duty of care to the company when selling it’s property. Holohan -v- Friends Provident and Century Life Office (1966) I.R.1. To consider whether this claim can succeed, it is necessary to detail some of the events leading up to the sale, and the evidence put forward by the Plaintiffs.
Meretz Investments NV & Anor v ACP Ltd & Ors
[2006] EWHC 74 (Ch)
MR JUSTICE LEWISON
Mortgagee’s equitable duties
The general principles
It is common ground that a mortgagee, exercising his remedies under the mortgage, owes equitable duties to the mortgagor and to subsequent encumbrancers. In Downsview Nominees Ltd v. First City Corporation Ltd [1993] AC 295 Lord Templeman described them as follows:
“Several centuries ago equity evolved principles for the enforcement of mortgages and the protection of borrowers. The most basic principles were, first, that a mortgage is security for the repayment of a debt and, secondly, that a security for repayment of a debt is only a mortgage. From these principles flowed two rules, first, that powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and secondly that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower.”
Mr Morgan also referred me to the distillation of principle by Peter Gibson LJ in Raja v. Austin Gray [2003] 1 EGLR 91, 96:
“(1) A mortgagee with the power of sale is not a trustee of that power, the power being given to the mortgagee for his own benefit.
(2) A mortgagee is not under a general duty of care to the mortgagor and can act in his own interests in deciding whether and when he should exercise his power of sale.
(3) A mortgagee, however, is subject to an equitable duty to act in good faith and to obtain the best price reasonably obtainable at the time he decides to sell. That duty is owed to those interested in the equity of redemption. They include the mortgagor, other mortgagees and a guarantor of the mortgage debt, but they do not include a tenant at will of the mortgaged property, nor, where the mortgagor is a trustee, a beneficiary of the trust.”
Mr Morgan also relied on the decision of Stuart V-C in Robertson v. Norris (1857) 4 Jur NS 155, in which the Vice Chancellor described a sale for purposes other than merely to recover payment of the debt as a “fraud on a power”. In so saying, the Vice Chancellor followed what he understood to be the law; namely that the mortgagee was a trustee of his power of sale. However, this view of the law is not correct. Moreover, the decision in Robertson v. Norris was disapproved by Jessel MR, in typically trenchant terms, in Nash v. Eads (1880) 25 Sol J 95 (which I quote below).
To whom are the duties owed?
In Downsview Lord Templeman said that the argument that a mortgagee owed no duty to a subsequent encumbrancer was untenable. He explained:
“The owner of property entering into a mortgage does not by entering into that mortgage cease to be the owner of that property any further than is necessary to give effect to the security he has created. The mortgagor can mortgage the property again and again. A second or subsequent mortgage is a complete security on the mortgagor’s interests subject only to the rights of prior encumbrancers. If a first mortgagee commits a breach of his duties to the mortgagor, the damage inflicted by that breach of duty will be suffered by the second mortgagee, subsequent encumbrancers and the mortgagor, depending on the extent of the damage and the amount of each security.”
Since the damage suffered by a second encumbrancer is measured by the extent of his security, it seems to me to follow that the extent of a mortgagee’s duty to a subsequent encumbrancer must itself be measured by the extent of the subsequent security.
Britel had been paid everything that was due to it as site payments. Its only remaining entitlement was as holder of the equity of redemption in the Lease-Back Option. But the Lease-Back Option was not secured. Consequently, in my judgment FP owed no equitable duty to Britel. Moreover, as Peter Gibson LJ pointed out in Raja, the duty is not owed to a tenant at will of the property. It must follow, therefore, that a mortgagee owes no duty to the holder of an option to take a tenancy of the property. Mr Morgan did not seriously suggest that an equitable duty was owed to Britel.
Meretz had been paid everything that was due to it, so long as the proceeds of sale of completed penthouses did not exceed £7.55 million. It retained its security but the debt thereby secured depended on two contingencies:
i) Net proceeds of sale exceeding £7.55 million and
ii) ACP being the grantor of sub-leases of completed penthouses.
The right dependent on the second of these contingencies was not a right capable of being “overreached” in the conventional sense of the word; that is to say a right which is transferred from the property itself to the proceeds of sale. It is this kind of right which gives rise to the equitable duty imposed on a mortgagee to take proper steps to obtain the best price for the mortgaged property. A subsequent mortgagee has an obvious interest in that price being achieved. But Meretz’ right was a contingent right which the exercise of the power of sale would itself destroy, in the sense that the contingency would never be capable of fulfilment. Once the power had been exercised, Meretz would have no interest in the proceeds of sale. If, therefore, the power of sale was exercisable at all, it must have been exercisable in circumstances in which that inevitable result would follow. In those circumstances I conclude that FP owed no equitable duty to Meretz which would require it to refrain from exercising its power of sale even though the result would be to deprive Meretz of its contingent entitlement. In practical terms, this means that FP owed no equitable duty to Meretz, apart from a duty to exercise its powers in good faith.
The content of the duty
Mr Morgan relied on the further statement by Peter Gibson LJ in Raja that:
“Equity intervenes to ensure that proper account is taken of the interests of the mortgagor and others interested in the equity of redemption. The mortgagee is only interested in the discharge of the debt owed to him, but equity makes sure that the mortgagee acts fairly to those interested in the equity of redemption when the mortgagee exercises the power of sale.”
Mr Morgan emphasised the statement that the mortgagee must act fairly to those interested in the equity of redemption. But of equal importance is that this duty arises when the mortgagee exercises his power of sale. Given that Peter Gibson LJ had just said that the mortgagee was entitled to act in his own interest in deciding whether and when to exercise that power, it does not seem to me that he can have intended his reference to the duty to act fairly “when” he exercises that power to cut down the mortgagee’s right to act in his own interests in deciding whether to exercise it.
Mr Morgan also referred to Palk v. Mortgage Services Funding Ltd [1993] Ch 330, 337 in which Nicholls V-C said:
“As Lord Templeman noted in the China and South Sea Bank case, at p. 545, a mortgagee can sit back and do nothing. He is not obliged to take steps to realise his security. But if he does take steps to exercise his rights over his security, common law and equity alike have set bounds to the extent to which he can look after himself and ignore the mortgagor’s interests. In the exercise of his rights over his security the mortgagee must act fairly towards the mortgagor. His interest in the property has priority over the interest of the mortgagor, and he is entitled to proceed on that footing. He can protect his own interest, but he is not entitled to conduct himself in a way which unfairly prejudices the mortgagor.”
This appears to me to emphasise that the mortgagee is entitled to protect his own interests and is entitled to give those interests priority over those of the mortgagor (or, for that matter, over those of a subsequent mortgagee). The question for decision in Palk was not whether the mortgagee was in breach of its duty (the Court of Appeal appeared to think that it was not); but whether the court should exercise a statutory discretion. Palk is not, therefore, of direct help.
The mortgagee’s motives
Mr Morgan submitted that a power of sale would only be properly exercised where the mortgagee had “purity of purpose”; that is to say where the mortgagee’s only motive was to recover, in whole or in part, the debt secured by the mortgage. Even if the mortgagee’s purpose was to protect his security, rather than to recover the secured debt, that was an illegitimate purpose. Moreover, Mr Morgan submitted that if the mortgagee had mixed purposes, the requisite purity of purpose was not achieved, and the exercise was improper. Mr Dutton, on the other hand, supported by Mr Pryor, submitted that as long as one of the mortgagee’s purposes was to recover the debt secured by the mortgage or to protect his security, it did not matter that he had other purposes as well. He referred to Fisher & Lightwood on Mortgages (11th ed para 16.13) in which it is said:
“It seems that a mortgagee who genuinely seeks payment of sums due will not be defeated merely because he has an additional improper motive.”
This is an expression of opinion by a respected work of authority; although in my judgment it is not clear whether the case on which it relies for this proposition (Ashley Guarantee plc v. Zacaria [1993] 1 WLR 62, 69) was a decision of principle or simply a decision on the facts.
In Nash v. Eads (1880) 25 Sol J 95 Jessel MR said:
“The mortgagee was not a trustee of the power of sale for the mortgagor, and if he was entitled to exercise the power, the Court could not look into his motives for so doing. If he had a right to sell on June 1, and he then said, ‘The mortgagor is a member of an old county family, and I don’t wish to turn him out of his property, and will not sell it at present,’ and then on July 1 he said, ‘I have had a quarrel with the mortgagor, and he has insulted me; I will show him no more mercy, but will sell him up at once’ – if all this was proved, the Court could not restrain the mortgagee from exercising his power of sale, except on the terms of payment of the mortgage debt. The Court could not look at the mortgagee’s motives for exercising his power. Lord Eldon had never said anything of the kind which Vice-Chancellor Stuart supposed him to have said. The Vice-Chancellor was entirely mistaken, and must have been citing the judgments to which he referred from his recollection, without looking at the reports. Of course there were some limits to the powers of the mortgagee. He, like a pledgee, must conduct the sale properly, and must sell at a fair value, and he could not sell to himself. But he was not bound to abstain from selling because he was not in urgent want of his money, or because he had a spite against the mortgagor.”
This quotation undoubtedly supports Mr Dutton’s submission. But it also seems to me to run counter to the modern trend of authority which imposes on the mortgagee a duty of some kind to act fairly towards the mortgagor. An exercise of a power of sale out of spite does not, at least at first blush, sit well with such a duty. Nevertheless, it does not appear to have been disapproved in any recent case.
It is in this context that it is appropriate to consider the facts of the Downsview case; and also the decision of the Court of Appeal in Quennell v. Maltby [1979] 1 WLR 318. In Downsview the holder of a second debenture appointed receivers of a company’s assets. Subsequently, a first debenture holder appointed receivers of the same company, not for the purpose of obtaining repayment of its debt; but for the purpose of disrupting a receivership by receivers originally appointed by the second debenture holder, and for reinstating the managing director of the company who had been removed by the second debenture holders’ receivers. The critical finding of fact made by the trial judge was as follows:
“In pursuit of his own objectives [the second defendant] embarked upon a course, having as its first objective disruption of the receivership under the [second] debenture. His intention in urgently acquiring the [first] debenture and accepting appointment as receiver was not for the purpose of enforcing the security under the [first] debenture but for the purpose of preventing the enforcement by the plaintiffs of the [second] debenture.”
The original receivers gave way to the subsequently appointed receivers, since their appointing creditor had priority. In addition the holder of the second debenture offered to buy the first debenture by paying all money secured by it (i.e. offered to redeem) but this offer was wrongly refused by the first debenture holder, even though it would have meant that it recovered its debt in full. The trial judge held that the receivers had been appointed by the first debenture holder for improper purposes. His decision was upheld by the Privy Council and the second receiver was held liable for equitable compensation. The measure of the compensation was the difference between what would have been recovered had the original receivership proceeded undisturbed, and the amount actually recovered under the subsequent receivership.
Mr Dutton submits that this was a case in which no part of the first debenture holder’s purpose was the recovery of the debt secured by the first debenture. This appears to me to be correct, on the facts.
The second case is the decision of the Court of Appeal in Quennell v. Maltby [1979] 1 WLR 318. In that case a house was mortgaged to a bank to secure a debt of £2,500. The house was let to tenants at an annual rate of £1,000. The tenants were protected as against the mortgagor by the Rent Acts. The tenancy was not binding on the bank. The mortgagor’s wife took a transfer of the mortgage and sued for possession. The purpose of obtaining possession was not to enable the wife to sell in her capacity as transferee of the mortgage, but to enable her husband, the mortgagor, to do so. It was held that this was an improper use of the powers conferred on a mortgagee. Lord Denning MR said:
“So the objective is plain. It was not to enforce the security or to obtain repayment or anything of that kind. It was in order to get possession of the house and to overcome the protection of the Rent Acts.”
Bridge LJ said:
“…on the facts of this case it is as plain as a pikestaff that the purpose of the bringing of these proceedings via Mrs. Quennell is not for her own benefit to protect or enforce the security which she holds as the transferee of the legal charge but for the benefit of her husband as mortgagor to enable him to sell the property with the benefit of vacant possession. In substance she is suing as his agent.”
Templeman LJ said:
“In the present case it is clear from the facts and the evidence that the mortgagee, Mrs. Quennell, is not bona fide exercising her rights and powers for her own purposes as mortgagee but for the purpose of enabling the landlord mortgagor (her own husband) to repudiate his contractual obligations and defeat the statutory tenancy of the tenant which is binding on the landlord. Mrs. Quennell does not even pretend to be acting in her own interests as mortgagee. She brings this action to oblige her husband. In my judgment the court must therefore treat this action, although in form brought by a mortgagee, as an action brought for and on behalf of the landlord mortgagor.”
Mr Dutton submits, and again I agree, that on the facts this was a case where no part of the mortgagee’s purpose in exercising the legal rights conferred on a mortgagee was that of enforcing the security for the mortgagee’s own benefit. I note also that Bridge LJ said that the mortgagee’s purpose was not to “protect or enforce” the security.
The quotation from Jessel MR in Nash v. Eads was applied by Russell J in Belton v Bass [1922] 2 Ch 449. In that case the mortgagees of shares in a brewery wanted to confer an option on one of the directors of the brewery to acquire the shares at a future date. They were advised that they had no power to grant such an option. So they purported to sell the shares to the director, as mortgagees, lending the whole of the purchase price, interest free, for that purpose. They also gave the director the right to require the mortgagees to buy back the shares at the original purchase price. The economic effect of the transaction was, therefore, the same as if they had granted the option that they were advised they could not do. The mortgagor applied to set aside the sale. The argument was that:
“…it is said that the mortgagee exercised his power of sale with an indirect motive, not with the view of realizing his security, but with the object of conferring a benefit upon the defendant Garrard by giving him an option masquerading as a sale.”
Having referred to Nash v. Eads, Russell J concluded:
“I am unable accordingly to inquire into the motives of the defendants Bass, or to hold that the sale is vitiated because they desired to confer a benefit on the purchaser by selling to him upon terms, which included a fair price.”
I should, lastly under this head, refer to the well-known case of Farrar v Farrars Ltd (1888) 40 Ch D 395. Mr JR Farrar was one of three mortgagees of a quarry. He was also a solicitor; and acted in that capacity for himself and his co-mortgagees. The mortgagor (James Farrar) defaulted on the loan. The mortgagees took possession and tried to sell the quarry, but without success. Mr JR Farrar then had the idea of forming a company to buy the quarry; and he and others duly formed the company, which bought the quarry. Mr JR Farrar was the solicitor to the company; and he was also a shareholder in it. The sale was not at an undervalue. The Court of Appeal held that the sale should not be set aside. However, they did say that the mortgagees had the burden of sustaining the transaction. However, they held that Mr JR Farrar had shown that the sale was made in good faith, and at a proper price; with the consequence that the sale stood. This case shows that the fact that the mortgagee will acquire benefits consequent upon the sale does not necessarily involve a breach of the mortgagee’s duty of good faith.
Drawing the threads together, it seems to me that none of the authorities to which I was referred gives unequivocal support to Mr Morgan’s submission that the mortgagee must have “purity of purpose”. On the contrary, Nash v. Eads and Belton v. Bass are inconsistent with it. So, too, is the statement in Fisher & Lightwood. A dissection of a mortgagee’s motives is likely to be difficult in practice. Moreover, unlike statutory powers conferred for the public benefit, or trustees’ powers conferred for the benefit of beneficiaries (which were two analogies on which Mr Morgan relied) a mortgagee’s powers are conferred upon him for his own benefit. In such circumstances “purity of purpose” may be difficult to achieve. The cases do support the proposition that a power of sale is improperly exercised if it is no part of the mortgagee’s purpose to recover the debt secured by the mortgage. Where, however, a mortgagee has mixed motives (or purposes) one of which is a genuine purpose of recovering, in whole or in part, the amount secured by the mortgage, then in my judgment his exercise of the power of sale will not be invalidated on that ground. In addition I consider that it is legitimate for a mortgagee to exercise his powers for the purpose of protecting his security.
Protection of purchasers
The statutory provision
Mr Tamimi relies on section 104 (2) of the Law of Property Act 1925 which provides:
“(2) Where a conveyance is made in exercise of the power of sale conferred by this Act, or any enactment replaced by this Act, the title of the purchaser shall not be impeachable on the ground—
(a) that no case had arisen to authorise the sale; or
(b) that due notice was not given; or
(c) where the mortgage is made after the commencement of this Act, that leave of the court, when so required, was not obtained; or
(d) whether the mortgage was made before or after such commencement, that the power was otherwise improperly or irregularly exercised;
and a purchaser is not, either before or on conveyance, concerned to see or inquire whether a case has arisen to authorise the sale, or due notice has been given, or the power is otherwise properly and regularly exercised; but any person damnified by an unauthorised, or improper, or irregular exercise of the power shall have his remedy in damages against the person exercising the power.”
The expression “purchaser” is defined by section 205 (1) (xxi) of the Act which, so far as relevant, reads:
“”Purchaser” means a purchaser in good faith for valuable consideration and includes a lessee, mortgagee or other person who for valuable consideration acquires an interest in property except that in Part I of this Act and elsewhere where so expressly provided “purchaser” only means a person who acquires an interest in or charge on property for money or money’s worth; and in reference to a legal estate includes a chargee by way of legal mortgage; and where the context so requires “purchaser” includes an intending purchaser”
Limits to the protection
Mr Morgan submitted that:
i) A purchaser cannot rely on section 104 (2) if he has knowledge of or participates in an impropriety in the exercise of a power of sale;
ii) Knowledge, for this purpose, includes both “shut-eye” knowledge and constructive knowledge;
iii) Knowledge, for this purpose, also includes knowledge (including “shut-eye” and constructive knowledge) acquired by an agent and imputed to his principal;
iv) The knowledge need not exist at the date of the contract for sale. Knowledge acquired by the purchaser between contract and completion will equally preclude him from relying on section 104 (2);
v) A purchaser can only rely on section 104 (2) if he is a purchaser in good faith. That is a concept which goes wider than a mere inquiry into the purchaser’s state of knowledge or notice.
Knowledge of impropriety
Mr Morgan’s first proposition is supported by the decision of the Court of Appeal in Corbett v. Halifax BS [2005] 1 WLR 964, 975 in which Pumfrey J (with whom Schiemann and Scott Baker LJJ agreed) said:
“section 104(2) makes it clear that the purchaser is not protected if he has actual knowledge of the impropriety. But if the purchaser has no notice of the impropriety, then on the face of it he takes free. Thus, the completed sale by a mortgagee pursuant to his statutory power is vulnerable only if the purchaser has knowledge of, or participates in, an impropriety in the exercise of the power.”
I observe in passing that although Pumfrey J speaks of both “knowledge” and “notice” I do not understand him to differentiate between the two. The Court of Appeal was not concerned, in that case, with differing degrees of knowledge or notice.
“Shut eye” or “blind eye” knowledge was described by Lord Scott of Foscote in Manifest Shipping Co Ltd v. Uni-Polaris Insurance Co Ltd [2003] 1 AC 469 as follows:
“Blind-eye” knowledge approximates to knowledge. Nelson at the battle of Copenhagen made a deliberate decision to place the telescope to his blind eye in order to avoid seeing what he knew he would see if he placed it to his good eye. It is, I think, common ground – and if it is not, it should be – that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence.”
He concluded:
“In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity.”
I accept Mr Morgan’s submission that “shut eye” or “blind eye” knowledge in this particular sense is the equivalent of actual knowledge.
Constructive knowledge presents more of a problem. The usual concept of constructive knowledge is knowledge that a person would have acquired if he had made all usual and proper enquiries. But section 104 (2) on its face absolves a purchaser from having to inquire whether a case has arisen to authorise the sale, or due notice has been given, or the power of sale is otherwise properly and regularly exercised. To hold that a purchaser cannot rely on section 104 (2) as a result of constructive knowledge appears to me to contradict the express words of the section.
The knowledge of one person may, in certain circumstances, be attributed to another person. This is generally known as imputed knowledge. However, it is not the same as constructive knowledge. The concept of imputed knowledge does not bear on the kind of knowledge possessed by one person that is attributed to another. The general rule of agency is that where in the course of any transaction in which he is employed on his principal’s behalf, an agent receives notice or acquires knowledge of any fact material to that transaction, under circumstances in which it is his duty to communicate it to his principal, the principal will be precluded from relying on his personal ignorance of that fact; and he will be taken to have known of it (or to have had notice of it) as from the time when his agent ought to have communicated it to him if he had performed his duty with due diligence. In Strover v. Harrington [1988] Ch 390, 409 Browne-Wilkinson VC said:
“In this, as in all other normal conveyancing transactions, after there has been a subject to contract agreement the parties hand the matter over to their solicitors who become the normal channel for communication between vendor and purchaser in all matters relating to that transaction. In so doing, in my judgment the parties impliedly give actual authority to those solicitors to receive on their behalf all relevant information from the other party relating to that transaction. The solicitors are under an obligation to communicate that relevant information to their own clients. At the very least, the solicitors are held out as having ostensible authority to receive such information. Whether there be express or ostensible authority, the purchaser is in my judgment estopped from denying that he received the information relating to the transaction which has been communicated to his solicitors acting in the same transaction. In my judgment, such knowledge should be imputed to the principal.”
I accept, therefore, that in a conveyancing transaction a solicitor’s actual or “shut eye” knowledge should be imputed to his client.
Did FP have a power of sale to exercise?
In my judgment it is not open to Meretz or Britel to contend that FP did not have a power of sale to exercise.
Why did FP exercise its power of sale?
The case for Britel and Meretz
Mr Morgan submitted that FP’s purpose in “using the charge” comprised the following strands:
i) FP wished to “take control” of the development;
ii) FP wished to put itself into a position in which it could obtain finance and build out the development;
iii) In order to facilitate (ii) Meretz had to be cut out because its contingent entitlement to commission payments would make the development unprofitable; and Britel had to be cut out because the prospect of having to grant the development sub-lease would prevent FP from building out the development and hamper attempts to raise finance;
iv) The overriding motive was to avoid a loss for ACP and, if possible, produce a profit for FP.
Conspicuous by its absence in Mr Morgan’s list is any desire on the part of FP to recoup any of its lending.
Financial pressures
It is clear that both ACP and FP were in financial crisis in the summer of 2002. Not only is this clear from the contemporaneous documentation (in particular Mr Bretherton’s e-mail of 3 April 2002, Mr Olsson’s e-mails of 1, 10 and 14 April 2002 and the board minutes), but Mr Olsson also said so many times during the course of his evidence. I quote some examples:
“Q. It did not matter, did it, whether ACP made the profit or FP made the profit, it was one of your companies [that] would make the profit?
A. At the end of the day that is true … but the only way FP could get any of the money it had lent to ACP back was to use the charge. (Day 8 p. 37-8)
Q. The main driving force for you doing this [i.e. entering into the Wrap Around Agreement] was that you were in one of your many financial crises in the run up to the 31st May 2002?
A. Especially it is true .. that there was a cashflow problem. The main problem, though was that the asset, the charge that [FP] had over ACP’s development lease was getting far, far too expensive. It was a great risk, especially after threats from Mr Stern that he would, right or wrong, demand the sub-lease in September. It meant that [FP] had to use the charge before then.” (Day 8 p. 127)
“Q. You had nowhere else to go, had you, except to use the life line that had been pointed out as a possible lifeline?
A. It would not have mattered when we decided to use the charge … we had a charge, we used it and we acted on the advice we had. Had we not then [FP] would have disappeared.” (Day 8 p. 128-9)
The financial crisis was, as Mr Olsson said, partly related to cashflow. But that was not the only problem. Because of cost overruns and delays, completion of the development by ACP was unlikely to prove profitable to ACP if it had to make the contractual commission payments to Meretz. On the contrary, the project was likely to result in a significant loss. ACP was a single purpose vehicle; and had no assets apart from its interest in Albert Court. The debt owed by ACP to FP was mounting; and the only hope of repayment was out of the profits (if any) arising from the development. If ACP made a loss, FP would not be repaid. Accordingly the only prospect for FP to recover any of the money it had lent to ACP was to exercise its power of sale; which would result in the overriding of ACP’s contractual obligation to make commission payments to Meretz. More than that, since the trigger for the making of the commission payments was the grant by ACP of long leases of completed penthouses, the contractual commission payments would not become due at all. Exercise of the power of sale would also defeat the Lease-Back Option which had not been registered against the development lease before FP’s charge had been registered.
FP had been advised, both by counsel and by Mr Hawkins, that the power of sale was only capable of being exercised for the purpose of recovering the debt due or to protect its position as chargee. I do not consider that FP would have disregarded that advice, given that the board of FP were anxious that their use of FP’s powers as mortgagee should be carefully vetted by the lawyers. Nor do I consider that Mr Hawkins would have devised the scheme and carried it into execution if he had thought that the power of sale was being exercised for an improper purpose.
When FP first began to consider “using the charge” one of the options was to sell to QQH. The valuation of the development lease was obtained on the basis that one of the options open to FP was to sell the lease to a developer. The contemporaneous documents show that it was not a condition of any such sale that FP should continue to be associated with the project; although it was willing to continue. This is shown by Mr Olsson’s instructions to the valuer and by Mr Hawkins’ e-mail of 25 March 2002 (among others). They also show that FP was willing to assign the charge to a third party lender (such as NatWest). Part of the problem was that the very success of Mr Stern’s three-fold strategy (and in particular his dogged determination to deter any potential purchaser) had made it impossible for the lease to be sold at anything like its true value in what one might call a clean break. The prospect of becoming embroiled in litigation with Mr Stern and “his companies” would be likely to deter all but the bravest of purchasers. Accordingly in my judgment there was little alternative, if FP was to succeed in recovering any money as a result of a sale, to doing a deal of the kind it did with Mr Tamimi.
Mr Olsson also said, and I accept, that if the lease was to be sold, it would have been “commercial madness” for anyone to attempt to build out the development using traditional as opposed to modular construction techniques; and that there were few builders, apart from FP, who had the necessary know-how.
Mr Morgan criticised FP for buying in the NUBBH charge. But as I see it the real purpose of buying in the NUBBH charge was to secure the release of the Loft, the value of which exceeded the amount secured by the NUBBH charge. I do not regard that as an irrational commercial decision.
Accordingly I conclude that at least one of the purposes (and a significant purpose) of FP’s exercise of its power of sale was to recover what money it could out of the financial wreckage of the project. I do not consider that that was an improper purpose.
Moreover, the appeal of Britel and Meretz is to the protection afforded by equity. But it is an unattractive appeal when they themselves have been responsible for doing their best to disrupt any potential sale; and in addition doing so on the basis of legal arguments which the Court of Appeal subsequently held to be wrong or irrelevant.
Potential loss of security
As Mr Olsson’s evidence indicates, one of the factors motivating FP was the potential loss of its security if Britel successfully exercised the Lease-Back Option. In my judgment another of the factors driving FP’s decision to exercise its power of sale was to avoid that potential loss. I do not regard that as an improper purpose. It would, in my judgment, be a strong thing for equity to impose upon a secured creditor a duty to allow his security to disappear, thus making it impossible for him to recover the debt.
The proof of the pudding
Mr Dutton submitted that one way of testing whether recovery of the whole or part of the secured debt was a purpose of FP was to examine what actually happened. Mr Tamimi paid real cash for the acquisition of the development lease, one of whose effects was to reduce the debt owed by ACP to FP. If that was one of the effects of the transaction, in what sense can it be said that it was not one of its purposes? In my judgment there is no answer to that question.
Conclusion
In my judgment FP exercised its power of sale for a proper purpose; and was not in breach of any equitable duty owed to Meretz.
If FP exercised its power of sale for improper reasons, is Mr Tamimi affected?
This question does not arise. However, I should summarise my conclusions, in case I am wrong on the question whether FP’s exercise of its power of sale is vitiated.
Mr Tamimi had actual or imputed knowledge of the various contractual documents. However, the allegation of improper exercise of the power of sale depends on the allegation that it was no part of FP’s purpose in exercising the power to recover its debt. Mr Tamimi had no knowledge of the internal discussions by the boards of ACP and FP and only limited access to the privileged communications between Mr Olsson and Mr Hawkins. Mr Hawkins had told Mr Ware in terms on 29 April 2002 that FP was taking action “in order to protect its own position as first chargeholder”. I do not consider that Mr Tamimi had knowledge of FP’s motivation, apart from what he was told. Nor did he have any suspicion of impropriety about which he decided not to inquire. If, as I think, the scheme devised by Mr Hawkins was capable of being properly used by a mortgagee, Mr Tamimi was entitled to assume that it would be.
Accordingly, even if FP’s exercise of the power of sale had been improper, Mr Tamimi would not have been affected by the impropriety; and his title is unimpeachable.
Medforth v Blake & Ors
[1999] EWCA Civ 1482 [2000] Ch 86, [1999] 29 EG 119, [1999] EWCA Civ 1482, [1999] 2 BCLC 221, [1999] Lloyd’s Rep PN 844, [1999] EG 81, [1999] 2 EGLR 75, [1999] 3 WLR 922, [1999] BPIR 712, [1999] 3 All ER 97, [1999] BCC 771, [1999] PNLR 920
THE VICE-CHANCELLOR: The issue on this appeal is whether a receiver and manager of a pig farm, appointed by a mortgagee, owes any duty to the mortgagor, over and above a duty of good faith, as to the manner in which he conducts the pig farming business. The appeal is from the judgment of His Honour Judge McGonigal given on 20 November 1998 on a preliminary issue.
The proprietor of the pig farming business is Mr Medforth, plaintiff in the action and respondent in this Court. The judge described Mr Medforth as “a pig farmer on a very large scale”. In April 1982 Mr Medforth had 2,000 sows which, by February 1984, had increased to 3,000 sows. He had also 120 boars and 11,000 weaners or thereabouts. In 1985, the turnover of the business was over £2 million. These figures demonstrate the scale of the business.
In order to finance this business, Mr Medforth had borrowing arrangements with his bankers, Midland Bank plc. His borrowings were secured by two Agricultural Charges both dated 13 July 1982 and made under the provisions of the Agricultural Credits Act 1928. One was to secure his current account overdraft; the other was to secure his indebtedness on a loan account. They were in identical terms.
Each Charge entitled the Bank to appoint receivers of the property subject to the Charge and provided that the receivers should have power (inter alia):-
“(a) To take possession of collect and get in any property hereby charged …;
(b) to carry on manage or concur in carrying on and managing the business of the Farmer and … to raise or borrow any money that may be required upon the security of the whole or any part of the property hereby charged;
(c) to sell or concur in selling all or any of the property hereby charged …;
…
(g) to do any such other acts and things as may be considered to be incidental or conducive to any of the matters or powers aforesaid and which he or they lawfully may or can do as Agent for the Farmer”.
Each Charge provided also that:-
“any Receiver or Receivers so appointed shall be deemed to be the Agent of the Farmer and the Farmer shall be solely responsible for his or their acts or defaults and for his or their remuneration”.
By February 1984 Mr Medforth’s indebtedness to the Bank exceeded £800,000. The Bank, on 21 February 1984, appointed Mr Blake and Mr Jones, partners in Robson Rhodes, Chartered Accountants, “to be the Receivers of all the property comprised in the said Charge(s) with all the powers conferred on a Receiver thereby”. The appointments expressly said that “the Receivers shall be the Agents of the Farmer who alone shall be responsible for their acts and defaults”.
On 1 May 1987, following Mr Blake’s retirement, another Robson Rhodes partner, Mr Hore, was appointed Receiver in his place. Mr Blake has since died. The defendants named in the title to these proceedings are Mr Blake, Mr Jones and Mr Hore. The action against Mr Blake has presumably abated, but nothing turns on that. They, or, more accurately, Mr Jones and Mr Hore are the respondents to this appeal.
After their appointment the Receivers exercised their power to carry on the farming business. Their accounts for the period 22 February 1984 to 30 April 1985 showed a net profit of £251,836. That profit was applied in reduction of Mr Medforth’s secured overdraft. The next trading year appears to have been less successful. A net loss was incurred. The secured overdraft was reduced to £23,896 but the Receivers’ own overdraft rose to £106,498.
A very substantial element in the trading costs consisted of the cost of feed for the pigs. In the first accounting period sales of pigs produced £2, 473,171 and out of the total cost of sales of £1,359,513, the cost of feed stuff comprised £1,193,919.
In September 1988, by which time Mr Medforth’s secured indebtedness to the Bank was £537,944 odd, the Bank entered into new financial arrangements with him under which the secured indebtedness was repaid. The Receivers were then discharged.
Mr Medforth was dissatisfied with the manner in which the Receivers had carried on the farming business. He had a number of complaints, of which only one remains relevant. His complaints led to the commencement of proceedings in February 1990. The one remaining issue relates to the arrangements made by the Receivers for the purchase of feed for the pigs.
The Receivers, as Mr Medforth had done when he had been running the pig farm, purchased their supplies mainly from two sources. One was the B.O.C.M. Group of Companies, in particular, United Agricultural Merchants Ltd; the other was Dalgety Agriculture Ltd. As to this, Mr Medforth’s pleaded case included the following allegations:-
(i) that B.O.C.M. and Dalgety offered, or were willing to allow, discounts to large-scale purchasers such as the Receivers;
(ii) that Mr Medforth had, prior to the appointment of the Receivers, bought pig feed from B.O.C.M. and Dalgety to a value of between £10,000 and £15,000 a week upon which weekly discounts of about £1,000 a week had been allowed.
(iii) that the Receivers purchased pig feed exclusively from B.O.C.M. and Dalgety;
(iv) that the obtaining of discounts from feed suppliers was normal commercial practice and, in any event, that Mr Medforth had frequently reminded the Receivers of the availability and importance of discounts; and
(v) that the Receivers had made no attempt to obtain any discount from either B.O.C.M. or Dalgety until early 1988.
The Amended Statement of Claim alleged (in paragraph 5) that in conducting the farm business the Receivers had owed Mr Medforth a duty of care and that their failure to request or obtain the discounts was a breach of that duty. In the alternative, if the Receivers’ only duty to Mr Medforth was a duty of good faith, it was accepted that the Receivers’ failure to do anything about the discounts was not a result of any deceit or of any conscious or deliberate impropriety, but nonetheless it was alleged that the failure was a breach of that duty.
The Receivers, in their Amended Defence, contended that they owed Mr Medforth only a duty to exercise their powers in good faith and denied that their failure to do anything about the discounts constituted a breach of that duty.
The pleadings dealt also with Mr Medforth’s other complaints against the Receivers but, as I have said, each of those has, for one reason or the other, fallen by the wayside and I need not complicate this judgment by referring to them.
The trial of the action was due to start in September 1998 but the parties asked for the issue whether the Receivers owed Mr Medforth a duty of care or simply a duty of good faith in their conduct of the pig farming business to be dealt with as a preliminary issue. They asked that the trial date be vacated and that the trial be re-listed after the court had dealt with the appeal from the judge’s decision on the preliminary issue. An appeal on the issue was apparently regarded as inevitable. The judge agreed to the request and expedited the hearing of the preliminary issue.
The formulation of the preliminary issue was as follows:-
“Assuming that the plaintiff can prove the facts pleaded in the Amended Statement of Claim and Reply:-
(1) Did the Defendants in the course of the receivership of the plaintiff’s farm owe to the plaintiff only a duty of good faith when –
(a) exercising their powers of sale; and/or
(b) exercising their powers of managing the business; and/or
(c) otherwise acting (if there is such a case) in the factual circumstances alleged in the Amended Statement of Claim and Reply?
(2) If the Defendants owed only a duty of good faith in cases (a) and/or (b) above (and (c) if appropriate), what is the nature and meaning of good faith in those cases?
(3) If the Defendants’ duties in cases (a) and/or (b) (and (c) if appropriate) are not limited to good faith, did the Defendants owe to the Plaintiff in those cases where it is not so limited a duty of care (whether in equity or at common law) and what is the standard) and scope of such duty in the factual circumstances alleged in the Amended Statement of Claim and Reply?”
In a judgment running to some 60 pages and containing a careful analysis of the relevant cases, the judge expressed the following conclusions on the preliminary issue:-
(1) that the Receivers, when exercising their power of sale, owed Mr Medforth, over and above a duty of good faith, an equitable duty of care, (paragraphs 4.3.1.2 and 4.3.3.4).
(2) that the standard of that duty of care was the standard of a reasonably competent receiver (paragraph 4.3.4.6).
(3) that no sensible distinction could be drawn between the exercise of a power of sale and the exercise of a power to manage a business, that the power to manage was ancillary to the power of sale and that the equitable duty of care was applicable to both (paragraphs 6.11 and 6.13).
These conclusions answered paragraphs (1) and (3) of the preliminary issue and made paragraph (2) irrelevant. But the judge dealt with paragraph (2) nonetheless. He held that if the evidence showed that the Receivers acted in a wholly unreasonable way in failing to seek discounts, the failure would be a breach of their duty of good faith (paragraph 8.16).
In their Notice of Appeal the Receivers contend that the answers that ought to be given to the questions posed by the preliminary issues are as follows:-
“(1) The Defendants …. owed to the Plaintiff the following duties:-
(a) a duty when exercising their power of sale to take reasonable steps to obtain a reasonable price for the property to be sold;
(b) a duty when exercising their powers of managing the business to act only in good faith;
(c) a duty when otherwise acting (if there is such a case) only to act in good faith.
in the factual circumstances alleged in the Amended Statement of Claim and Reply.
(2) The nature or meaning of good faith in the context of the Defendants’ duties to the Plaintiff means that fraud or deliberate or wilful misconduct is required to constitute a breach of the duty.
(3) The standard and scope of the duty at (a) above … is irrelevant because the Defendants were not exercising their power of sale”.
Mr Peter Smith Q.C., Counsel for the Receivers, has, in some very interesting submissions both in written form and orally, made a sustained attack on the proposition that a receiver of mortgaged property owes to the mortgagor any duty other than a duty of good faith. He accepts, of course, that this court, in Cuckmere Brick Co Ltd -v- Mutual Finance Ltd 1971 Ch 949 held that a mortgagee, when exercising his power of sale, owes a duty to the mortgagor to take reasonable care to obtain a proper price. He reserves the right, however, to contend in a higher court that Cuckmere was wrongly decided. In any event, he agreed, the rule ought to be applied only to mortgagees and ought not to be applied to receivers. Provided there was no lack of good faith, a receiver who sold mortgaged property at a price lower than that which reasonable steps to obtain a proper price would have achieved had, it was submitted, no liability to the mortgagor.
Mr Smith accepted, too, that a mortgagee in possession would be accountable to the mortgagor on a footing of wilful default – that is, to say, the mortgagee must be treated as having received sums that he would have received if he had managed the property with due diligence. The facts pleaded regarding the Receivers’ failure to obtain discounts on the price of the pig feed disclose, I would think, a failure to manage the business with due diligence. So, if the failure had been that of a mortgagee in possession, the mortgagee would be accountable for the lost discounts. But Mr Smith insists that if the failure is that of a receiver managing the mortgaged business, the receiver has no liability to the mortgagor in the absence of a lack of good faith.
Mr Smith did accept that a receiver managing the mortgaged business might well owe a duty of care to the mortgagee who had appointed him. If a receiver’s failure to manage the business with due diligence has led to an insufficiency of assets to meet the secured debt, the failure might represent a breach of that duty and expose the receiver to an action in damages by the mortgagee. But, if there is a sufficiency of assets, the failure will have caused the mortgagee no loss. The loss will have been suffered by the mortgagor. Unlike the mortgagee, however, and provided the receiver has acted in good faith, the mortgagor will have no remedy against the receiver.
The proposition that, in managing and carrying on the mortgaged business, the receiver owes the mortgagor no duty other than that of good faith offends, in my opinion, commercial sense. The receiver is not obliged to carry on the business. He can decide not to do so. He can decide to close it down. In taking these decisions he is entitled, and perhaps bound, to have regard to the interests of the mortgagee in obtaining repayment of the secured debt. Provided he acts in good faith, he is entitled to sacrifice the interests of the mortgagor in pursuit of that end. But if he does decide to carry on the business why should he not be expected to do so with reasonable competence? The present case, if the pleaded facts are established, involves the failure of the Receivers to obtain discounts that were freely available. Other glaring examples of managerial incompetence can be imagined. Suppose, the Receivers had decided to carry on the business but had decided, through incompetence and not for any dishonest reason, that the pigs need not be fed or watered more than once a week, and, as a result a number of pigs had died. The Receivers would, I suppose, be in trouble with the RSPCA but, if Mr Smith is right, although they might be liable to the mortgagee they would have no liability to the mortgagor. Or suppose, that, as may well be the case, it is common practice to inoculate weaners against diseases to which pigs are prone but the Receivers decided to save money by dispensing with inoculations, with the result that a number of the weaners contracted disease and died and that the rest had to be slaughtered. If Mr Smith is right, the Receivers would have no liability to the mortgagor whose business they had, by incompetence, ruined. It is accepted that, if the mortgagee had gone into possession and carried on the business similarly incompetently, the mortgagee would have been accountable to the mortgagor for the loss caused to the mortgagor by the incompetence. But, it is submitted, not so the Receivers.
Mr Smith has sought to justify this proposition both by reference to the historical origin of receiverships and by reference to authority.
As to historical origin, the position prior to Lord Cranworth’s Act (23 & 24 Vict.c.145), enacted in 1860, was that a mortgagee had no power to appoint a receiver unless he had expressly stipulated for it in the mortgage. If he did appoint a receiver, not having stipulated for any power to do so, the receiver was the mortgagee’s agent and, in taking possession of the mortgaged property, rendered the mortgagee, his principal, liable to account to the mortgagor on the footing of wilful default. Mortgagees, in order to avoid the disadvantages of becoming mortgagees in possession, began to insist on a contractual provision requiring the mortgagor to appoint a receiver at the request of the mortgagee, with the receiver being directed to apply the income of the mortgaged property in paying the interest on the secured debt and any surplus to the mortgagor. All directions given to and powers conferred on the receiver were, in form if not in substance, given and conferred by the mortgagor whose agent the receiver became. This practice was given statutory recognition, first in Lord Cranworth’s Act (sections 11 and 17 to 23) and, later, in the Conveyancing Act 1881 (section 24). The relevant statutory provisions are now contained in section 109 of the Law of Property Act 1925 (see generally the explanation given by Rigby L.J. in Gaskell -v- Gosling [1896] 1 Q.B. 669 in his dissenting judgment later upheld in the House of Lords [1897] A.C. 575).
Mr Smith pointed out that the main reason for the development of the system under which the receiver is appointed by the mortgagee but is treated nonetheless as the agent of the mortgagor, is to enable the mortgagee to avoid becoming a mortgagee in possession while enjoying the advantages of his nominee, the receiver, displacing the mortgagor from control of the mortgaged property and from the receipt of the income derived from it. He argued that if the receiver is held to owe obligations to the mortgagor that go beyond duties of good faith, the advantages intended to be derived by mortgages from the receivership system will be undermined. They will be undermined, he said, because if the receiver is held to owe the mortgagor the same sort of obligations as a mortgagee in possession would owe, there will be no advantage to the mortgagee in avoiding being a mortgagee in possession. I am unable to accept these arguments.
If receivers who decide to carry on a mortgaged business do owe a duty to the mortgagor to do so with reasonable competence, I do not follow how that could adversely affect the mortgagee. If the receivers are in breach of that duty they will be answerable to the mortgagor. Mr Smith suggested that the mortgagee would then have to indemnify the receivers. Why should they do so? If a mortgagee, on appointing a receiver, has undertaken to indemnify the receiver against any claims for default made against the receiver by the mortgagor, that undertaking might have to be honoured. But, if mortgagees choose to give indemnities to guard receivers against the consequences of the receivers’ defaults, that is their affair. It is no reason at all for contending that the system of receivership is being undermined. In any event, Mr Smith accepted that a failure on the part of a receiver to show reasonable competence in his management of the mortgaged property would probably constitute a breach of a duty owed by the receiver to the mortgagee who had appointed him. A mortgagee would hardly be likely to give a contractual undertaking to indemnify a receiver against the consequences of conduct which constituted a breach of the receiver’s duty to the mortgagee.
Mr Smith argued that the mortgagee might have given instructions to the receiver as to the manner in which the receiver should manage the business that was to be carried on. He argued that an action by the mortgagor based upon a complaint that the receiver had been managing the business in that manner would entitle the receiver to look to the mortgagee for an indemnity. It is difficult to deal with a submission of this sort otherwise than by reference to particular facts. A mortgagee who has appointed a receiver has no general right to instruct the receiver as to how or when to exercise the powers that have been conferred on the receiver. The mortgagee retains his own powers as mortgagee. He does not, for example, lose his power to sell by appointing a receiver with a power of sale. The receiver, on appointment, exercises his powers as agent for the mortgagor. Paragraphs 3(g) and (h) of the Agricultural charges in the present case so provide. So does section 109(2) of the 1925 Act. If a mortgagee establishes a relationship with the receiver he has appointed under which the receiver exercises his powers in accordance with instructions given by the mortgagee, I can see the force of an argument that if the receiver is liable to the mortgagor then so will the mortgagee be liable. But this begs the question whether or not it is right that the receiver should be liable to the mortgagor. Take the present case as an example. Suppose that the reason why the Receivers had done nothing to obtain the freely available discounts was that the Midland Bank, the mortgagee, had instructed them not to do so. The proposition that the law should refrain from holding the Receivers liable to the mortgagor because to do so would lead to liability being imposed also on the mortgagee and that that would, in effect, be treating the mortgagee as a mortgagee in possession does not seem to me to make any sense. I agree that, on the supposed facts, if the Receivers were liable to the mortgagor, the mortgagee would be liable too. And why not? If the mortgagee chooses to instruct the Receivers to carry on the business in a manner that is a breach of the Receivers’ duty to the mortgagor, it seems to me quite right that the mortgagee, as well as the Receivers, should incur liability. This conclusion does not in the least undermine the receivership system. What it might do is to promote caution on the part of mortgagees in seeking to direct receivers as to the manner in which they (the receivers) should exercise their powers. I would regard that as salutary.
For these reasons, Mr Smith’s reliance on the history of receiverships as a justifying the exoneration of receivers from any duty to mortgagors other than that of good faith, falls, so far as I am concerned, on stony ground.
Let me now turn to the three authorities on which Mr Smith particularly relied. They were in re B. Johnson & Co (Builders) Ltd [1955] Ch. 635, and Downsview Nominees Ltd -v- First City Corporation [1993] AC 295 and Yorkshire Bank plc -v- Hall [1999] 1 A.E.R. 879).
In re: B. Johnson & Co (Builders) Ltd was a decision of the Court of Appeal. The issue was whether a receiver and manager, who had been appointed under a debenture, was an “officer” of the company for the purposes of section 333(1) of the Companies Act 1948. A second issue, assuming that the receiver/manager was an “officer”, was whether a case of misfeasance had been disclosed. On the first issue the court held that the receiver/manager was not an “officer” for section 333 purposes. The court dealt, also, with the second issue although its finding on the first issue had made that unnecessary.
In dealing with the first issue, Sir Raymond Evershed, Master of the Rolls, emphasised that the receiver/manager “is not managing on the company’s behalf but is managing in order to facilitate the exercise by him, for the mortgagees, of the mortgagees’ power to enforce the security”. It is, I think, important, whenever considering the exercise by receivers of their powers, to bear in mind the point made by the Master of the Rolls. The receivers’ main function is to assist the mortgagee in obtaining payment of the secured debt. The Master of the Rolls commented, also, that:-
“it is elementary that a mortgagee seeking to realise his security has no duty of care to see that there is as much as possible left over for those who are interested in what is called the equity”.
This statement of principle has been qualified, but not invalidated, by Cuckmere Brick Co. Ltd -v- Mutual Finance Ltd [1971] Ch 949, a case to which I will return. On the second point, the Master of the Rolls analysed the pleaded complaints against the receiver/manager as constituting no more than “charges of mere negligence” (p. 852). A case of mere negligence could not, he held, be prosecuted under section 333.
Both Jenkins L.J. and Parker L.J. agreed with the Master of the Rolls that the receiver/manager was not an “officer” for section 333 purposes. Jenkins L.J., in doing so, made remarks about the nature of a receiver/manager’s duty on which Mr Smith relies. After stating that “The primary duty of the receiver is to the debenture holders and not to the company” Jenkins L.J. continued, at p. 662, as follows:-
“But the whole purpose of the receiver and manager’s appointment would obviously be stultified if the company could claim that a receiver and manager owes it any duty comparable to the duty owed to a company by its own directors or managers …
He is under no obligation to carry on the company’s business at the expense of the debenture holders. Therefore he commits no breach of duty to the company by refusing to do so, even though his discontinuance of the business may be detrimental from the company’s point of view. Again, his power of sale is, in effect, that of a mortgagee, and he therefore commits no breach of duty to the company by a bona fide sale, even though he might have obtained a higher price and even though, from the point of view of the company, as distinct from the debenture holders, the terms might be regarded as disadvantageous.
In a word, in the absence of fraud or mala fides (of which there is not the faintest suggestion here), the company cannot complain of any act or omission of the receiver and manager, provided that he does nothing that he is not empowered to do, and omits nothing that he is enjoined to do by the terms of his appointment. If the company conceives that it has any claim against the receiver and manager for breach of some duty owed by him to the company, the issue is not whether the receiver and manager has done or omitted to do anything which it would be wrongful in a manager of a company to do or omit, but whether he has exceeded or abused or wrongfully omitted to use the special powers and discretions vested in him pursuant to the contract of loan constituted by the debenture for the special purpose of enabling the assets comprised in the debenture holders’ security to be preserved and realized. That seems to me to be an issue wholly outside the scope of section 333”.
This was not a reserved judgment and it is important to be clear about the object of Jenkins L.J’s remarks. He was distinguishing the duties of a receiver/manager from those of a director/manager in order to explain why section 333 applied only to the latter. Mr Smith is, however, entitled to point to the sentence commencing “In a word, in the absence of fraud or mala fides …” as supporting his submissions.
Downsview Nominees Ltd -v- First City Corporation was a Privy Council decision on an appeal from the Court of Appeal of New Zealand. The judgment of the Board was given by Lord Templeman. Lord Templeman made clear his view that such duty as a receiver/manager owed to the mortgagor was, like the duty owed by the mortgagee, a duty imposed by equity. It was not a duty in tort. It was not attributable to the application of the Donaghue -v- Stevenson “neighbour” principle. This was important because the first instance judge, Gault J., had held that “the proposition that a receiver will not be liable in negligence so long as he acts honestly and in good faith no longer represents the law of New Zealand: …” and that “a receiver owes a duty to the debenture holders to take reasonable care in dealing with the assets of the company …”, and the Court of Appeal had held that “… if there were any duties on the part of the … receiver to a subsequent debenture holder, they would have to be based in negligence”. Lord Templeman did not disagree that the receiver owed duties to the subsequent debenture holder but insisted that they were duties arising in equity and were not common law duties of care. In the result, Gault J’s monetary award against the receiver and in favour of the subsequent debenture holder was upheld, but placed on a different jurisprudential basis.
Lord Templeman cited with approval the passage from Jenkins L.J’s judgment in In re B. Johnson (Builders) Ltd that I have cited and, at p.315, said this:-
“The general duty of care said to be owed by a mortgagee to subsequent encumbrancers and the mortgagor in negligence is inconsistent with the right of the mortgagee and the duties which the courts applying equitable principles have imposed on the mortgagee. If a mortgagee enters into possession he is liable to account for rent on the basis of wilful default; he must keep mortgage premises in repair; he is liable for waste. Those duties were imposed to ensure that a mortgagee is diligent in discharging his mortgage and returning the property to the mortgagor. If a mortgagee exercises his power of sale in good faith for the purpose of protecting his security, he is not liable to the mortgagor even though he might have obtained a higher price and even though the terms might be regarded as disadvantageous to the mortgagor. Cuckmere Brick Co. Ltd -v- Mutual Finance Ltd . [1971] Ch 949 is Court of Appeal authority for the proposition that, if the mortgagee decides to sell, he must take reasonable care to obtain a proper price but is no authority for any wider proposition. A receiver exercising his power of sale also owes the same specific duties as the mortgagee. But that apart, the general duty of a receiver and manager appointed by a debenture holder, as defined by Jenkins L.J. in In re B. Johnson & Co (Builders) Ltd [1955] Ch. 634, 661, leaves no room for the imposition of a general duty to use reasonable care in dealing with the assets of the company. The duties imposed by equity on a mortgagee and on a receiver and manager would be quite unnecessary if there existed a general duty in negligence to take reasonable care in the exercise of powers and to take reasonable care in dealing with the assets of the mortgagor company”.
As a Privy Council case, Downsview Nominees is not binding but, as Mr Smith submitted, is a persuasive authority of great weight. But what did it decide as to the duties owed by a receiver/manager to a mortgagor? It decided that the duty lies in equity, not in tort. It decided that there is no general duty of care in negligence. It held that the receiver/manager owes the same specific duties when exercising the power of sale as are owed by a mortgagee when exercising the power of sale. Lord Templeman cited with approval the Cuckmere Brick Co. Ltd test, namely, that the mortgagee must take reasonable care to obtain a proper price. So, a receiver/manager when selling must take reasonable care to obtain a proper price. In so deciding, Lord Templeman departed from the proposition to be found in Jenkins L.J’s judgment in Johnson.
In Yorkshire Bank plc -v- Hall Robert Walker L.J., at p. 893 reviewed a mortgagee’s duty to his mortgagor. He referred to China and South Sea Bank Ltd -v- Tan [1990] 1 AC 536, National Bank of Greece -v- Pinios Shipping Co [1990 1 AC 637 and the Downsview Nominees case and then said this:-
“These cases together establish or reaffirm that a mortgagee’s duty to the mortgagor or to a surety depend partly on the express terms on which the transaction was agreed and partly on duties (some general and some particular) which equity imposes for the protection of the mortgagor and the surety. The mortgagee’s duty is not a duty imposed under the tort of negligence, nor are contractual duties to be implied. The general duty (owed both to subsequent incumbrancers and to the mortgagor) is for the mortgagee to use his powers only for proper purposes and to act in good faith … . The specific duties arise if the mortgagee exercises his express or statutory powers … If he exercises his power to take possession, he becomes liable to account on a strict basis (which is why mortgagees and debenture holders operate by appointing receivers whenever they can). If he exercises his power of sale, he must take reasonable care to obtain a proper price”.
These remarks apply, in my view, equally to the exercise by a receiver of a receiver’s powers.
The Cuckmere Brick Co. Ltd test can impose liability on a mortgagee notwithstanding the absence of fraud or mala fides. It follows from Downsview Nominees and Yorkshire Bank -v- Hall that a receiver/manager who sells but fails to take reasonable care to obtain a proper price may incur liability notwithstanding the absence of fraud of mala fides. Why should the approach be any different if what is under review is not the conduct of a sale but conduct in carrying on a business? If a receiver exercises this power, why does not a specific duty, corresponding to the duty to take reasonable steps to obtain a proper price, arise? If the business is being carried on by a mortgagee, the mortgagee will be liable, as a mortgagee in possession, for loss caused by his failure to do so with due diligence. Why should not the receiver/manager, who, as Lord Templeman held, owes the same specific duties as the mortgagee when selling, owe comparable specific duties when conducting the mortgaged business? It may be that the particularly onerous duties constructed by courts of equity for mortgagees in possession would not be appropriate to apply to a receiver. But, no duties at all save a duty of good faith? That does not seem to me to make commercial sense nor, more important, to correspond with the principles expressed in the bulk of the authorities.
In the Cuckmere Brick Co. Ltd case, the Court of Appeal held that a mortgagee when exercising his power of sale owed a duty to the mortgagor “to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it” (p. 968). This is firmly established now as a duty in equity.
In Tse Kwong Lam -v- Wong Chit Sen [1983] 1 WLR 1349, a Privy Council decision on an appeal from the Court of Appeal of Hong Kong, the Board held that a sale by a mortgagee to a company in which the mortgagee was interested “can only be supported if the mortgagee proves that he took reasonable precautions to obtain the best price reasonably obtainable at the time of sale” (p. 1356). The same, applying what Lord Templeman said in Downsview Nominees about specific duties, would apply to a receiver. This is not consistent with the notion that a receiver owes only a duty of good faith.
In Tomlin -v- Luce 43 Ch. 191, the Court of Appeal held a mortgagee liable to second mortgagees for any loss occasioned by the insertion in auction particulars of a misstatement. Cotton L.J. said that “the first mortgagees are answerable for any loss which was occasioned by the blunder made by the auctioneer at the sale” (p. 194). A receiver in similar circumstances would similarly have been liable.
Knight -v- Lawrence [1991] BCC 411 was a case in which a receiver of mortgaged properties which were tenanted failed to serve on the tenants the notices which were necessary to put in motion rent review procedures. As a result the opportunity to obtain increases in the rent was lost. The mortgagor successfully sued the receiver in negligence. It is, I think, now established that the mortgagor ought to have sued on a duty of care owed in equity rather than on a tortious duty of care. But the distinction is an immaterial one. The extent of the duty of care, whether in equity or at common law, depends on all the circumstances of the case. What standard of conduct in all the circumstances does the law require of the receiver in managing the mortgaged properties? Sir Nicholas Browne-Wilkinson, the then Vice-Chancellor held that the circumstances imposed on the receiver a duty of care in regard to the service of the rent review notices. There can be no doubt but that if a mortgagee in possession had failed to serve the notices he would have been accountable to the mortgagor for the loss caused by the default. Sir Nicholas Browne-Wilkinson said this about the receiver:-
“In my judgment [the receiver] had a total misapprehension about the functions of a receiver. He regarded himself as being there to do what he was told by his appointor …; provided he discharged what they told him to do he had discharged his functions. He was, in his own eyes nothing but a rent collector. That to my mind, is an unhappy misapprehension of the functions of a receiver. … it is one of the first functions of a receiver in a case like this to get solicitors or others to review the position of the rent review clause, and to take such steps as are necessary to ensure that the reviews take place …” (p. 418).
There is, in my judgment, no difficulty whatever in regarding the passage I have cited as expressing correctly the duty imposed by equity on the receiver in the circumstances in which the receiver found himself. The duty was, in my opinion, owed both to the mortgagee and to the mortgagor. Each had an interest in the value of the mortgaged property being safeguarded by the service of the rent review notices.
McHugh -v- Union Bank of Canada 1913 AC 299 concerned a chattel mortgage of a herd of horses on a ranch about 55 miles from Calgary. The mortgagee bank took possession of the horses and drove them to Calgary for sale. But they were driven so hurriedly, without being allowed sufficient time to feed, that they lost condition and some of them died. On the taking of the mortgage account the mortgagor sought to charge the mortgagee with damages for his negligent want of care of the horses. The trial judge found negligence proved and assessed the damages to be allowed to the mortgagor in the mortgage account. The Privy Council upheld his decision. There was no suggestion of fraud or mala fides. Suppose a receiver had been appointed and the receiver had managed the drive to Calgary in the same way as the mortgagee had done and with the same result. Mr Smith’s submissions would excuse the receiver from any liability for his negligence.
Mr Smith has submitted that to hold a receiver liable to the mortgagor for anything more than a breach of a duty of good faith would require a number of established authorities on the law of mortgages to be torn up and thrown away. He instanced Kennedy -v- de Trafford [1897] A.C. 181. This was a case where the mortgagors were two tenants in common. The mortgagees, in exercise of their power of sale, sold to one of the two. The trustee in bankruptcy of the other tenant in common applied to the court to have the sale set aside. He claimed, alternatively, damages against the mortgages for negligence in the exercise of the power of sale. The report of the case in the House of Lords shows that the trustee’s main complaint was that the purchaser from the mortgagees had been one of the two mortgagor tenants in common. It was argued that this individual stood in a fiduciary relationship to his co-tenant and was disqualified from purchasing. It was argued, also, that the sale had been at an undervalue. The House of Lords dealt with the case peremptorily. Counsel for the respondents was not called on. Judgment was delivered at once. Lord Herschell, in rejecting the argument based on sale at an undervalue said that:-
“… if a mortgagee in exercising his power of sale exercises it in good faith without any intention of dealing unfairly by his mortgagor, it would be very difficult indeed, if not impossible, to establish that he had been guilty of any breach of duty towards the mortgagor. Lindley L.J., in the court below, says that “it is not right or proper or legal for him either fraudulently or wilfully or recklessly to sacrifice the property of the mortgagor”. Well I think that is all covered really by his exercising the power committed to him in good faith. It is very difficult to define exhaustively all that would be included in the words “good faith”, but I think it would be unreasonable to require the mortgagee to do more than exercise his power of sale in that fashion. Of course, if he wilfully and recklessly deals with the property in such a manner that the interests of the mortgagor are sacrificed, I should say that he had not been exercising his power of sale in good faith.
My Lords it is not necessary in this case to give an exhaustive definition of the duties of a mortgagee to a mortgagor, because it appears to me that, if you were to accept the definition of them for which the appellant contends, namely, that the mortgagee is bound to take reasonable precautions in the exercise of his power of sale, as well as to act in good faith, still in this case he did take reasonable precautions”. (p. 185).
The other members of the House agreed.
Mr Smith submits that the Cuckmere Brick Co. case is inconsistent with Lord Herschell’s statements of principle in Kennedy -v- de Trafford . He reserves the right to contend in a higher court that the Cuckmere Brick Co case was wrongly decided. In my judgment, Kennedy -v- de Trafford did not lay down as an inflexible principle that the only duty owed by a mortgagee when selling was a duty of good faith. Lord Herschell’s remarks about the difficulty of proving any breach of duty in a case where no want of good faith could be alleged show that he was leaving open the possibility of a case where, on the facts, that difficulty could be overcome.
Moreover, in my view, it is inappropriate to treat expressions of principle delivered ex tempore by no matter how august a judge as if they were of statutory effect. One of the great virtues of the common law duty of care is its inherent flexibility and its scope for development and adjustment in order to meet the changing requirements of society. Principles of equity, we were all taught, were introduced by Lord Chancellors and their deputies, the Vice-Chancellors sitting in the Chancery Courts, in order to provide relief from the inflexibility of common law rules. The equity of redemption was a Chancery invention, introduced in order to ensure that a conveyance by way of mortgage remained a security for the repayment of money whether or not the date fixed for repayment and re-conveyance had passed. The duties imposed on a mortgagee in possession, and on a mortgagee exercising his powers whether or not in possession, were introduced in order to ensure that a mortgagee dealt fairly and equitably with the mortgagor. The duties of a receiver towards the mortgagor have the same origin. They are duties in equity imposed in order to ensure that a receiver, while discharging his duties to manage the property with a view to repayment of the secured debt, nonetheless in doing so takes account of the interests of the mortgagor and others interested in the mortgaged property. These duties are not inflexible. What a mortgagee or a receiver must do to discharge them depends upon the particular facts of the particular case. A want of good faith or the exercise of powers for an improper motive will always suffice to establish a breach of duty. What else may suffice will depend upon the facts. Tse Kwong Lam -v- Wong Chit Sen is a very good example. The fact that the mortgagee had an interest in the purchasing company placed the mortgagee under an obligation to show that a proper price had been obtained. This was an obligation more onerous than would otherwise have been required. It is true that Lord Herschell in Kennedy -v- de Trafford expressed the duty on the mortgagee in terms much less onerous than the terms in which Salmon L.J. expressed the duty in the Cuckmere Brick Co. case. That does not make the two cases inconsistent with one another. The facts that constituted the mortgagors’ complaints were different. And the duty in equity appropriate to have been owed by a mortgagee selling in 1888 is not necessarily of the same weight as the duty appropriate to have been owed by a mortgagee selling in 1967. Equity is at least as flexible as the common law in adjusting the duties owed so as to make them fit the requirements of the time.
I do not accept that there is any difference between the answer that would be given by the common law to the question what duties are owed by a receiver managing a mortgaged property to those interested in the equity of redemption and the answer that would be given by equity to that question. I do not, for my part, think it matters one jot whether the duty is expressed as a common law duty or as a duty in equity. The result is the same. The origin of the receiver’s duty, like the mortgagee’s duty, lies, however, in equity and we might as well continue to refer to it as a duty in equity.
In my judgment, in principle and on the authorities, the following propositions can be stated:-
(1) A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption.
(2) The duties include, but are not necessarily confined to, a duty of good faith.
(3) The extent and scope of any duty additional to that of good faith will depend on the facts and circumstances of the particular case.
(4) 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 debt can be paid and the debt itself re-paid.
(5) Subject to that primary duty, the receiver owes a duty to manage the property with due diligence.
(6) Due diligence does not oblige the receiver to continue to carry on a business on the mortgaged premises previously carried on by the mortgagor.
(7) If the receiver does carry on a business on the mortgaged premises, due diligence requires reasonable steps to be taken in order to try to do so profitably.
In my judgment, Judge McGonigal’s answers to the preliminary issue were, with one or two minor qualifications, in accordance with principle and correct. The minor qualifications are these:-
(i) The judge held that a receiver’s power to manage a business was ancillary to the power of sale. I do not think it is. I would agree that in many cases, a receiver will manage a business in order to bring the mortgaged property to a state in which the business can then be sold as a going concern. But the power to manage is, in my view, independent of the power to sell. A receiver can manage a business for the purpose of generating profits from which the secured debt can be discharged. The management of the business does not have to be ancillary to an intended eventual sale. But I agree that in the management of the business an equitable duty of care is owed.
(ii) I do not think that the concept of good faith should be diluted by treating it as capable of being breached by conduct that is not dishonest or otherwise tainted by bad faith. It is sometimes said that recklessness is equivalent to intent. Shutting one’s eyes deliberately to the consequences of what one is doing may make it impossible to deny an intention to bring about those consequences. Thereapart, however, the concepts of negligence on the one hand and fraud or bad faith on the other ought, in my view, to be kept strictly apart. Equity has not always done so. The equitable doctrine of “fraud on a power” has little, if anything, to do with fraud. Lord Herschell in Kennedy -v- de Trafford gave an explanation of a lack of good faith that would have allowed conduct that was grossly negligent to have qualified notwithstanding that the consequences of the conduct were not intended. In my judgment, the breach of a duty of good faith should, in this area as in all others, require some dishonesty or improper motive, some element of bad faith, to be established.
Finally, although I am not sure that it is strictly an answer to a question posed by the preliminary issue, in my judgment the facts pleaded in the Amended Statement of Claim and Reply would, if proved, and in the absence of any answer pleaded in the Amended Defence other than denial, constitute a breach by the Receivers of the duty they owed in equity to Mr Medforth.
I would dismiss this appeal.
LORD JUSTICE SWINTON THOMAS: I agree with judgment of the Vice-Chancellor.
Bula Ltd. (In Receivership) & Ors v. Crowley & Anor
[2003] IESC 28 (11 April 2003)
Denham J.
Murray J.
McGuinness J.
Appeal No. 185/02
I
Judgment delivered on the 11th day of April, 2003 by Denham J. [Nem Diss]
1. Litigation
Four appeals are considered in this judgment, which appeals are part of a series of seven appeals by these parties which have been before this Court this term. Three appeals of this series have been heard by the Court and judgment was delivered on the 13th day of February, 2003. As pointed out in that judgment these appeals are part of a long line of litigation between the parties, stretching over decades.
2. Parties
The parties in this litigation are as follows: (a) Bula Limited (In Receivership), hereinafter referred to as Bula; (b) Bula Holdings, hereinafter referred to as Holdings; (c) Thomas C. Roche who died in 1999 is not a party but is still named in some proceedings; (d) Thomas J. Roche is also named in some proceedings but is no longer a party in the litigation; (e) Richard Wood; (f) Michael Wymes; (g) Laurence Crowley, hereinafter referred to as the Receiver, is the Receiver appointed by the Banks over the assets of Bula; (h) the Northern Bank Finance Corporation Limited; (i) Ulster Investment Bank Limited; (j) Allied Irish Investment Bank Limited: these three banks are referred to collectively as the Banks. Richard Wood and Michael Wymes are directors of Bula and Holdings. Michael Wymes is the moving party in the overall litigation. Thomas C. Roche (now deceased) and Thomas J. Roche, who took no part in the proceedings, were directors of Bula.
3. History
These appeals are part of a long history of litigation between the parties. It was the intention of Bula and its directors to engage in major mining operations on its lands and to that end large sums of money were borrowed from the Banks and duly secured by a number of mortgages and debentures which entitled the relevant banks holding security to appoint a receiver over the property of the company in the event of default by Bula in its obligations to the bank in question. Major financial difficulties occurred in consequence of which the Banks called in their loans by formal demands in 1982. On the 8th October, 1985 the Banks appointed Laurence Crowley as the Receiver over Bula’s secured property and he then went into possession of the property.
4. Four Appeals
There are four appeals considered in this judgment. They are part of a series of seven appeals to this Court. The first three appeals were determined in a judgment delivered on the 13th February, 2003. The matters before this Court now will be referred to as the fourth, fifth, sixth and seventh appeal.
(a) The fourth appeal, appeal No. 185/02
The fourth appeal is an appeal by Bula, Holdings, Richard Wood and Michael Wymes against the judgment and order of the High Court (Murphy J.) delivered on the 20th June, 2002 (now reported at [2002] 2 ILRM 513) in which the High Court, on the application of the Receiver pursuant to s. 316 of the Companies Act, 1963, made an order approving the sale of the Bula orebody to Tara Mines Limited, hereinafter referred to as Tara, on the terms set out in contract dated the 9th May, 2001, hereinafter referred to as the Contract. The High Court order of the 20th June, 2002 is referred to hereinafter as the s. 316 order.
(b) The fifth appeal, appeal No. 271/02
The fifth appeal is an appeal by Bula, Holdings, Richard Wood and Michael Wymes against the judgment and order of the High Court (Murphy J.) delivered on the 12th July, 2002 in which the High Court declined to grant a stay on the s. 316 order.
(c) The sixth appeal, appeal No. 272/02
The sixth appeal is an appeal in a separate set of proceedings, High Court Record No. 2002, No. 10141 Bula Limited (In Receivership), Bula Holdings, Richard Wood and Michael Wymes v. Laurence Crowley, which proceedings were instituted on the 23rd July, 2002 and brought by Bula, Holdings, Richard Wood and Michael Wymes against the order of the High Court (Murphy J.) made on the 1st August, 2002 in which the High Court refused to grant injunctions the effect of which would have been to restrain the vendor and purchaser under the Contract (which contract had been completed pursuant to the s. 316 order) pending the determination of the fourth appeal herein.
(d) The seventh appeal, appeal No. 334/02
The seventh appeal is an appeal by Bula, Holdings, Richard Wood and Michael Wymes against the order of the High Court (Murphy J.) made on the 5th November, 2002 in which the court declined to amend the s. 316 order perfected on the 25th June, 2002 which purported to embody the judgment made on the 20th June, 2002.
The four appeals are brought in each case by Bula, Holdings, Richard Wood and Michael Wymes. Bula, Holdings, Richard Wood and Michael Wymes are hereinafter referred to collectively as the plaintiffs.
5. The fourth appeal, appeal No. 185/02
5.(i) Decision of the High Court
On the 20th June, 2002 the High Court made an order approving the sale of Bula orebody to Tara pursuant to s. 316 of the Companies Act, 1963, on the terms set out in the Contract. The learned High Court judge reached the conclusion:
“The Court finds that the Receiver, in selling the asset of the Company which are secured under the various debentures, had exercised all reasonable care necessary to obtain the best price. The price was, in the circumstances, the only price reasonably obtainable for the property as at the time of sale.
There has been no breach by the Receiver of his duty under subsection 1 of Section 316A.
I will, accordingly, allow the Receiver’s Application and make an Order approving the sale of the said property to Tara Mines Limited on the terms set forth in the contract dated the 9th May, 2001 and grant liberty to Bula Limited (in Receivership) to complete the said contract.”
5.(ii) Appeal
On the 2nd July, 2002 the plaintiffs filed thirty-four grounds of appeal. The Court has been furnished with helpful written submissions on the matter and heard oral submissions.
5.(iii) Submissions of Plaintiffs
In oral submissions for the plaintiffs, Mr. John Trainor S.C. stated that this, the fourth appeal, the appeal against the s. 316 order, was the main appeal. The most important issues which counsel addressed were as follows. First, he submitted that the statutory test had not been satisfied in that (a) there was no specialist valuer; (b) the sale was at a gross undervaluation; (c) there was a failure to exploit the position of Tara; and (d) the Receiver went to the market at the wrong time. Counsel emphasised that these four aspects of the matter were merely facets of the issue as to whether in all the circumstances the statutory requirements of s. 316 had been met. Counsel opened extensive case law on the test to be applied in a s. 316 application. Counsel submittted further that there had been a lack of fair procedures. Comprehensive case law was opened to the court in oral and written submissions as to the duty of good faith required of the Receiver. Counsel argued that the s. 316 application had the gravest consequences for the plaintiffs and that consequently these were proceedings in which all the requirements of fair proceedings should be made available to the plaintiffs. Counsel submitted that where a matter is of great consequence to parties the right to cross-examine is a fundamental right; if the consequences are sufficiently grave it is a right of the party to test the evidence. In this case on the 23rd April, 2002, when the hearing commenced, application on behalf of the plaintiffs was made to the Court to cross-examine the Receiver and Mr. Wells on their affidavits. (Notice to Cross-examine had been served on the 22nd April, 2002.) The learned High Court judge declined the application, he declined to allow an adjournment for cross-examination or for discovery. Counsel submitted that essentially the learned trial judge’s reason was because it would cause unjustifiable delay. In the judgment of the High Court delivered on the 20th June, 2002 the matter was referred to as follows:
“However, an application for cross-examination had been rejected by the Court at the commencement of this action as had an application for adjournment for the purpose of discovery motions.”
Counsel stated that from that ruling two things followed: first, paragraphs 168 to 259 of Michael Wymes affidavit which dealt with the involvement of Navan Mines with Bula was withdrawn as those references without discovery could not proceed. Thus those paragraphs were not opened to the trial judge, they were withdrawn voluntarily by the plaintiffs. Secondly, an objection was taken to paragraphs 146 to 167 of the affidavit of Michael Wymes as they contained hearsay and they were ruled out by the learned trial judge. There was no appeal against that decision. Thus paragraphs 146 to 259 of the affidavit of Michael Wymes were not before the trial court. Counsel submitted that the reason given by the learned trial judge for not allowing cross-examination was that it would cause unjustifiable delay. Counsel submitted that to give delay as a reason was not valid. The Contract had been entered into on the 9th May, 2001 and was subject to court approval: see Special Condition 10. Closing was to be ten days thereafter. Closing could be and was postponed. Counsel queried the rush in forcing on a hearing in April or May of 2002. The primary obligation to close in 2001 had gone. Counsel submitted that the affidavits were silent as to where the urgency lay. Counsel submitted that there was a bare formulaic affidavit which required to be tested by cross-examination. Counsel opened extensive case law on the need for fair procedures. Counsel also opened extensive case law on the test to be applied to a s. 316 application.
5.(iv) Submissions on behalf of the Receiver
In written and oral submissions counsel for the Receiver submitted that the trial judge was correct in finding that the Receiver had complied with his statutory and legal duties in effecting a sale of the mine and was correct in authorising the completion of the sale.
5.(v) Submissions on behalf of Tara
Comprehensive written submissions were filed on behalf of Tara. In oral submissions counsel for Tara adopted the submissions of the Receiver and submitted that the High Court order was not in error, that it was the only order open to the learned High Court judge. Counsel pointed out that Tara had bought the Bula orebody pursuant to a contract approved by the High Court; an order of the High Court which was in force at the time. Tara completed the contract which the court had said was to be completed. Counsel pointed out that Tara had been in litigation brought by the plaintiffs since 1986. He submitted that in this appeal the court was being asked whether the Receiver correctly exercised his jurisdiction. Counsel referred to the long history of litigation and ventured that if the price had been different, if the Receiver was seeking to stand over a sale at half or double the price, the matter would still be litigated by the plaintiffs. Counsel emphasised that the Receiver had a duty of good faith. He argued that there was not a scintilla of evidence that the Receiver acted in any way other than in good faith. He submitted that the function of the Receiver was to take charge of the assets and sell them, that he had a duty of good faith, and that the Receiver’s primary duty was to the Banks. Here, he pointed out, the Receiver had come to court to get approval for a sale at a price which was greatly less than the liabilities to the Banks; yet the sale was supported by the Banks. Further, that those who would in the first instance be liable to make up the shortfall, the guarantors, that is the Roches, also supported the sale. He submitted that on the facts and law the Receiver had at all times acted correctly. As to the issue of extracting a higher price from Tara, counsel queried how the Receiver could turn to Tara and order it to pay a higher price; no one else was bidding. He referred to the process, including to those interested parties who came to the data room yet none made an offer. He pointed out that it was only when the Receiver went back to those who had expressed an interest that he had received a sealed bid from Tara. Counsel argued that the only reasonable explanation was that as a stand alone mine Bula had no commercial value. He submitted that the evidence, the process, was sufficient for the Receiver. He submitted that the obligation was to get the property to the market, that in s. 316 faith is put in the market. He submitted that in this case the market value had been ascertained in the only conclusive way it could be, by an open and fair sale process. Counsel adopted the arguments of the Receiver as to the cross-examination point. Counsel submitted that the appeal should be dismissed.
5.(vi) Submissions on behalf of the Banks
Extensive written submissions were filed by the Banks and I have considered them carefully. Counsel for the Banks adopted the submissions of the Receiver and Tara. Counsel pointed out that the price obtained, IR£27,500,000, fell short of the debt of approximately €95,000,000 and that therefore the Banks would suffer a loss. In addition to that loss there is also the cost of the receivership and litigation over nearly two decades. He submitted that in that context, if there was any reality to the plaintiffs’ case and if the Receiver had failed in his duty, the parties most disadvantaged would be the Banks; yet the Banks supported the sale. He submitted that the Banks’ support for the position of the Receiver is a significant relevant factor. He pointed out that in relation to the valuation issue argued by the plaintiffs, that the plaintiffs had advanced no evidence of market value, that the only evidence brought by the plaintiffs was that of Mr. Evans and that it did not purport to be evidence of market value. Counsel submitted that at the end of the day a valuation is only the opinion of one expert, that the only true test is the open market. Counsel concluded by submitting that the Receiver had complied with s. 316 and that the appeal of the plaintiffs should be dismissed.
5.(vii) Notice of Motion
The application for a s. 316 order was brought by way of Notice of Motion dated the 20th March, 2002. In the motion the Receiver sought the following relief:
“1. An Order pursuant to section 316 of the Companies Act 1963 for directions in connection with the contract entered into for the sale of the property known as the Bula Mine, Navan County Meath (and more particularly described in the Schedule hereto) by Bula Limited (In Receivership) to Tara Mines Limited on 9 May 2001, a copy of which contract appears as Exhibit LC2 to the Affidavit of Laurence Crowley sworn herein on 4 March 2002.
2. Further or in the alternative, an Order approving the sale of the said property to Tara Mines Limited on the terms set forth in the said contract and/or an Order granting directions and/or liberty to Bula Limited (In Receivership) to complete the said contract.”
The motion also referred to further or other relief which the court might deem appropriate and to costs. The motion was grounded on the affidavit of the Receiver sworn on the 4th March, 2002 and that of Andrew Wells affirmed on the 4th March, 2002. In his affidavit sworn on the 4th March, 2002 the Receiver deposed:
“MY EFFORTS TO DISPOSE OF THE LANDS:
13. When the second of the above entitled sets of proceedings were instituted, an injunction was sought restraining me from seeking to dispose of the mine. The application for the injunction was struck out, but I did undertake to the Plaintiffs in that action that I would apply to the Court for the approval of any sale of the mine or other charged assets on notice to the Plaintiffs. I have been advised by my counsel and believe that (at the latest) the basis upon which this undertaking had been given lapsed upon the determination of the Supreme Court of 15 January 1999, (the effect of which was that all allegations against the Defendants in the second action save for the then adjourned matters relating to the Statute of Limitations, stood dismissed). Nonetheless, this application (which is prompted by the terms of the agreement between the Company and Tara Mines Limited to which I shall refer further below) is on notice to the parties who were Plaintiffs in the second action.
14. Following the decision of the Supreme Court I immediately embarked upon the process of seeking to dispose of the mine. At the outset I retained International Mining Consultants (“IMC”) formerly Mackay & Schnellmann Limited, to advise me and IMC assisted me throughout the process. IMC is one of the leading firms of mining consultants with a very high level of expertise throughout the industry. Advertisements were placed at the beginning of May 1999 in financial newspapers and mining journals circulating in the UK, France, Germany, Australia, South Africa, Canada and the USA. I beg to refer to a copy of the advertisement published upon which marked with the letters “LC4” I have signed my name prior to the swearing hereof. In addition I wrote to approximately sixty major mining enterprises on 6 May 1999 inviting expressions of interest.
15. Replies were received from forty-five parties, expressing varying levels of interest. A data room was set up in the offices of KPMG Dublin with the assistance of IMC which contained all of the technical and other relevant documentation relating to the orebody. My solicitors prepared a Confidentiality Agreement to be signed by parties who wished to take the matter further and this Confidentiality Agreement was signed by nineteen parties. In all twelve parties visited the data room and a further seven were sent technical information. This due diligence process continued in the main throughout the Summer of 1999 and up until October/November 1999.
16. In early 2000 I had discussions with a number of the parties and also had a number of meetings with the Banks to review progress. There were also continuing developments in the various legal actions which had to be considered. I had discussions with a number of parties, including Tara Mines Limited, following which Tara Mines Limited submitted an offer in a sealed envelope on 2 October 2000 which offer was valid up until 31 March 2001.
17. Following receipt of the Tara Mines offer, on 11 October 2000 I wrote to the nineteen parties who had expressed an interest in the mine and had signed the Confidentiality Agreement advising them that I had received an offer and requesting them to indicate if they wished to pursue their interest. After the letter of 11 October 2000 was issued discussions took place with four of those parties but none resulted in the receipt of a realistic offer for the mine.
18. A further meeting was held with representatives of Tara Mines Limited on 10 January 2001 at the conclusion of which an offer of IR£27.5 million was secured from Tara Mines Limited for the mine. I discussed this offer fully with IMC who strongly recommended that I should proceed.
19. In the course of that process, I caused my solicitors to advise the Solicitors who had represented and were then representing the Company and certain of its directors, including Mr. Michael Wymes (who has been the person controlling on behalf of the Plaintiffs the various sets of legal proceedings to which I have referred) of the fact and extent of the efforts being undertaken to dispose of the mine. I have gathered together and marked with the letters “LC5” prior to the swearing hereof, a booklet containing copies of the correspondence which has passed between the parties to that end. Insofar as that correspondence presents objections to my engaging in that course of action, I believe that same are duly and properly answered in the letters sent by my solicitors and, insofar as it is necessary so to do, I beg to refer to my position as articulated and set forth in that correspondence.
20. The process of seeking to dispose of the mine has resulted in a conditional contract being negotiated with Tara Mines Limited, the owner of the adjoining property, and a Defendant in the first set of legal proceedings to which I have referred above. That company has entered into an agreement to purchase the mine for a sum of £27.5 million and that agreement in turn is dependant upon the approval of this Court. It is in this connection that this application is brought to the Court. That agreement was entered into on 9 May 2001, and is exhibited above.
21. As is apparent from the agreement dated 9 May 2001, the closing date of that contract is 10 working days from the date upon which the approval of the Court has been obtained, and in any event not later than December 31 2001. Tara Mines Limited by letter dated 25 January 2002 agreed to extend the closing date to 31 March 2002. I am now extremely anxious to conclude this transaction.
22. Specifically, in circumstances where the Receivership of this company has had such a lengthy history, in which its principal asset has not been exploited while proceedings outlined in this Affidavit were pending, in which the debts now owed to the Banks far exceed the value of the asset itself, and in which Tara Mines Limited has executed a contract to purchase the mine, I believe it just and appropriate that the Court grant the directions sought herein.
23. I believe that the consideration reflected in that contract represents the best available price for the mine in all of the circumstances, and is by far the best offer which it has been possible to obtain following an extensive and exhaustive marketing campaign. In these circumstances, I pray the Court to grant the relief claimed herein.”
In a supplemental affidavit sworn on the 18th April, 2002 the Receiver further deposed:
“2. This Affidavit is sworn by me in response to the Affidavit of Michael Wymes herein. On Tuesday evening 16 April my solicitors received an unsworn electronic version of an Affidavit to be sworn by Michael Wymes. My solicitors were advised that this would correspond to a version of the Affidavit to be sworn by Mr. Wymes. This was notwithstanding the express direction by this Court that any affidavits in reply to my application should be delivered not later than Monday 15 April 2002. Subsequently, at 6.15 p.m. on Wednesday 17 April my solicitors received the Affidavit of Mr. Wymes together with the exhibits thereto which had been sworn that day.
3. From the perspective of the Receivership of Bula Limited, it is critical that the within application be heard and determined at the soonest available opportunity. Having had an opportunity to consider the contents of Mr. Wymes’ Affidavit, I do not believe it necessary that I respond to the many and lengthy averments in same. I adopt this position conscious of the fact that a response from me will provoke a further lengthy reply from Mr. Wymes, and will jeopardise the rapid determination of this matter and, I believe, waste further Court time. I adopt this course of action aware that it will provoke Mr. Wymes to assert that I am therefore accepting the claims made by him, and that were the assertions made by him untrue, I would have denied them. I must, accordingly, make it clear that I am not responding to this Affidavit for the reasons I have stated, and that my decision not to respond to Mr. Wymes’ Affidavit is not an admission of any of the contents of same, either as to their relevance, accuracy or truth I will respond to any particular aspect of that Affidavit if the Court, in exercise of its jurisdiction to grant directions herein, believes it appropriate that I so do.
4. I am advised and I believe that the issue before the Court herein is whether I took reasonable care to obtain the best price reasonably obtainable for the property in question. I believe for the reasons set forth in my first Affidavit that I took such care, that I took all steps reasonably open to me to this end, and that the price obtained by me is in fact the best price reasonably obtainable. In the course of determining to sell that property I have acted without regard to any considerations other than my duty to obtain that price, and I have acted in this connection in accordance with the best professional advice available to me. I personally do not have any conflict of interest real or apparent in connection with the discharge of this, nor any, of my duties as Receiver, and I am advised and believe that the objections suggested by Mr. Wymes to that end are misplaced in law. In this regard, I regret the fact that Mr. Wymes has chosen to present his objection to the sale of this asset in the manner apparent from his Affidavit.
5. I should finally draw the attention of the Court to the fact that Thomas J. Roche and Thomas C. Roche have indicated their support for the within application. I beg to refer to a letter from their solicitors so recording of 17 April, upon a copy of which marked with the letters “LC1″ I have signed my name prior to the swearing hereof.”
On behalf of the Receiver an affidavit was affirmed by Andrew P. Wells on the 4th March, 2002, which stated:
“I, ANDREW P. WELLS Metallurgist of 60 Worship Street, London EC2A 2HD, England, aged eighteen years and upwards Affirm and say as follows:-
1. I am the Principal Metallurgist with International Mining Consultants (“IMC”) 60 Worship Street, London EC2A, 2HD, England which, inter alia, incorporates Mackay & Schnellmann Limited. IMC and its predecessor company Mackay & Schnellmann Limited have acted as specialist mining consultants to Mr. Laurence Crowley in his capacity as Receiver of Bula Limited throughout the period of the receivership.
2. In January 1999 IMC was instructed by the Receiver to advise on a comprehensive marketing campaign to sell the orebody. IMC was closely associated with this campaign through the process and in particular advised the Receiver on the format of the advertisement for potential buyers, the newspapers and specialist journals in which the advertisement should be placed in order to bring the campaign to the attention of a specialised market and the parties to whom the Receiver should write informing them of the availability of the orebody for sale.
3. Subsequently we advised the Receiver on the documentation and information to be made available to parties expressing an interest in the purchase of the orebody. IMC subsequently assembled a data room in the offices of KPMG Dublin containing all available relevant technical information which a potential purchaser would reasonably wish to examine and review in considering making an offer for the orebody. IMC assisted the Receiver and his staff throughout this process and responded to any queries raised. The process described in the preceding paragraphs led to a number of parties expressing an interest in the orebody and IMC advised the Receiver on the background to the parties concerned and the extent of their participation in the industry.
4. Ultimately, in January 2001, the marketing campaign culminated in the negotiation by the Receiver of an offer from Tara Mines Limited to purchase the orebody for a consideration of IR£27.5 million. The Receiver advised me of this offer. I was in no doubt, having regard to the world-wide marketing campaign, the then current zinc price and all other relevant factors, that this was a reasonable price for disposal of the mine and I so informed the Receiver. In the period of thirteen months which has since elapsed there have been no developments to alter that opinion and indeed during the period in question there has been a significant deterioration in actual zinc prices and in the expectation for such prices.
5. I am informed and believe that the Receiver is applying to the High Court seeking approval of a contract for the sale of the Bula orebody to Tara Mines Limited for a consideration of IR£27.5 million. I am of the opinion that this is a price which should be accepted. Furthermore, in achieving this offer, I am satisfied that the Receiver has conducted a comprehensive and exhaustive marketing campaign which has encompassed all parties in the industry in any way likely to have an interest in acquiring the orebody.
6. I make this Affidavit from facts within my own knowledge save where otherwise appears and wheresoever otherwise appearing I believe same to be true.”
5.(viii) Ruling of President as to s. 316 Order
The President of the High Court on consent gave directions as to the pleadings in the s. 316 application. On the 20th March, 2002 the President fixed the 23rd April, 2002 as the date for hearing of the s. 316 application. The plaintiffs were given until the 15th April to file replying affidavits. (In fact the affidavit of Mr. Wymes was sworn on the 17th April, 2003.)
5.(ix) Ruling by High Court on 24th April, 2002
On the 22nd April, 2002 the plaintiffs filed notice to cross-examine the Receiver and Andrew Wells on their affidavits. On the application coming on for hearing on the 23rd April, 2002 Mr. Peart, on behalf of the plaintiffs, sought an adjournment to enable a cross-examination of Mr. Wymes and Mr. Wells and for discovery. This was refused by the High Court. Ruling, on the 24th April, 2002, Murphy J. stated:
“This [is] an application for an adjournment in a matter where the President, by consent of the parties, gave directions that the matter be heard on the 23rd of April – that is yesterday. The application by the Receiver is an application under [s]316 and indeed [s]316A of the 1963 Act as amended by Section 171 of the 1990 Companies Act. The Receiver was appointed on the 8th of October, 1985 by Northern Bank Finance Corporation and some other banks, . . .
Section 316A, I simply refer to it obliquely here, refers to the duties of the Receiver in selling the property to get the best price reasonably obtainable and this is the substance, of course, of the application that the President directed be heard yesterday.
The background position is that an offer has been made in the conditional contract and that provides for a payment of some 27.5 million [punts] in relation to the assets of the company over which the Receiver has charge. The analysis of that contract is not necessary, save as to deal with one of the conditions which has been subject to the ground for adjournment, and that is condition 10, the Court approval and the closing date, and in particular 10 C, which states
‘Prior to the closing date the Receiver will establish to the satisfaction of the purchaser that the challenges made in the course of litigation, both as to the validity of his appointment and continuance in office and to his authority to effect sale of the assets, have failed and been disposed of and consequentially provide no impediment to the completion of the sale in accordance with the terms of this contract.’
Now, Mr. Peart in applying for a short adjournment without prejudice to his indication that he will apply, and indeed was applying for a longer adjournment pending the determination by the Supreme Court of the appeal of the judgment of Mr. Justice Barr, relied on that conditional element of the contract which Tara were to, had agreed under certain conditions and with certain time limits, had made an offer for the assets of Bula: It has been urged upon me by Mr. Finlay that the question of this being an impediment to his application is misfounded on the basis that it is the purchaser who has to be satisfied. And indeed Mr. Gallagher and Mr. Nesbitt supported that stance, and Mr. Feeney for the purchaser clearly stated that in opposing the application for an adjournment, that it was a matter for his client and not a matter that would impede the process of this sale – but that of course was to get drawn into the substance of the matter – but in terms of an application for an adjournment he would resist that on that basis also.
It does seem to me in determining that question that I am going to the substance of the matter and I would then refrain from making any definitive decision on that matter at present. However, it does seem to me that it would not be a ground for an adjournment where it is, where it goes to the substance of the matter. For that reason I would reject that as a basis for a short or more lengthy adjournment. It does seem to me that the condition speaks for itself and that it’s really a matter, again without making a finding, is a matter of conveyance rather than a matter of substance and certainly not a matter that would seem to me to hold up this matter before the Court.
Secondly, Mr. Peart says that the valuation evidence which he has given in the replying affidavit of Mr. Wymes, that he would like an opportunity of putting that on affidavit. However, he did not think that the provisional valuation would differ substantially from that offered. Mr. Finlay replied that he was happy to accept the provisional valuation without any necessity to have that sworn, and dealt with the elements that constituted an application under [s.]316 and [s.] 316A to the court.
It does seem to me that there is no ground for an adjournment to put in a further affidavit and I am fortified in this regard by the consent order that was made by the president with regard to the timing of the grounding affidavit and the replying affidavit.
The third ground put forward as a basis for the adjournment is the necessity of serving a notice, or if that notice has been served, to cross-examine the deponent, the Receiver, that it was necessary to have time to prepare for that examination. It does seem to me that this is a matter which came very late in the day and certainly was not a matter which was before the President, with regard to the directions that by consent were ordered by the President.
The fourth ground relates to the need for discovery. Mr. Peart says that, given again the elements relating to valuation, that he is entitled to discovery with regard to the underlying bases for valuation and for the offer made by Tara. It does seem to me that this is a matter which properly should have been dealt with by the President. I cannot conceive, nor has it been urged upon the Court, any grounds why or any reasons why this was not known at the time of the application for directions. Again, I would say by way of aside, that where an application has been made for directions, that that is the time at which minds are concentrated as to the steps, preliminary steps necessary for matters – for interlocutory matters to be dealt with.
The final ground relied upon is, to my mind, an important one; that is [that] no prejudice would be suffered by the Receiver for a short adjournment – and I leave aside for the moment the question of a longer adjournment. And in fairness, the application proceeded on the basis of a short adjournment, presumably this morning where, probably on the insistence of the Court, that the application for the longer adjournment was also included with the intent that if that had – if the short adjournment had succeeded, then the matter could be reserved with regard to a longer adjournment. Or alternatively, if a longer adjournment was not granted, at least a short adjournment could find favour with the Court.
But the question of prejudice does, of course, come from both the history of this matter and also from the offer itself. The closing date has been varied but 10 B, in dealing with the closing date, while it does envisage – envisage a date originally of the 31st of December 2001, also originally, or also in the version which is a subject of the application by the Receiver, also deals with the 31st of December 2002, that is to say should the approval not be obtained by the 31st of December 2002, as also otherwise agreed in writing, this contract will be deemed to be the an end and the purchaser would be entitled to a return of its deposit with interest but without compensation for damages.
Now, it does seem to me that this is – the argument on prejudice – that it’s within that context that I have to deal with the element of prejudice. Whatever agreements that were made or extended, the Court has to look at closing dates and also has to be aware, and will be aware, of the substance of the action, of the way underlying economic considerations can affect offers. And this is a matter that the Receiver will have to satisfy the Court, that at the present time, in terms of the application, that pursuant to Section 316 A that the best price available has been obtained.
The history of this matter, again the brief references that were made by counsel on the perusal of the decision of Mr. Justice Lynch and the references to the judgment of the Supreme Court and that of Mr. Justice Barr in the second action that was referred to, it does seem to me that further prejudice will ensue from a delay from the middle 1980’s up to the final realisation of the issue regarding the matters being at that time statute barred and the attempted finalisation of this matter, that severe prejudice would be suffered by the applicant who is, of course, the – sorry – the applicant in the substantive action, with regard to the finalisation of this matter.
For this, these reasons, it seems to me that I must refuse both the application for a longer adjournment to the determination of the Supreme Court appeal and also an application for a shorter adjournment for the purpose of the cross-examination on affidavit of the deponent’s [sic] on the grounding affidavit and also for the purposes of discovery.”
The s. 316 application then proceeded before the High Court.
5.(xi) High Court judgment delivered 20th June, 2002
The s. 316 application was at hearing for ten days before the High Court. Judgment was reserved and delivered on the 20th June, 2002. The learned High Court judge concluded:
“The Court finds that the Receiver, in selling the asset of the Company which are secured under the various debentures, had exercised all reasonable care necessary to obtain the best price. That price was, in the circumstances, the only price reasonably obtainable for the property as at the time of sale.
There has been no breach by the Receiver of his duty under subsection 1 of section 316 A.
I will, accordingly, allow the Receiver’s Application and make an Order approving the sale of the said property to Tara Mines Limited on the terms set forth in the contract dated the 9th May, 2001 and grant liberty to Bula Limited (in Receivership) to complete the said contract.”
It is against that decision that the plaintiffs have appealed.
5.(xii) Section 316 Application
At issue is the order made on an application pursuant to s. 316 of the Companies Act, 1963 as amended by s. 171 of the Companies Act, 1990. Section 316 provides:
“Where a receiver of the property of a company is appointed under the powers contained in any instrument, any of the following persons may apply to the court for directions in relation to any matter in connection with the performances or otherwise by the receiver of his functions, that is to say –
(a)(i) The receiver . . .
and on any such application, the court may give such directions, or make such order declaring the rights of persons before the court or otherwise, as the court thinks just.”
Section 316A(1) as inserted by s. 172 of the Companies Act, 1990 provides:
“A receiver, in selling property of a company, shall exercise all reasonable care to obtain the best price reasonably obtainable for the property at the time of sale.”
6. Decision on the Fourth Appeal
Of receivers it is stated in Keane, Company Law (3rd Ed.) at para. 22.01:
“The remedy most usually availed of by debenture holders is the appointment of a receiver. As his title indicates, his main function is to receive or get in all the assets of the company on behalf of the debenture holder and dispose of them in due course in order to pay off the principal and interest due.”
The primary duty of the receiver is to the debenture holders, but he also has a duty to the company. He has a duty to take reasonable care. This may be seen in s. 316A. Under s. 316A the receiver has a duty: (a) to exercise all reasonable care, (b) to obtain the best price reasonably obtainable for the property, (c) at the time of sale.
Section 316A gives statutory force to common law. Of s. 316A Keane J. stated in In Re Edenfell Holdings Ltd. [1999] 1 IR 443 at p. 464:
“It is clear that, at common law, a receiver owed a duty of care in relation to the sale of the property, comprised in the charge by virtue of which he was appointed, to any persons interested in the property. That common law duty was given statutory force by s. 316A of the Act of 1963, which was inserted by s. 172 of the Companies (Amendment) Act, 1990, and which is as follows:-
‘A receiver, in selling property of a company, shall exercise all reasonable care to obtain the best price reasonably obtainable for the property at the time of the sale.’
Strictly speaking, the application by the receiver might have been dealt with on the basis that, since he was clearly entitled prima facie to sell the property for what seemed to him the best price obtainable, he should be permitted so to do, without prejudice to the rights of any person who might be interested in the property to institute proceedings, claiming either an injunction restraining him from disposing of the property or damages for breach of his common law and statutory duty. Since, however, there was also a motion before the court on behalf of Mr. Barrett seeking an order restraining the receiver from completing the sale and all the parties who might have had an interest in the matter were before the court, it was obviously sensible to decide the substantive issue, as the trial judge did, on the basis of the evidence on affidavit and submissions before her.”
On the function of the Court Keane J. held, at p. 466:
“It is not the function of the court in a case such as this to decide, with the benefit of hindsight, whether it might have been better for the creditors and anyone else interested in the property had the receiver rejected the Astra offer and continued to deal with Anglo Éire or anyone else who might be interested. The court was dealing with the matter with the advantage of hindsight: the receiver had to deal with the matter then and there and in the light of the expert advice available to him from a valuer. Having tested the market again, without any response in the form of an unconditional offer, he was entitled, in all the circumstances, to take the view he did, that accepting the Astra proposal was the more prudent course.”
Under s. 316 the function of the court is to consider whether the Receiver has taken all reasonable care to obtain the best price reasonably obtainable for the property at the time of sale. Applying Edenfell the Receiver had to deal with the matter then and there and in the light of the expert advice available to him. The appropriate date is the date of sale. The Receiver does not have a general obligation to wait for the market to rise. This was described in Keane, Company Law (3rd Ed.) para. 22.20 as follows:
“. . . while every case should be judged on its own facts, there is no general obligation on a receiver to wait for the market to rise. If he makes a reasonably prudent assessment of the market at the relevant time, he will not be held liable simply because it appears subsequently that by waiting he might have got a better price.”
Thus, the Receiver has a duty to take all reasonable care to obtain the best price reasonably possible at the time of sale. However, he is not obliged to postpone a sale to obtain a better price. I adopt the law as stated in Keane, Company Law (3rd Ed.) as cited above and as stated in Gower, Principles of Modern Company Law (5th Ed.) (1992) p. 438:
“In the exercise of his powers a receiver is under a duty to the debtor company to take reasonable care to obtain the best price reasonably possible at the time of sale; this duty is also owed to a guarantor of the company’s debts. However, as the receiver in exercising his power of sale is in a position analogous to that of the mortgagee, he is not obliged to postpone sale in order to obtain a better price or to adopt a piecemeal method of sale.”
The Process
The facts of each case are crucial and each s. 316 application depends on the circumstances of that case. At the core of the analysis of the function of the Receiver in this s. 316 application is consideration of the process carried out by the Receiver in selling the mineral orebody. The facts of the process have been found by the learned High Court judge on the evidence before him, as set out previously in this judgment.
Important steps in the process taken by the Receiver included the following:
1. In 1999 after the conclusion of the Tara litigation the Receiver commenced taking steps to sell the mine.
2. The Receiver engaged mining consultants, International Mining Consultants (IMC), formerly Mackay & Schnellman Limited, to advise him on the sale.
3. Advertisements were placed in financial newspapers, mining journals and other publications in May, 1999 in the United Kingdom, France, Germany, Australia, South Africa, Canada and the United States of America.
4. The Receiver wrote directly to sixty major mining companies inviting expressions of interest.
5. These steps were as advised by IMC and were stated to have encompassed all parties in the industry in any way likely to have an interest in acquiring the orebody.
6. Replies were received from forty-five parties expressing interest.
7. The Receiver provided documentation and facilities including a data room in Dublin containing information about the mine, subject to a confidentiality agreement, to enable interested parties further consider the matter.
8. Nineteen interested parties signed the confidentiality agreement.
9. Twelve interested parties visited the data room.
10. In October, 2000 Tara submitted a sealed bid valid until the 31st March, 2001.
11. Following receipt of this offer the Receiver advised all the nineteen parties who had expressed an interest in the mine that an offer had been made and asked them whether they wished to pursue their interest.
12. Discussions took place with four of these interested parties but none lead to a realistic offer for the mine.
13. On the 11th January, 2001 Tara made an offer of IR£27,500,000.
14. The Receiver received advice from IMC that the price should be accepted. (See the affidavit of Mr. Wells).
15. The sale was supported by the Banks. The Banks are owed greatly in excess of IR£27,500,000. Consequently their support of this sale is an important factor to be weighed in the situation.
16. The sale was supported by the Roches. As the debt is in excess of the sum obtainable on the sale and the Roches are guarantors their support is also an important factor to balance in the situation.
After the process and the High Court order the sale took place. The Receiver sold the orebody to Tara, pursuant to the High Court order. The plaintiffs appealed against the order and judgment of the High Court on many grounds. However, in relation to the s. 316 order counsel emphasised four facets. These were:
(a) that there was no specialist valuer;
(b) that the sale was at a gross undervaluation;
(c) that there was a failure to exploit the position of Tara, and
(d) that the Receiver went to the market at the wrong time.
I will consider each of these submissions separately. However, in such separate analysis it becomes clear that the fundamental facts of the case, the process undertaken by the Receiver, repeatedly arise and govern the case.
The fundamental issue on this appeal is whether the statutory requirements of s. 316 were met. The four important matters raised by counsel for the plaintiffs were four facets of that basic issue. In fact, the issue as to whether the requirements of s. 316 were met is answered by considering the process carried out by the Receiver. In an analysis of that process is the answer to the fundamental issue and also to the four facets raised by counsel.
I shall consider each of the four facets as submitted by counsel for the plaintiffs. However, I shall not deal with them in the same order as raised by counsel. This is to facilitate analysis of the process of the Receiver as a whole.
(1) Submission that the Receiver went to the market at the wrong time
Counsel for the plaintiffs submitted that the Receiver went to the market at the wrong time. The answer to this submission is found in the common law as quoted previously in Edenfell and in the process followed by the Receiver. Applying the analysis of
Keane J., as set out previously in this judgment, in Edenfell, to the facts of this case it is clear that the Receiver took reasonable care to obtain the best price reasonably obtainable for the property at the time of sale.
The Receiver is entitled to choose the time at which he will sell the asset. He is not obliged to postpone a sale until the markets may rise or other possible events. However, the receiver is obliged to fairly expose the asset to the market.
In this case the decision to commence the sale process after the conclusion of the Tara litigation was rational. To paraphrase Edenfell, it is not the function of the Court, with the benefit of hindsight, to decide if it might have been better if the Receiver had waited further. The Receiver had been appointed in 1986, and in light of the circumstances in 1999 he then decided to commence taking steps toward the sale of the mine. He based his decision, inter alia, on the conclusion of the Tara litigation in the Supreme Court.
The Receiver had an obligation to take all reasonable care to obtain the best price reasonably obtainable for the property at the time of sale. Given the facts of this case, the decision of the Receiver to sell in 1999 was reasonable.
The plaintiffs submitted that the sale should not have proceeded because of the pending and threatened litigation. However, the plaintiffs had already brought about litigation since 1986. In 1999, with the conclusion of the Tara appeal, albeit that there was other litigation in the offing, it was reasonable for the Receiver to take steps toward sale of the mine. In a situation such as he found himself, with the ongoing threat of litigation, it might have been considered that the litigation would not conclude in any reasonable time and thus if threat of litigation was a bar to a sale no sale could take place in the foreseeable future. This could not be reasonable. It would enable mischievous litigation to stop sales. Further, the particular situation was met in this case by the decision of the Receiver that no purchaser would be required to buy into litigation. This decision was reflected in the Contract. And, as stated previously, the Receiver did not have a general obligation to wait for the market to rise.
The primary duty of the Receiver was to the secured creditors, and this meant to realise the assets. Having decided not to sell prior to the Tara litigation there was no good reason why that decision could not be revisited and revised at the conclusion of the Tara case. A threat of further litigation could not be a reasonable reason to bar any process toward sale in all circumstances.
Thus there was evidence of reasonable care being taken by the Receiver as to the timing of the sale. However, the Receiver’s primary responsibility was to the secured creditors. See Lightman & Moss, The Law of Receivers and Administrators of Companies (3rd Ed.) at para. 7-032 and the additional authorities there cited, and in particular Bank of Cyprus (London) Ltd. v. Gill [1980] 2 Lloyds’ Rep. 51 and Routestone Limited v. Minories Finance Ltd. [1997] BCC 180 in which at p. 187 Jacob J. stated that “[n]o duty of care is owed by the mortgagee or receiver in relation to the actual decision to sell”. I would distinguish Re Charnley Davies Ltd. (No. 2) [1990] B.C.L.C. 760 and accept that it applies to an administrator. I adopt the words of Millett J. at p. 775:
“A mortgagee is bound to have regard to the interests of the mortgagor, but he is entitled to give priority to his own interests, and may insist on an immediate sale whether or not that is calculated to realise the best price; he must take reasonable care to obtain the true value of the property at the moment he chooses to sell it: see Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] 2 All ER 633, [1971] Ch 949. An administrator, by contrast, like a liquidator, has no interest of his own to which he may give priority, and must take reasonable care in choosing the time at which to sell the property.”
The Receiver is in the same position as a mortgagee. The first duty of the Receiver is to the secured creditors. Thus, in proceeding to sale the Receiver may put the secured creditors’ interests first. The Receiver was not under a duty to wait for the market to rise. The Receiver took a rational decision in all the circumstances to proceed to sell the asset. Indeed, also, on the evidence, it is clear that he took reasonable care in the timing of the sale. Therefore, the submissions on behalf of the plaintiffs that the Receiver went to the market at the wrong time must fail.
(2) Submission that there was no specialist valuer
Counsel submitted that the requirements of s. 316 had not been met because there was no specialist valuer. There is no doubt that selling an asset requires reasonable care. The asset in this case is of a special type. Thus, at issue is the sale of a special type of property, the orebody of a mine. Clearly such a sale requires specialist advice. In this case the Receiver sought, obtained and was guided by the expertise of Mr. Wells and International Mining Consultants of London. No evidence was called to undermine that expertise. I am satisfied that the Receiver was entitled to rely on that expertise, as was the High Court. It was an appropriate expertise in the circumstances for the Receiver. The expertise of Mr. Wells was never really challenged by any expert called by the plaintiffs. Nor was any expert called who challenged, in any significant manner, the expert opinion of Mr. Wells. That expertise, coupled with the process followed by the Receiver, was utilised by the Receiver and ensured that the asset was on sale on the open market.
The process in this case was as advised by the expert. It has been set out in detail previously in this judgment. It involved engaging mining consultants International Mining Consultants (IMC), advertisements in financial newspapers, mining journals and other publications in targeted countries and the Receiver writing directly to sixty mining companies. Each of these steps were advised by IMC and were stated to encompass all parties in the industry likely to have an interest. There were 45 replies expressing an interest, a data room was established containing information about the mine, nineteen interested parties took a step further and signed the confidentiality agreement, twelve interested parties visited the data room, yet there was one sealed bid only, from Tara. However, on receipt of the bid the Receiver wrote back to the nineteen parties who had expressed an interest and informed them of the offer, and asked them if they wished to pursue the matter. Discussions did take place with four of the parties but did not proceed. Tara offered IR£27,500.000. The Receiver was advised by IMC that the price should be accepted. This entire process was advised and assisted by IMC. It was a professional process. The combination of the process and the expertise of the experts appointed by the Receiver brought the sale of the mine to the open market, the specialist financial mining market and to the specific notice of sixty major mining companies, and it was then followed up. The open market determined the price.
I am quite satisfied that there was no error on behalf of the learned trial judge on this aspect of the application. The Receiver was entitled to rely on the expert he appointed. The court, in turn, had clear evidence upon which it was entitled to determine that in the appointment and reliance on the expert (both as to the process and the advice as to price) the Receiver exercised all reasonable care so as to obtain the best price reasonably obtainable for the property at the time of sale. Consequently, I would dismiss this ground of appeal.
(3) Submission that the sale was at a gross undervaluation
Counsel for the plaintiffs submitted that they should succeed on the appeal because the sale was at a gross undervaluation. However, I am satisfied that the appeal of the plaintiffs on this ground is not sound. The issue under s. 316 is price, not valuation.
The issue of valuation is governed by the facts of the case, in this case the process of sale. The essence of the Receiver’s duty of care is that the asset, the mine, was fairly and properly exposed to the market. The process, the steps he took, have been set out previously. It is clear from that process that no party was excluded from the process. It is evident that it was a fair process. Within that process the steps were appropriate. The advertising was appropriate. The letters written to sixty parties was an exercise in reasonable care. It was good practice for the Receiver to require a confidentiality letter. Further, the Receiver did not just rest on the offer made. Rather, he then went back to the nineteen parties who had expressed an interest and requested them if they wanted to pursue their interest. The process in this case brought the mine to the open market. It was a reasonable process. The market set the price. The consequence was that the price was the best price reasonably obtainable for the property at that time.
The fact that the asset might have a special added value to one party does not negate the price as the open market price after a reasonable process. In such a situation the price meets the requirements of s. 316.
On behalf of the plaintiffs Mr. Evans gave evidence on affidavit of valuation in excess of the price achieved. However, the question of a valuation of the mine as an independent mine or as an adjunct mine is an exercise not relevant to the matter of the s. 316 application. Section 316 does not refer to or require a valuation. Section 316 requires the “best price”. Under s. 316 the objective is the best price not the best valuation. Consequently, I am satisfied that the plaintiffs submissions on this ground must fail.
(4) Submission that there was a failure to exploit the position of Tara
The plaintiffs submitted that the Receiver had failed to exploit Bula’s bargaining power and Tara’s commercial viability. This claim must be analysed in context. The context is the sale process set out previously. The argument that the Receiver could have forced Tara to pay more brings an air of unreality to the matter of the sale. What type of force? Force is not relevant. The sale was conducted on the open market. The process has been set out fully previously. The market set the price. It is the market price that is relevant, not the value to Tara. The value to an individual purchaser is immaterial.
The case Trans-Tec Automotive (Campsie) Limited [2001] B.C.C. 403 was opened to the court but I am satisfied that it is distinguishable. The Receiver was selling the orebody but had no leverage over Tara and was powerless to increase the price above that obtainable on the open market. There was no evidence upon which this case could have had any applicability.
Considering the process from this aspect I am satisfied that there was no action which might be described as failure to exploit the position of Tara, rather the Receiver exercised all reasonable care to obtain the best price reasonably obtainable for the mine at the time of sale.
Thus, having considered and analysed the process carried out by the Receiver and the resulting price achieved for the orebody from the point of view of these four facets submitted on behalf of the plaintiffs, I am satisfied that the statutory requirements of s. 316 were met. Further, on consideration of the sale process of the Receiver and on analysis of the s. 316 order as a whole, in light of the relevant law and all the facts of the case, I am satisfied that there was no error by the learned High Court judge in making the order which he did. Consequently this aspect of the plaintiffs’ case must fail.
Fair procedures – cross-examination of deponents
Counsel submitted that there had been a lack of fair procedures. Specifically, counsel submitted that the s. 316 application had grave consequences for the plaintiffs and that consequently they had the right to cross-examine deponents to test their evidence. Counsel submitted that the refusal of the trial judge to allow cross-examination on behalf of the plaintiffs was in breach of fundamental fair procedures.
This ground of appeal requires analysis from several angles. First, the parties, by consent, sought and obtained directions for the s. 316 hearing from the President of the High Court on the 20th March, 2002. On that date orders were made as to the exchange of affidavits and as to the date of hearing. It was at that time that issues such as the cross-examination of the witnesses should have been addressed. The affidavit of the Receiver and Mr. Wells had been sworn on the 4th March, 2002.
Secondly, the application for cross-examination was filed on the 22nd April, 2002 in circumstances where the date for trial (23rd April, 2002) had been set on the 20th March, 2002 and the affidavits in issue sworn on the 4th March, 2002 and filed on the 20th March, 2002. In a case where there has been a history of litigation and delays the timing of this application was an appropriate factor for the High Court to consider.
Thirdly, the application to cross-examine has to be considered in the context of the s. 316 application. In this case the Receiver had chosen to go to court to seek directions as to the sale. It is understandable, in light of the long history of litigation, that the Receiver chose to avail of this facility and make the application to court. Counsel for the Receiver submitted that in any application under s. 316 a competent Receiver must come before the court in the knowledge that the court might not approve the sale. Thus it was essential that while the Receiver placed before the court material sufficient for directions he must not disclose material that could prejudice a subsequent sale if the court did not approve the sale. He instanced, if the Receiver came to court and said that the nineteen parties who signed the confidentiality agreement all told the Receiver that the mine was hopeless, and if that was disclosed and the court did not approve the application for the sale, how would that leave the Receiver if he wished to sell? Counsel submitted that careful judgment was necessary by the Receiver to determine if there was sufficient material for the court to exercise its function. However, on the other hand, the Receiver should not disclose commercially sensitive information in case a subsequent sale was necessary. The test for the court was to consider if it had sufficient information upon which to make a decision. The court could either require further information or refuse (because of lack of sufficient information or otherwise) to direct the sale. I am satisfied that this is the correct analysis of the nature of the application and the functions of the Receiver and the court and I apply them to this case. If the court required further material it could have requested it, it could have requested commercially sensitive material in a sealed envelope or it could have refused to order the sale. However, the court did not take any of these approaches.
In this case the court had to be satisfied that the Receiver had exercised all reasonable care necessary to obtain the best price, the price reasonably obtainable for the property at the time of sale. The facts which the learned trial judge had before him included those set out in the affidavits of the Receiver and Mr. Wells. These facts have been set out in this judgment, as has the process taken by the Receiver toward the sale. There was no significant challenge as to the expertise of Mr. Wells. There was no significant challenge as to the expert opinion of Mr. Wells. There was evidence of valuation put forward by Mr. Wymes and Mr. Evans. However, no expert gave evidence such as to challenge the expertise of IMC. But the plaintiffs wished to cross-examine the Receiver’s deponents.
On the 22nd April, 2002 the solicitor for the plaintiffs sent by fax a notice to cross-examine the Receiver and Mr. Wells. Counsel for the Receiver submitted that the notice for cross-examination was misconceived, that it was in the form of cross-examination pursuant to O. 40, r. 31 of the Rules of the Superior Courts, 1986. It stated:
“Notice of Cross-Examination
TAKE NOTICE that the respondents, Bula Limited (in Receivership), Bula Holdings, Michael Wymes and Richard Wood intend at the trial of this application to cross-examine the several deponents named and described in the schedule hereto on their affidavits therein specified. AND ALSO TAKE NOTICE that you are required to produce the said deponents for such cross-examination before the court aforesaid.”
Counsel submitted that this referred to trials on affidavit. He submitted that an entirely different provision deals with the discretion of the court, in applications such as these under s. 316. He referred to O. 40, r. 1. That rule provides:
“1. Upon any petition, motion, or other application, evidence may be given by affidavit, but the Court may, on the application of either party, order the attendance for cross-examination of the person making any such affidavit.”
On the other hand, following the heading III Trial on Affidavit O. 40, r.r. 28, 29, 30 provide:
“28. Within fourteen days after a consent for taking evidence by affidavit as between the parties has been given, or after an order has been made for such purpose, or within such time as the parties may agree upon, or the Court may allow, the plaintiff shall file his affidavits and deliver to the defendant or his solicitor a list thereof.
29. The defendant, within fourteen days after delivery of such list, or within such time as the parties may agree upon, or the Court may allow, shall file his affidavits, and deliver to the plaintiff or his solicitor a list thereof.
30. Within seven days after the expiration of the last-mentioned fourteen days, or such other time as aforesaid, the plaintiff shall file his affidavits in reply, which affidavits shall be confined to matters strictly in reply, and shall deliver to the defendant or his solicitor a list thereof.”
Following the above rules r. 31 provides:
“When the evidence is taken by affidavit, any party desiring to cross-examine a deponent who has made an affidavit filed on behalf of the opposite party may serve upon the party by whom such affidavit has been filed a notice in writing, requiring the production of the deponent for cross-examination at the trial, such notice to be served at any time before the expiration of fourteen days next after the end of the time allowed for filing affidavits in reply, or within such time as in any case the Court may specially appoint; and unless such deponent is produced accordingly, his affidavit shall not be used as evidence unless by the leave of the Court. The party producing such deponent for cross-examination shall not be entitled to demand the expenses thereof in the first instance from the party requiring such production. The notice shall be in the Form No. 21 in Appendix C.”
It is clear that this latter rule relates to a trial which, as an exception to the oral tradition, is being heard on affidavit. In such a trial the right to cross-examination of such evidence exists.
However, a s. 316 application is an entirely different matter to a trial on affidavit. There are opposing parties in an adversarial trial. In contrast, this is a motion, the Receiver has applied to court to obtain the court’s consent, if appropriate, for a sale. Parties are put on notice and may present evidence but it is not an adversarial trial by affidavit. Instead, the court, in exercising its judicial discretion on the application, may also exercise a judicial discretion as to whether there may be cross-examination. In the exercise of that judicial discretion it was quite appropriate for the court to have regard to the fact that there had been, by consent, a hearing before the President of the High Court on the 20th March, 2002 for directions as to the application and there had been no application there for cross-examination. Further, it was appropriate to have regard to the fact that although the plaintiffs had the affidavits of the Receiver and Mr. Wells by that date, yet it was the 22nd April, 2002 before they filed Notice to Cross-examine. This delay was a factor the High Court was entitled to take into consideration. Further, the High Court was entitled to have regard to the fact that application on the 23rd April, 2002 before the High Court was for time to prepare for cross-examination.
I am satisfied that the issue of cross-examination in an application under s. 316 is a matter for the judicial discretion of the court in an application or motion. It is not a right as is expressed for trials on affidavit. Consequently, the court was correct to consider that it had a discretion and then to exercise judicial discretion. In such exercise of discretion the court did not err in considering the matters which it did. In refusing the adjournment on the 24th April, 2002 the court acted within its discretion. It is clear from case law that appellate courts are slow to intervene and overturn an order such as a refusal of an adjournment. The burden on the plaintiffs is heavy.
I am satisfied that the plaintiffs have failed to meet any such burden of proof. I would not intervene in the High Court’s decision not to adjourn the case. Further, I am satisfied that the plaintiffs’ submissions are grounded on a false understanding as to the alleged right to cross-examination as an application under s. 316 is not a trial on affidavit. Consequently, I am satisfied that the plaintiffs’ appeal on this ground fails also.
As to the issue of the refusal of the High Court to enable discovery on the 23rd April, 2002: for the reasons given above I am satisfied that the decision was within the discretion of the trial judge and I would not allow an appeal on this ground either.
7. The fifth appeal, appeal No. 271/02
7.(i) The fifth appeal is an appeal by the plaintiffs against the judgment and order of the High Court (Murphy J.) delivered on the 12th July, 2002. In essence the High Court on the 12th July, 2002 refused a stay on the High Court order of the 20th June, 2002 and the plaintiffs are now appealing against that refusal of the stay on 12th July, 2002.
I am satisfied that this appeal is a moot. The High Court ordered the sale on 12th July, 2002. The sale has proceeded. In the fourth appeal herein I have upheld that judgment of the High Court. Consequently, the issue of a stay is moot.
7.(ii) Counsel for the plaintiffs opened the facts of the case to the court and pressed the court, even if it was of the view that the matter was a moot, to consider the issue in light of the decision of the High Court. While making it plain that this was not to be considered a precedent, the plaintiffs were allowed to express their views about the order of the High Court.
7.(iii) The facts in this appeal are that on the 20th June, 2002 the High Court made an order pursuant to s. 316 of the Companies Act, 1963 approving the sale of the mine to Tara on the terms set forth in the Contract dated the 9th May, 2001 (which High Court judgment was the subject of the fourth appeal considered previously in this judgment). On 2nd July, 2002 the plaintiffs served notice of appeal against the order of the High Court of the 20th June, 2002. There was correspondence and communication between the parties and it was indicated to the plaintiffs that it was intended that completion of the sale would take place on Thursday the 11th July, 2002. The plaintiffs applied by notice of motion dated the 8th July, 2002 for a stay on the order of the 20th June, 2002. On the 12th July, 2002 counsel for the plaintiffs applied in court for the said stay. Counsel for the Receiver and the Banks submitted that the High Court judge was functus officio and relied upon Hughes v. O’Rourke and Ors. [1986] I.L.R.M. 538, and GMcG v. DW (No. 2) [2000] 4 I.R. 1. The High Court ordered on the 12th July, 2002 that the application for a stay be refused. Counsel’s note of the judgment provides:
“Note of Ruling delivered on the 12th July 2002 by Murphy J.
The Learned Judge began by [saying that] a stay application was the substantive motion, that the Order had been perfected on the 25th of June and that an Appeal was now pending before the Supreme Court. There was now a preliminary question which needed to be addressed. What does a stay involve? Clearly it is a stay on execution of the Order. Under Rule 18, there is no automatic stay, and an application for a stay must be made to the Court. What is the appropriate time for such an application to be made? The stay clearly refers to the Order made, and it seemed to me that such an application should be made before the Order is made up. Only in limited circumstances can the matters be revisited by the Court, such as on the consent of the parties and the Court accedes to their request, and also under the slip rule. Although not before the Court formally, there has been submissions made by Mr. Trainor, that there is a disjunction between the Judgment and Order. This would be interesting to pursue if there is a disjunction and if so maybe injunctive relief should be sought under the contract. The reason why no stay application was made, Mr. Trainor said, was that there was an understanding that nothing could happen before the Appeal was determined. The applicants could seek relief by way of amendment and/or injunction. However, while this may be of interest, it was not before the Court this morning. An application for a stay is. There is an ambiguity in [Order 58], Rule 18. Usually where there is ambiguity . . . The High Court Order had been perfected and to that extent, I am now functus officio, and the Supreme Court will have to deal with that. Therefore unless the Supreme Court rules otherwise then the order remains.
Under [Order 58], Rule 19, an application may be made either to the High Court or Supreme Court, and in the first instance be made to the High Court. It seems this allows an application for a stay to be made to both Courts; to the High Court when [it has seisin of the matter and] to the Supreme Court when . . . when the Supreme Court has seisin on the Appeal. This seems to be the interpretation which the Supreme Court has come to in Hughes v. O’Rourke. It is a fundamental principle that one (sic) the final Order has been made and perfected, the High Court (sic) jurisdiction is exhausted. Mr. Trainor raises issues that it only covers matters raised by the Court on matters determined by the Court. He suggests that because a stay was not applied for, there is no Order. But it seems the substantive matter is different from procedural matters. Henchy J refers to substance. The stay should be applied for at the time of delivery of the Judgment and certainly before the Order is perfected. The Supreme Court appeared to agree with this in the case of GMcG v DW (No. 2) (quotation from the decision of Ms Justice Denham). It appears that the approval of the sale to the purchaser under the contract is a final Order. Questions of stay are matters of procedure.
(Quotation of Chief Justice Finlay in the [Belville case [1994]
1 I.L.R.M. 29])
It seems accordingly I must refuse the application
Costs were awarded against the applicants with a stay in the event of an Appeal.”
The Rules of the Superior Courts provide as follows: O. 58, R.18 states:
“An appeal to the Supreme Court shall not operate as a stay of execution or of proceedings under the decision appealed from, except so far as the High Court or the Supreme Court may order; and no intermediate act or proceedings shall be thereby invalidated, except so far as the High Court or the Supreme Court may direct.”
O. 58, r. 19 provides:
“Whenever under these Rules an application may be made either to the High Court or to the Supreme Court it shall be made in the first instance to the High Court.”
It is clear that an application for a stay should be made in the first instance to the High Court. This is usually done in the High Court at the time the High Court decision is made or as soon as possible thereafter. If the stay is refused by the High Court then an application may be made to the Supreme Court appealing that refusal. While it is normal practice to apply for a stay at the time of the decision of the High Court it may be made thereafter on notice to the High Court.
Counsel for the plaintiffs submitted that the following facts were significant. It was submitted that the plaintiffs had originally believed no stay was necessary once their appeal had been filed as it was on the 2nd July, 2002. Counsel submitted that the plaintiffs were surprised that an application for a stay was necessary. Owing to the elevation of their legal adviser to the High Court the plaintiffs had to change solicitors. Counsel was retained on an emergency basis. Counsel applied to the High Court first thing on Monday morning, the 12th July, 2002. After the refusal of the stay by the High Court, counsel was engaged elsewhere during that day. There appears to have been a breakdown in communications. No application was made to the Supreme Court for a stay.
8. Decision on the fifth appeal
While counsel for the plaintiffs did not accept that this appeal was moot he did accept that there were some difficulties in the appeal seeking a stay in the circumstances. Counsel for the Receiver, the Banks and Tara submitted that the appeal was moot.
This Court has to consider the appeal in the circumstances that now exist. The court is not a forum for academic discourse. The circumstances are that this is an appeal from a refusal of a stay on a sale pending an appeal. However, that sale has been completed and the appeal on the sale order heard. Consequently, the issue of a stay on the sale is now moot. There is well settled law that this court will not consider a moot. The reality is that the appeal, for a stay of a sale ordered on the 20th June, 2002, pending an appeal, in all the circumstances is moot. I would strike out the appeal of the plaintiffs.
However, I will express my opinion that the High Court has jurisdiction to grant a stay in a case even if the High Court order has been made up and the matter is on appeal to the Supreme Court. If such an application for a stay to the High Court fails a party may apply to the Supreme Court for a stay pending an appeal.
9. The sixth appeal, appeal No. 272/02
This appeal arose in proceedings in which the plaintiffs sought an interlocutory injunction restraining the Receiver and Tara from exercising their respective rights as vendor and purchaser following the completion of the sale on the 12th July, 2002. On the 1st August, the High Court refused this application.
The plaintiffs acknowledged that the Receiver had made his position clear in correspondence in the days prior to the 12th July, 2002 that he intended to complete the sale of Bula’s assets on the 12th July, 2002 unless the order of the High Court of the 20th June, 2002 was subject to a stay. As set out above the application for a stay was refused by the High Court and there was no appeal from that order to the Supreme Court.
The plaintiffs accepted that on the afternoon of the 12th July, 2002 there was neither a stay nor an injunction in place restraining the Receiver from completing the sale to Tara. On the 12th July, 2002 the Receiver proceeded to complete the sale of the mine in accordance with the Contract pursuant to the order of the High Court made on the 20th June, 2002.
10. Decision on the sixth appeal
I am satisfied that this appeal is moot. However, in addition, it is clear that the application was in essence a second application for a stay, which had already been refused by the High Court and from which there had been no appeal to the Supreme Court. It was an attempt to set up the same case again. I am satisfied that it was in fact inappropriate to apply to the court for this order. The dictum of Lord Halsbury L.C. in Reichel v. McGrath [1889] 14 A.C. 665 was referred to by counsel. That dictum was cited with approval by Keane J. in Belton v. Carlow County Council [1997] 1 I.R., 172 (at p. 182) and by this court in McCauley v. McDermott [1997] 2 I.L.R.M. 486 (at p. 497). The dictum was:
“I think it would be a scandal to the administration of justice if, the same question having been disposed of by one case, the litigant were to be permitted by changing the form of proceedings to set up the same case again.”
I adopt and apply this law. I am satisfied that the trial judge did not err in refusing the application. The sale had been specifically authorised by the trial judge on the 20th June, 2002 and had been completed. His decision as to the sale was on appeal. I am satisfied that the learned trial judge did not err in the exercise of his discretion in declining the plaintiffs injunctive relief on their Notice of Motion filed on the 24th July, 2002.
While I acknowledge that there was a reference by the High Court judge in his judgment on the fifth appeal to injunctive proceedings, and the human situation of the plaintiffs as to their stated difficulties in applying for a stay, I am satisfied that these proceedings qualify as a technical abuse of process, the same questions having been disposed of previously. I would dismiss the appeal on these grounds alone. However, it should be noted that in all the circumstances the appeal was in fact moot.
11. The seventh appeal, appeal No. 334/02
The seventh appeal is an appeal by the plaintiffs against the order of the High Court made on the 5th November, 2002 in which the learned High Court judge declined to amend the s. 316 order of the High Court made on the 20th June, 2002 and perfected on the 25th June, 2002 which purported to embody his judgment made on the 20th June, 2002.
The plaintiffs applied to the High Court to have the order which had been perfected on the 25th June varied. The learned High Court judge rejected the application of the plaintiffs for two reasons. First, he was of the view that the order appeared to embody the effect of his judgment. Secondly, he considered that the sale had been completed, an application for a stay had been refused, as had an application for an injunction.
The plaintiffs submitted that the appeal should be allowed on the grounds that they did not accept the decision of the learned trial judge that the order of June 25th did not misrepresent the effect of his judgment delivered on the 20th June, 2002.
The note of the judgment given by Murphy J. on the 5th November, 2002 includes the following:
“The caselaw has been extensively opened to me by Counsel for the Applicants and it is clear that I do have the power to amend my Order in the appropriate circumstances. I accept that the principles are correctly stated in the decision of Romer J as he then was in Ainsworth v Wilding. There does seem to be a leitmotif running through the caselaw that an Order or Judgment should be amended so that it accurately reflects the intention of the Court. The question, therefore, is whether the shortened version of my ruling contained in the perfected Order correctly states what the Court intended.
. . .
Completion of the sale of the mine could only mean completion subject to the contract of the 9th of May. I find that there is no discrepancy between the Judgment and the Order; the Order is merely shorter in form. This argument was extensively dealt with by me at pages 124 to 132 of the Transcript. The Court has already dealt with this matter.
The amendment of the application is at the discretion of the Court and I am entitled to bear in mind the fact that the application for a stay and for an injunction have been refused. It doesn’t seem that the difference between the Order and the Judgment is a discrepancy; Counsel for the Applicants has conceded that there is not a difference in substance but merely a difference in wording. I find there is no real difference between the Order and the Judgment. Having regard to all the circumstances, I find that more injustice would be caused by my amending the Order than by my not amending the Order. I therefore refuse to grant the first and second amendments to the Order sought by the Applicants.”
Counsel for the Receiver submitted that a judge may amend a perfected order if it does not accurately reflect the order which was actually decided and intended by the court. Here the trial judge, on the application of the plaintiffs, reviewed the order and having heard submissions from the parties, decided that the perfected order did accurately reflect what he had intended and (except in relation to a typographical error) he refused to amend the order. Counsel on behalf of Tara submitted inter alia that it was extraordinary that this court should be asked to review and reverse the learned trial judge’s view as to the effect of his own judgment and whether that judgment was properly reflected in the order as perfected. It was submitted that in this case the purported discrepancies between the judgment and the order were brought to his attention and he did not accept that there were any such discrepancies.
12. Decision on the seventh appeal
To request this court to go behind a finding of the learned trial judge that the High Court order properly reflected his intention in his judgment is an unstatable appeal and accordingly should be dismissed.
13. Access to court and case management
The right of access to court is an elementary right under the Constitution. It is a fundamental facet of a democracy encompassing the rule of law. The right of access to court includes affording a plaintiff an adequate opportunity to substantiate the claim which he has made: see Bula Ltd. v. Tara Mines Ltd. (No. 1) [1987] I.R. 85. However, that right does not exclude the necessity of case management by the courts. The time when a court could take a laissez-faire attitude to the length of a case has passed together with the 19th Century. The court has a duty to all litigants who wish to proceed before the court. Court time is not infinite. Court resources are not unlimited. Thus the time allocated to a case should not be so disproportionate that it reflects unfairly on other litigants. In addition, while the general rule is that costs follow the event the circumstances of a case may be relevant to the issue of costs, and these circumstances may include the time allocated to a case. Thus an unreal attitude to the length a case should take, or a situation where a case is determined to be an abuse of the process of the courts, or unstatable, may weigh heavily in any application as to costs. I am concerned at the length of court time which was allocated to these cases in the High Court and hope that in the future the court will be assisted in case management.
14. Conclusion
I have perhaps been too indulgent of the plaintiffs’ appeals in dealing with them at some length. Certainly in relation to the fifth, sixth and seventh appeals, these appeals are quite simply moot. However, I have taken care to indicate that I have considered the issues raised by the plaintiffs to insure that in spite of many bad points being raised on behalf of the plaintiffs that no injustice is done in the midst of this tidal application. After very careful consideration I am satisfied that the plaintiffs have no ground upon which to succeed on any of these appeals.
For the reasons stated I would dismiss the fourth appeal and affirm the order of the High Court. As to the fifth appeal, I am satisfied that it is moot and should be struck out. I would dismiss the sixth appeal on the grounds that it was an abuse of the process of the courts and affirm the order of the High Court. As to the seventh appeal, I regard it as unstatable and accordingly am satisfied that it too should be dismissed.
John F Ronan & Ors v Declan Taite
[2013] IEHC 386 (15 August 2013)
Judgment of Ms. Justice Laffoy delivered on 15th day of August, 2013.
Background
1. By two separate deeds of appointment of statutory receiver dated 18th September, 2012 made by National Asset Management Agency (NAMA) in favour of Declan Taite (the Receiver), the Receiver was appointed pursuant to the powers contained in s. 147 of National Asset Management Agency Act 2009 (the Act of 2009) to be a statutory receiver over the assets comprised in and charged by two separate security documents, namely:
(a) a mortgage dated 27th February, 2003 made between Richard Pratt, John Fraher and John F. Ronan of the one part and Allied Irish Banks plc (the Bank) of the other part, which was an “all sums” mortgage, and which created a security over the property now known as Poppyfield Retail Park, Clonmel, County Tipperary (Poppyfield); and
(b) a mortgage dated 22nd July, 2005 made between Mr. Ronan, Mr. Fraher, Mr. Pratt and Sean White of the one part and the Bank of the other part, which was also an “all sums” mortgage and which created security over the property now known as West City Retail Park, Ballincollig, County Cork (West City).
Prior to the appointment of the Receiver as statutory receiver in relation to each property, National Asset Loan Management Limited (NALM) had acquired pursuant to the Act of 2009 –
(i) the indebtedness and other obligations owing by Mr. Pratt, Mr. Fraher and Mr. Ronan (the Poppyfield Borrowers) to the Bank and secured by the mortgage dated 27th February, 2003 (the Poppyfield Mortgage), and
(ii) the indebtedness and other obligations owing by Mr. Ronan, Mr. Fraher, Mr. Pratt and Mr. White (the West City Borrowers) to the Bank and secured by the mortgage dated 22nd July, 2005 (the West City Mortgage).
2. The liability of the Poppyfield Borrowers to NALM, as successor in title of the Bank, is governed by the terms of a letter of sanction dated 6th July, 2010 issued by the Bank and accepted by the Poppyfield Borrowers, which sanctioned one facility (the Poppyfield Facility). The amount sanctioned was €24.5m, its purpose being the continuation of the loan facility relating to financing the retail development at Poppyfield. In relation to repayment it was provided:
“Full Net Rental Income to be applied quarterly to meet interest and/or reduce level overall debt. Facility to be repaid in full/re-financed on or before 8th December, 2010.”
Recourse was stated to be “Nil”. The security stipulated was the Poppyfield Mortgage.
3. The West City Borrowers’ liability to NALM, as successor in title of the Bank, is governed by the terms of another letter of sanction dated 6th July, 2010 issued by the Bank and accepted by the West City Borrowers, which sanctioned two facilities, namely:
(a) a facility (Facility 1) in an amount in excess of €16.7m, the purpose of which was expressed to be a continuation of loan facility originally sanctioned to fund the purchase, development and associated costs and equity release on the commercial site developed at West City; and
(b) a facility (Facility 2) in an amount in excess of €1.8m, the purpose of which was expressed to be a continuation of loan facility originally sanctioned “to refund promoters for costs incurred in the development of” West City.
In relation to each facility there was a repayment provision in precisely the same terms as the repayment provision quoted at para. 2 above. As regards recourse, it was provided:
(i) in respect of Facility 1, the Bank would continue to have several recourse to the West City Borrowers in the amounts following:
Mr. Ronan – €1.35m,
Mr. Fraher – €1.35m,
Mr. Pratt – €1.35m,
Mr. White – €0.45m
(ii) in respect of Facility 2, the Bank would continue to have joint and several recourse to each of the West City Borrowers for the amount of the debt.
The security stipulated was the West City Mortgage and also, but in respect of Facility 2, only the Poppyfield Mortgage.
The application
4. The application before the Court, which was initiated by an originating notice of motion issued on 15th March, 2013, is an application by the Receiver for directions pursuant to s. 316(1) of the Companies Act 1963 (the Act of 1963). By virtue of s. 148(1) of the Act of 2009, the Receiver has the powers, rights and obligations that a receiver has under the Companies Acts. He has also the powers, rights and obligations specified in Schedule 1 to the Act of 2009, to which I will return. Mr. Ronan, Mr. Pratt, Mr. Fraher and Mr. White are notice parties on the application.
5. The issues in respect of which the Receiver has sought directions have arisen out of the engagement of the Receiver with the Poppyfield Borrowers and the West City Borrowers and various solicitors acting for members of each class since his appointment.
6. The genesis of the first issue, which, broadly speaking, relates to the appropriation of receivables by the Receiver to the various loan accounts which represent the loan facilities outlined earlier, appears to be a letter dated 8th October, 2012 from P. J. O’Driscoll & Sons, Solicitors, acting for Mr. Ronan and Mr. Pratt to NAMA. The letter addressed the order in which it was contended the Receiver should apply the monies he would receive in the future in discharge of the West City Borrowers’ liability. In that letter it was stated that it was clear that, acting on the West City Borrowers’ pre-existing request, the Bank had agreed to credit incoming payments against Facility 2 on the basis that, after it had been repaid, the monies would be applied in reduction of Facility 1. It was also asserted that the law as to appropriation of payments as far as it concerns bankers is that “the person paying the money has the primary right to say to what account it shall be appointed” (citing Deeley v. Lloyds Bank plc [1912] AC 756; and also Johnson on Banking and Security Law in Ireland for the proposition that the principle in the Deeley case is confirmed in Irish law). It was stated that the purpose of the letter was to confirm that “the indication already in place that Facility 2 is to be repaid first remains in place for all future monies to be received”.
7. In response to the contention in that letter that there was agreement that incoming payments in relation to West City would be credited first against Facility 2, the Receiver has exhibited a letter dated 7th March, 2013 from the Bank to NAMA in which it is stated that in September 2010 the West City Borrowers had made what is described as “an out of course” lodgment of €600,000 in reduction of Facility 2. It was stated that, while the Bank had agreed to a request that the lodgment of €600,000 would be applied in reduction of the West City Borrowers joint and several liability on foot of Facility 2, it was never agreed that the repayment in question would either vary the overall terms of the facility agreement dated 6th July, 2010 or the loan repayment provisions otherwise provided for in that facility agreement. The arrangement was referred to as “a one off arrangement”.
8. As regards the first issue, the Receiver has averred in his grounding affidavit on this application that he had discussions with the legal representative of Mr. White, whom I understand to be Daniel Spring & Co., Solicitors, who maintained that the West City Borrowers are entitled to direct the application of all monies receivable after his appointment as statutory receiver to discharging Facility 2 first and that only after Facility 2 had been paid off should any receivables be used to pay down Facility 1.
9. The second issue on which the Receiver seeks directions is his entitlement to receive arrears of rent which had accrued in respect of Units at Poppyfield and West City prior to his appointment. The Receiver has averred that he had discussions with the legal representative of Mr. Ronan, namely, P. J. O’Driscoll & Sons, who asserted that the Poppyfield Borrowers and the West City Borrowers were entitled to all rents arising prior to his appointment.
10. A further aspect of the second issue, which will be treated as the third issue in this judgment, was raised in a letter dated 14th February, 2013 from P. J. O’Driscoll & Sons to the Receiver and it related to arrears of service charge held by a company, West City Estate Managers Limited (the Management Company), which had been formed by the West City Borrowers. P. J. O’Driscoll & Sons stated in that letter that the Management Company had been in existence from the outset and at no time were service charges administered or collected by the West City Borrowers. The Management Company procured and rendered services including contracting with service providers for the delivery of the services. The Management Company billed the tenants for the services so procured and rendered. They then made the following assertion:
“On the basis that the Management Company operated legally as a separate entity providing services for which it was entitled to be paid and on the basis that the Management Company is not a party to any charge entered into with the Bank I am satisfied that the statutory receiver has no entitlement to the funds of the Management Company or the service charges either collected by it or invoiced by it.”
Issues
11. The issues on which the Court has been requested by the Receiver to give directions are formulated as follows in the Receiver’s grounding affidavit:
(i) whether the application of the income received from and the possible proceeds of sale of the charged assets secured by the Poppyfield Mortage and the West City Mortgage should be applied as determined by the Poppyfield Borrowers and the West City Borrowers (in which case the receivables in respect of West City would be applied towards the discharge of Facility 2 in the first instance) or whether the Receiver is entitled to apply the same in accordance with the best interests of NALM; and
(ii) the extent to which the Receiver is entitled to or empowered to recover arrears of rent and service charges (and, if applicable, damages for breach of contract) from the tenants of properties in both Poppyfield and West City relating to the periods before and after his appointments and his entitlement to apply such receivables in accordance with the requirements of NALM; and
(iii) as an extension to issue (ii), the extent to which the Receiver is entitled to the funds within the control of the Management Company and his entitlement to apply such funds in accordance with the best interests of NALM.
The evidence before the Court
12. The application is grounded on the affidavit of the Receiver sworn on 14th March, 2013.
13. Only one of the respondents on the application, that is to say, Mr. Fraher, filed an affidavit in response to the application. His first affidavit was sworn on 8th May, 2013 and filed by his Solicitors, AMOSS. Most of that affidavit addresses an issue raised by Mr. Fraher which is of no relevance whatsoever to the issues the Court has to determine. As regards the issues on which the Receiver has sought directions, Mr. Fraher’s position as disclosed in that affidavit and in a subsequent affidavit sworn by him on 23rd July, 2013, is as follows:
(a) he considers that the Receiver is entitled to, and obliged to, collect the arrears of rent due to the Poppyfield Borrowers and the West City Borrowers at the date of his appointment and thereafter;
(b) the Receiver “should only/should first use” the income from Poppyfield in respect of the liabilities of the Poppyfield Borrowers and the West City income in respect of the liabilities of the West City Borrowers; and
(c) as NALM has obtained judgment against him in an amount in excess of €5.5m, and as he has petitioned for bankruptcy in the United Kingdom, it makes no material difference to him how the income and sale proceeds of West City is applied by the Receiver.
The hearing of the application
14. At the commencement of the hearing of the application on 26th July, 2013, counsel for the Receiver informed the Court that he had been made aware by counsel instructed for P. J. O’Driscoll & Sons on behalf of Mr. Ronan and Mr. Pratt that Mr. Ronan and Mr. Pratt, on whose behalf there was no appearance, were not objecting to the application. He also informed the Court that he had also been made aware that Daniel Spring & Co., who had represented Mr. White, were consenting to the orders the Receiver is seeking.
15. Mr. Fraher was represented at the hearing by a solicitor from AMOSS., who made submissions on his behalf, which were somewhat at variance with the position as outlined in Mr. Fraher’s affidavit. It was submitted on behalf of Mr. Fraher that the income generated from Poppyfield should first be used to pay down the Poppyfield Borrowers’ liability in respect of the Poppyfield Facility and any surplus may be used to pay down the West City Borrowers’ liability, as I understand the submission, in respect of Facility 2. As regards the application of the income from West City, it should be used to discharge Facility 2 first and, when Facility 2 has been fully discharged, then in discharge of Facility 1. Alternatively, the income should be split on a fifty/fifty basis between Facility 1 and Facility 2, which would be the fairest approach. It was acknowledged that the Receiver can receive the arrears of rent which accrued before he was appointed. As regards the service charge, it was submitted that, while the Management Company holds about €100,000, not all of the services had been provided to the tenants. There is no evidence of that factual matter before the Court and, in any event, it is difficult to see on what basis the solicitors for Mr. Fraher are entitled to speak for the tenants in West City.
Conclusion on the first issue
16. In my view, the application of the income and possible proceeds of sale from Poppyfield and West City is to a large extent governed by the contractual terms entered into –
(a) by the Poppyfield Borrowers and the Bank, and
(b) the West City Borrowers and the Bank,
as evidenced by the two letters of sanction of 6th July, 2010, the contents of which have been outlined above. Acceptance of the terms and conditions endorsed on each letter of sanction was signed by the relevant borrowers on 9th September, 2010. While the chronological order of acceptance of the terms and conditions in each letter of sanction has not been deposed to, I think it is reasonable to infer that it was intended that the contractual terms in relation to Poppyfield would be prior in time to the contractual terms in relation to West City.
17. As I understand it, there is no controversy in relation to the appropriate allocation of the receivables from Poppyfield. In any event, I consider that the income, and in the event of a sale, the proceeds of sale of Poppyfield must be applied first in discharge of the Poppyfield Borrowers’ liability to NALM in respect of the Poppyfield Facility. Once that liability is discharged, any surplus income and proceeds may be applied to the discharge of the West City Borrowers’ liability on foot of Facility 2, which liability is also secured on Poppyfield.
18. In essence, the controversy giving rise to the first issue centres on whether it is the West City Borrowers or NALM, as the successor in title of the Bank, that has entitlement to appropriate the income from and, in the event of a sale, the proceeds of sale of West City to Facility 1 or Facility 2 in relation to West City. While the relevant letter of sanction makes it clear that the full net rental income from West City is to be applied in discharge of Facility 1 and Facility 2, it does not expressly stipulate how the income is to be appropriated between the two loan accounts, which now represent Facility 1 and Facility 2. Therefore, one must fall back on the general law. The significant factor, in my view, is that NALM is a secured creditor with security over West City for two debts on two loan accounts and the Receiver is a receiver over the secured assets.
19. Historically, the question whether a secured creditor in that position could appropriate income or proceeds of sale to either debt has usually arisen in the context of the bankruptcy or liquidation of the debtor. The historical approach was explained by Plowman J. in Re William Hall (Contractors), Ltd. [1967] 2 All ER 1150, where he quoted (at p. 1158) the following passage from the judgment of Sir James Bacon C.J. in Re Foster, Ex p. Dickin (1875) L.R. 20 Eq. 767:
“The case is not incumbered with any sort of difficulty. Nothing is more clear than the law upon this subject, that a creditor who has a security which he has a right to apply to one or other of two debts due to him, can exercise that right in any way he thinks fit.”
Plowman J. cited that case for that statement of general principle and he put it in context by quoting from the headnote, which was as follows:
“A creditor of two partners was also a creditor of one of the partners separately and the title deeds of separate estate of that partner were deposited with him to secure both the joint and separate debts. The two partners filed a joint liquidation petition, and the partner whose separate estate was mortgaged also filed a separate liquidation petition. The security having been realised: Held, that the creditor was entitled to apportion the produce of the realisation between the joint and separate debts in whatever way was most for his advantage, and that, to enable him to exercise this option, he was entitled to apply to the court, under s. 104 of the Bankruptcy Act, 1869, to have a dividend on the joint estate declared before the declaration of a dividend on the separate estate.”
20. As regards the income, and any proceeds of sale, of West City, in my view, the Receiver is entitled to apply the same to the discharge of Facility 1 and Facility 2 in whatever order he considers to be in the best interests of NALM, in respect of which, no doubt, he will be guided by NALM. In particular, the West City Borrowers have no entitlement to require the Receiver to apply the receivables from West City to Facility 2 first, so as to limit their personal exposure for the debts due to NALM.
Conclusion on the second issue
21. It is clear, as a matter of law, that a receiver is entitled to arrears of rent out of the assets over which he is appointed which have accrued prior to his appointment, but which are unpaid. Counsel for the Receiver referred the Court to the following passage from Picarda on The Law Relating to Receivers, Managers and Administrators (4th Ed.) at p. 444:
“A receiver of rents is entitled to all arrears of rent unpaid when the order appointing him is made, and the tenant will be ordered to pay those arrears even though the tenant has not attorned to the receiver.”
All of the authorities cited by Picarda for the foregoing proposition bear it out. The most recent of the authorities is an Irish authority: Crawford v. Annaly (1891) 27 LR Ir. 523. There, Porter M.R. stated (at p. 529):
“. . . it is a principle of this Court, recognised in the case of Hollier v. Hedges, that a receiver is entitled to collect and receive all arrears, subject of course to the limitation, that they are arrears of rent belonging to the estate over which he is appointed.”
22. In this case, the arrears of rent do belong to the estate over which the Receiver is appointed: they belong to the Poppyfield Borrowers and the West City Borrowers subject to NALM’s mortgages. Therefore, the Receiver is entitled to the arrears of rent. Further, the Receiver is entitled to apply the arrears of rent in the same manner as he is entitled to apply the rents which have accrued since his appointments.
Conclusion on the third issue
23. The Receiver has formulated this issue as an extension of the second issue. However, the arrears of service charge are not necessarily in the same position as the arrears of rent.
24. Under Schedule 1 to the Act of 2009, a Statutory Receiver appointed by NAMA is given very extensive powers. For instance, under paragraph 34 he is given “power to exercise in relation to a secured asset all the rights, powers and authorities that he or she could exercise if he or she were the absolute beneficial owner of the secured asset”. In order to determine the status of the arrears of service charge, it is necessary to consider the provisions in relation to service charge in the leases of units in Poppyfield and West City.
25. The Receiver has exhibited a copy of the draft lease annexed to an agreement for lease dated 25th July, 2005 made between the West City Borrowers of the first part, 4 Home Limited of the second part, and Dairygold Co-Operative Society Limited of the third part, from which it is clear that the Management Company was not intended to be a party to a lease of a unit in West City. Therefore, the obligations and rights in relation to the provision of services and the payment of the service charge were intended to arise as between the West City Borrowers, as landlords, and 4 Home Limited, as tenant, directly.
26. In the draft lease, in Clause 3.1, the tenant covenants with the landlord to pay, inter alia, the Service Charge, which is defined in the definitions clause as meaning the annual proportion of the Service Costs properly attributable to the demised unit, which proportion is based, in broad terms, on floor area of the demised unit vis-à-vis the aggregate floor areas of all the demised units The expression Service Costs is defined as meaning the aggregate of all costs, expenditure and outgoings reasonably and properly incurred by the landlord in complying with its obligations under Clause 4.3 of the lease and the items set out in the Fourth Schedule. Clause 4.3 is a covenant by the landlord, subject to the payment by the tenant of the Service Charge, at all times to provide the services, which are outlined in the Fourth Schedule. In other words, the Service Charge paid by the tenant is intended to represent payment by the tenant for its share of the costs of providing the services. Even if the Receiver was the “absolute beneficial owner” of West City and he had collected the service charges now held by the Management Company, his entitlement to deal with the monies representing those service charges would turn on his liability to 4 Home Limited and the other tenants of units in West City.
27. On the basis of the evidence available, it is not possible to express a view on what calls, if any, the tenants of units in West City have in respect of the monies held by the Management Company. Accordingly, while the Receiver stands in the shoes of the West City Borrowers and, as such, should take control of the monies in the name of the Management Company, which represent service charges collected from the tenants in West City, in my view, he is not entitled to treat that money in the same way as he is entitled to treat the arrears of rent or to use it in the best interests of NALM, as he asserts. The money representing the arrears of service charges held by the Management Company should be paid to the Receiver and should be lodged to a separate account pending an inquiry by or on behalf of the Receiver as to what claims the tenants of units in West City have in respect of that money. It is also possible that the Management Company, as a separate corporate entity, may have discharged its obligations to the tenants out of its own funds and that it has a claim to be the beneficial owner of all or part of that money. To the extent that it is so established, the Management Company would be entitled to that money. Until such time as all claims against the money representing the arrears of service charge are dealt with, it must be “ring fenced” by the Receiver and may not be made available to NALM. Indeed, the probability is that NALM will never have an entitlement to it.
Order
28. The Court will make an order giving the following directions:
(a) that the Receiver appropriate –
(i) the receivables from Poppyfield first in discharge of the Poppyfield Borrowers’ liability to NALM under the Poppyfield Mortgage in respect of the Poppyfield Facility and thereafter in discharge of the West City Borrowers’ liability to NALM in respect of Facility 2,
(ii) the receivables from West City in discharge of the West City Borrowers’ liability to NALM under the West City Mortgage in respect of Facility 1 and Facility 2 in such manner as the Receiver considers to be in the best interests of NALM;
(b) that the Receiver is entitled to recover the arrears of rent from the tenants in Poppyfield and in West City and appropriate the same in the manner set out at (a) above; and
(c) the arrears of service charge paid by the tenants of West City, including any arrears of service charge held by the Management Company in respect of West City, must be applied in discharge of the obligations of the West City Borrowers to the tenants of West City or any other existing obligations.
If necessary, when the factual position in relation to the service charges is ascertained, the Court will give further directions in relation to the arrears of service charges and the monies held by the Management Company.
Lynch and Others v. Ardmore Studios (Ir.) Ltd.
Budd J. [1966] IR 133
BUDD J.:
9 June
In these proceedings the plaintiffs seek an injunction to restrain the defendants and each of them from issuing execution or causing or procuring execution to be issued on foot of the order of the High Court dated the 30th April, 1965, in an action entitled:”1964. No. 1193 P. The High Court. Between Ardmore Studios (Ireland) Limited, Plaintiffs, and George Lynch, Anthony Kelly, Dermot Moloney, Leo Murphy and Peter Kingsley, Defendants.”
The present application is by way of motion for an interlocutory injunction to much the same effect, but in somewhat wider terms. It has been agreed to treat the hearing of the motion as the trial of the action.
The background of the case is as follows: Ardmore Studios (Ireland) Ltd., the first-named defendants (generally herein referred to as “the Company”), carried on business, prior to certain events to which I am about to refer, at Ardmore Studios, Bray, Co. Wicklow. The Company was engaged in the business of letting its studios and premises and providing facilities for film making. In 1963 it became involved in a trade dispute resulting in the picketing of the Company’s premises by members of the Electrical Trades Union (Ireland). An action ( Ardmore Studios (Ireland) Ltd.v. Lynch and Others : see [1965] I. R., at p. 6) was brought to restrain the picketing. This action was dismissed with costs on the 30th July, 1963. A certificate of taxation of the costs was issued on the 23rd June, 1965, the amount certified for being £1,125 18s. 6d. These proceedings are referred to herein as “the first action.”
The Company had, prior to the first action, borrowed money from the Industrial Credit Company Ltd. The advances made were secured by an indenture of mortgage debenture, dated the 31st October, 1958, executed by the Company in favour of the Industrial Credit Company Ltd. and by sundry supplemental deeds of charge.
After the termination of the first action, and largely by reason thereof, the Industrial Credit Company Ltd. appointed Mr. William Sandys receiver over the assets of the Company pursuant to the powers enabling them to do so under the terms of the indenture of mortgage debenture. The appointment was made by an indenture of agreement, dated the 31st October, 1963, made between the Industrial Credit Company Ltd. and Mr. Sandys.
For six months after his appointment the receiver did not attempt to carry on the business of the Company as a going concern, but tried to bring about a sale. He failed to find a purchaser.
In or about May, 1964, there were negotiations with a film production company for the sale of the Company’s business, but these fell through because of the prospective purchaser’s fears of being involved in the trade dispute, or a recurrence thereof. The receiver then decided that he could not get a realistic price unless he could satisfy the prospective purchaser that the Company was able to carry on business without getting involved in disputes with trade unions operating in the film business.
In May, 1964, the receiver, accordingly, negotiated for the hiring of the studios for the making of a film. Later, in June, 1964, the Company’s premises were picketed by members of the Electrical Trades Union (Ireland) who alleged that a trade dispute existed between the Union and the Company.
The receiver then caused proceedings to be issued in the name of the Company against certain members of the Union seeking a declaration that no trade dispute existed in furtherance of which it might be lawful for the defendants or any of them to watch, beset or picket the said premises, and, further, claiming an injunction restraining the defendants from watching, besetting or picketing the said premises and from disturbing the Company in the conduct of its business. These proceedings are referred to herein as “the second action.” The said action was tried. before Mr. Justice McLoughlin, who, on the 5th October, 1964, gave judgment granting the said declaration and the injunction therein claimed (1).
In the second action, therefore, the Company was successful and by order, dated the 30th April, 1965, the defendants in that proceeding were ordered to pay the costs which were taxed on the 5th August, 1965, to the sum of £1,208 0s. 8d. It will be perceived that the difference between the costs awarded in the two actions was £82 2s. 2d.
The defendants in the second action are the plaintiffs in the present proceedings. After judgment had been given in the second action, a question arose as to whether or not the costs of the first action could be set off against the costs of the second action. An adjournment was given to consider the matter. The defendants’ counsel came to the conclusion that this could not be done because the defendants in the second action were, as to some of them, different persons to the defendants in the first action. The order was then drawn up awarding costs against the defendants without the allowance of any set-off.
By an indenture of assignment, however, dated the 15th October, 1965, the defendants in the second action (plaintiffs in these proceedings) obtained from the defendants in the first action an assignment of the defendants’ costs in the first action together with all the benefit of the judgment in the first action. Their solicitors gave notice of the assignment to the solicitors for the plaintiff Company in the second action by letter, dated the 27th October, 1965, and thereby also purported to set off the sum of £1,125 18s. 6d., the costs in the first action, against the sum of £1,208 0s. 8d., the costs awarded in the second action. The notice of set-off is not aptly worded, but no point was made of any technical imperfection in the wording. The difference between the two sets of costs, £82 2s. 2d., was tendered by cheque enclosed in the same letter and no point is made as to the validity of the tender.
It was claimed on behalf of the Company (plaintiffs in the second action and the first-named defendants in the present proceedings) that no right of set-off exists for certain reasons, which I will deal with later, and, accordingly, that a right to levy execution existed. The decree in the second action was accordingly lodged with the sheriff (the second-named defendant in the present proceedings) who sent in his bailiff to the dwelling-house of the first-named defendant in the second proceedings (who is the first-named plaintiff in the present proceedings) for the purposes of effecting execution. The bailiff was, however, withdrawn by agreement to enable the present plaintiffs to take such steps as they might be advised in the circumstances. The present proceedings, seeking the relief already mentioned, were then launched and an interim injunction, restraining the levying of execution pending the hearing of an interlocutory application for an injunction of a like nature, was granted on the 18th January, 1966.
An order for the compulsory winding-up of the Company had been made on the 1st November, 1965, and an official liquidator was then appointed, but it was ordered that all further proceedings in the winding-up of the Company, other than the advertisement of the order, be stayed until further order. Liberty to continue the present proceedings was however granted by order of the 4th March, 1966. I was informed that the proceedings were stayed because the receiver was still in possession of the assets pursuant to the provisions of the said mortgage debenture.
The plaintiffs in the present proceedings contended that, in the circumstances which I have detailed, they have the right to set off the amount of the costs awarded in the first action, now assigned to them, against the costs awarded against them in the second action, and, further, that in the circumstances existing, each party having a judgment against the other, a Court of equity has jurisdiction to restrain, and should restrain, the levying of execution. Reliance was placed on certain passages in the judgments in the case of Hanak v. Green (1) and on the decisions in Philipson and Brewer v. Caldwell (2) and Baskerville v. Browne (3), but on the view that I take of the case it is unnecessary to enlarge upon the arguments founded on these cases.
A great number of submissions were made on behalf of the first-named defendant. Some of the points made were, in the main, technical objections as to procedure, but each, it was claimed, was a bar to the proceedings.
The other submissions made had regard to the substance and nature of the claim made to a right of set-off. The right of the plaintiffs to obtain relief by way of injunction must depend, apart from considerations of a procedural nature, upon having a valid right of set-off. The submissions going to the substance of the matter were to the effect that in the circumstances of the case no valid right of set-off could exist because of a lack of identity between the party entitled to the benefit of the judgment in the second action, alleged to be the debenture holders, and the party liable for the debt for costs in the first action, alleged to be the Company itself. This lack of identity, it was submitted, prevented that mutuality of interests existing which was a necessary element to found a right of set-off.
The chief points of a. technical and procedural nature were briefly these: firstly that the matter was res judicatahaving regard to the decision of Mr. Justice McLoughlin in the second action, reported in the Irish Reports, 1965, at page 1 (1). The basis of this contention was that Mr. Justice McLoughlin had decided in the second action that the receiver was not bound by the contracts and obligations of the Company existing prior to his appointment which would include the Company’s liability in respect of the costs of the first action. Secondly, that set-off was a matter of defence exclusively and there was no procedure known to the law whereby a party, after judgment in an action against him, can acquire a credit against the plaintiff in the action and then set it off affirmatively. Thirdly, it was submitted, the only procedure open was to apply for a stay of proceedings or other relief in the action in which the judgment sought to be executed had been obtained under the provisions of Order 42, r. 28, of the Rules of the Superior Courts and this had not been done. While I feel it right to say that these matters were argued before me, I do not think it necessary or desirable to express a final view on the abstract matters involved because of the view that I have formed on a matter relating to the substance and nature of the claim as to right of set-off.
The main contentions advanced on behalf of the first-named defendant on the denial of a right of set-off were these: it was submitted that the appointment of a receiver under the terms of a mortgage debenture of the nature existing in this case has in the first place the effect of crystallising the charge. The appointment of the receiver further alters the character of the Company. The receiver after his appointment conducts the affairs of the Company and manages its property on behalf of the debenture holders and not on behalf of the Company. The crystallisation of the charge further has the result that the debenture holder becomes a priority creditor and the title of the receiver takes priority over all execution creditors who have not completed their execution prior to his appointment, so that they are postponed. A debt which cannot be executed on cannot be set off against a debt that is capable of immediate execution. The debt due by the plaintiffs in these proceedings to the Company is one capable of immediate execution. The debt which the plaintiffs have acquired was not capable of immediate execution, being a debt of the Company which is postponed to the title of the receiver. Therefore it could not be set off against the debt due to the Company.
The final submission made was this: by reason of the crystallisation of the debenture holder’s charge on the appointment of the receiver on the 31st October, 1963, the judgment debt in respect of the costs of the second action, as soon as it came into existence, became assigned in equity to the debenture holder. The beneficial interest in the debt was therefore in the debenture holder at the time when the judgment was pronounced on the 5th October, 1964. On the other hand, the debt arising by reason of the judgment against the Company in the first action was a debt of the company. That debt was not assigned to the present plaintiffs until the 15th October, 1965. At the time of the attempted set-off that debt did not involve the debenture holder, being a debt of the Company postponed to the debenture holder’s priority. In the result, there was at the time of the purported set-off no mutuality giving a right of set-off to the plaintiffs.
In reply to these contentions, the plaintiffs submitted that the receiver was under the terms of the mortgage debenture the agent of the Company and could only sue in the name of the Company as its agent. Thus, when he sued in the name of the Company in the second action the costs were in truth awarded to the Company and were the Company’s costs and the debt due was due to the Company. Accordingly, the debt due by the Company in respect of the costs of the first action could properly be set off against the claim of precisely the same party, namely, the Company.
Before I proceed to consider the above contentions, I should refer to some of the terms of the mortgage debenture of the 13th October, 1958. After recital of the application by the company for an advance to the Industrial Credit company Ltd. and the agreement to make the advance, repayment thereof being secured in manner thereinafter appearing, there follow the usual covenants as to repayment and a sub-demise of the Company’s leasehold premises to the lending Company. Clauses 6, 7, 8 and 9 deal with the charges for the security of the lender and are as follows:
“6. The borrower HEREBY CHARGES with the payment of all Principal Monies and interest for the time being owing hereunder all its undertaking property and assets for the time being both present and future including its uncalled capital book debts and goodwill.
7. The Borrower HEREBY ASSIGNS to the Lender all its fixed machinery plant, fixtures, tools, and implements TO HOLD the same unto the Lender absolutely.
8. All the property and assets demised granted charged and assigned at Clauses 5, 6 and 7, hereof are hereinafter referred to as ‘the Mortgaged Property’ and the Principal Monies and interest hereby secured are hereinafter referred to as ‘the Mortgage Debt.’
9. The said Charge on the Mortgaged Property shall be a first charge and as to the said Leasehold property shall be a specific charge and as to the other assets of the Borrower shall be a floating charge but so that the Borrower shall not be at liberty to create any mortgage or charge upon the Mortgaged Property or any part or parts thereof either having priority to or to rank pari passu with the charge hereby created without the previous consent in writing of the Lender.”
After providing for the use of the capital advanced and the release and re-assignment of the property on repayment of the loan, come provisions relating to the appointment of a receiver which I now quote:
14. The Lender may at any time after the Mortgage Debt shall have become payable appoint by writing under its seal a Receiver of the Mortgaged Property or any part thereof and remove any Receiver so appointed and appoint another in his stead and the following provisions shall have effect:
(a) Such Receiver shall in the exercise of his powers authorities and discretions conform to the directions from time to time given by the Lender.
(b) The lender may from time to time fix the remuneration of such Receiver and direct payment thereof out of the Mortgaged Property.
(c) The Receiver shall be the Agent of the Borrower and the Borrower shall be solely responsible for his acts and default and for his remuneration.
15. A Receiver so appointed shall have power:
(a) To enter upon take possession of collect and get in the mortgaged property or any part thereof and for that purpose to take possession in the name of the Borrower or otherwise as he may deem fit.
(b) To carry on or concur in carrying on the business of the Borrower or any part thereof and in particular (without restricting the generality of the foregoing power) to employ and dismiss managers, agents, servants and others upon such terms and with such salaries wages or remuneration as he shall think proper and to pay out of the Mortgaged Property or the proceeds thereof for materials and machinery and things as he may consider necessary and (with the consent in writing of the Lender) to raise money on the mortgaged property or any part thereof in priority to this security.
(c) To sell or concur in selling all or any part of the mortgaged property and to carry any such sale into effect by assuring the same in the name and on behalf of the Borrower.
(d) To make any arrangement or compromise which he shall consider expedient.
PROVIDED that nothing in this clause shall prejudice the right or power of the Lender itself as Mortgagees to enter into possession of the Mortgaged Property or any part thereof or to exercise the power of sale applicable hereto and other mortgagees’ powers hereby or by the Statute conferred.
16. Neither the Lender nor any Receiver appointed as aforesaid shall by reason of the Lender or such Receiver entering into or taking possession of the Mortgaged Property or any part thereof be liable to account as Mortgagees in possession or for anything save actual receipts or be liable for any loss on realisation of assets or for any default or decision for which a Mortgagee in possession might but for this provision be liable.
17. The provision of section 24 of the Conveyancing Act, 1881, with the exception of sub-sections (1) and (2) and (8) thereof shall apply to this deed and to any Receiver appointed by the Lender hereunder.
All monies received by any such Receiver shall be applied as follows:
(a) In payment of all sums necessary or proper in or for the purposes of the exercise of the powers and duties of such Receiver hereunder.
(b) In discharge of all outgoings affecting or payable in respect of the Mortgaged Property.
(c) In payment of his remuneration.
(d) In payment of the premium on fire and other insurance and the cost of executing necessary or proper repairs to the Mortgaged Property.
(e) In payment of the interest on the Mortgage Debt and other monies (if any) other than the Mortgage Debt due or payable under this deed and in such order as the Lender may direct.
(f) In or towards the discharge of the Mortgage Debt.
(g) In payment of the residue (if any) of the monies received by the Receiver to the Borrower.”
It has not been suggested that this debenture contains clauses out of the ordinary run and it would appear to follow the form usually to be found in a modern mortgage debenture. Under the provisions of the deed the receiver, when appointed, had power to take full possession of the property and assets of the Company and to carry on, or concur in carrying on, the business of the Company in order to enable him to realise the property to best advantage or to carry on the business so that the debenture holder would obtain repayment of the loan plus interest. He was to operate as the agent of the Company, which was to be responsible for his acts and defaults, but the receiver would, on the face of the debenture, be clearly concerned for the benefit of the debenture holder and not for the Company during the period of his receivership, though no doubt his management would be technically on behalf of the Company.
By a deed of agreement made between the Industrial Credit Company Ltd. and the receiver, dated the 31st October, 1963, being supplemental to the mortgage debenture and further deeds of charge the Industrial Credit Company Ltd. did thereby:
“1. Appoint the Receiver to be Receiver of all the undertaking property and assets present and future of the Borrower including its uncalled capital book debts and goodwill and also all other if any the property and assets comprised in the said recited Mortgage Debenture and deeds of Further Charge and the property and assets from time to time subject to the floating charge created by the said recited mortgage debenture and deeds of further charge all of which said property is referred to in the said recited Mortgage Debenture and Deeds of Further Charge and also hereinafter referred to as ‘the mortgaged property.’
2. Delegate to the Receiver the powers following, that is to say:
(a) Power to enter upon take possession of collect and get in the mortgaged property or any part or parts thereof and for that purpose to take proceedings in the name and on behalf of the Borrower or otherwise as it may seem expedient.
(b) To carry on or concur in carrying on the business of the Borrower or any part thereof and in particular (without restricting the generality of the foregoing powers) to employ and dismiss managers, agents, servants and others upon such terms and with such salaries wages or remuneration as he shall think proper and pay out of the said mortgaged property or the proceeds thereof for materials and machinery and things as he may consider necessary and with the consent in writing of the Credit Company to raise money on the security of the mortgaged property or any part thereof in priority to the said recited Mortgage Debenture and Deeds of Further Charge.
(c) To sell or concur in selling the mortgaged property or any part thereof and to carry any such sale or sales into effect on behalf of the Borrower or otherwise convey the same to a purchaser.
(d) To make any arrangement or compromise which he shall think expedient in the interests of the Credit Company.
(e) To do all such other acts and things as may be necessary and expedient in pursuance of the powers conferred on the receiver by law and by the said recited Mortgage Debenture and Deeds of Further Charge.”
The receiver’s agreements are set out in paras. 3 and 4 of the agreement and are as follows:
3. The Receiver agrees that he shall act as such Receiver and exercise the powers delegated to him as aforesaid subject to and in conformity with any directions that may be given to him by the Credit Company from time to time and shall subject to the payment of all debts having priority to any charge created by the said recited Mortgage Debenture and Deeds of Further Charge by virtue of sections 107 and 209 of the Companies (Consolidation) Act, 1908, and subject to the provisions in that behalf contained in the said recited Mortgage Debenture and Deeds of Further Charge and transfer all monies received by him to the Credit Company and otherwise carry out his duties in accordance with the provisions on that behalf in the said recited Mortgage Debenture and Deeds of Further Charge.
4. The Receiver further agrees that he will from time to time furnish to the Credit Company all such accounts documents and information regarding the affairs of the Borrower as may be required by the Credit Company PROVIDED ALWAYS that the receiver shall for all purposes be the agent of the Borrower and the Borrower alone shall be responsible for his acts and defaults.
AND PROVIDED ALSO that the Credit Company shall be at liberty to discharge the receiver at any time by giving to the receiver one week’s notice in writing.”
The effect of the appointment of Mr. Sandys under the terms of the debenture was to make him receiver and manager of the Company’s business and property. As to the position of a person appointed to be a receiver and manager under a mortgage debenture of this kind there are some observations in the judgments of the Court of Appeal in England in In re B. Johnson & Co. (Builders) (1) to which I wish to refer. The applicant in that case sought an order under the Companies Act, 1948, for the investigation of the conduct of the receiver and the liquidator. It was held that the receiver was not within the class of persons whose conduct could be the subject of an examination under the section proceeded on, but in the course of arriving at this conclusion the character of a receiver’s managership was considered. At p. 644, Lord Evershed M.R. said:”The situation of someone appointed by a mortgagee or a debenture holder to be a receiver and manageras it is said, ‘out of court’ is familiar. It has long been recognised and established that receivers and managers so appointed are, by the effect of the statute law, or of the terms of the debenture, or both, treated, while in possession of the company’s assets and exercising the various powers conferred upon them, as agents of the company, in order that they may be able to deal effectively with third parties. But, in such a case as the present at any rate, it is quite plain that a person appointed as receiver and manager is concerned, not for the benefit of the company but for the benefit of the mortgagee bank, to realise the security; that is the whole purpose of his appointment; and the powers which are conferred upon him, and which I have to some extent recited, are (as Sir Lynn observed, and I think fairly observed) really ancillary to the main purpose of the appointment, which is the realisation by the mortgagee of the security (in this case, as commonly) by the sale of the assets.”
At p. 661, Jenkins L.J. states the position of a receiver as follows: “. . . receiver and manager for debenture holders is a person appointed by the debenture holders to whom the company has given powers of management pursuant to the contract of loan constituted by the debenture, and, as a condition of obtaining the loan, to enable him to preserve and realise the assets comprised in the security for the benefit of the debenture holders. The company gets the loan on terms that the lenders shall be entitled, for the purpose of making their security effective, to appoint a receiver with powers of sale and of management pending sale, and with full discretion as to the exercise and mode of exercising those powers. The primary duty of the receiver is to the debenture holders and not to the company. He is receiver and manager of the property of the company for the debenture holders, not manager of the company. The company is entitled to any surplus of assets remaining after the debenture debt has been discharged, and is entitled to proper accounts. But the whole purpose of the receiver and manager’s appointment would obviously be stultified if the company could claim that a receiver and manager owes it any duty comparable to the duty owed to a company by its own directors or managers.”
Finally, at p. 664, Parker L.J. says:”What, however, in my judgment, is decisive of the case is that any work of management done by a receiver is not done as manager of the company. The powers of management are ancillary to his position as receiver, and, in exercising those powers, he is not acting as manager of the company but as manager of the whole or part of the property of the company.”
These observations, with which I respectfully concur, support the contentions made that a receiver appointed acts for the benefit of the debenture holder, but with the precise nature of his position I shall deal more fully later.
On the actual point in issue in this action, regarding the right to set off a debt due by a company before the appointment of a receiver against a debt becoming due to the company after the appointment of a receiver, there was cited to me a case of N. W. Robbie & Co. Ltd. v. Witney Warehouse Co. Ltd. (1) which has many features strikingly similar to the present case, as will be seen from the following recital of the facts.
In January, 1960, the plaintiff company issued a debenture to the Bank of Ireland. In July, 1961, the Bank appointed a receiver and manager. Prior to the appointment of the receiver and manager the plaintiff company had sold goods to the defendant company on credit for £95. After the receiver was appointed, he permitted the plaintiff company to carry on business and the plaintiff company sold further goods to the value of £1,251 to the defendant company, again on credit, the goods being portion of the stock of the company when the receiver was appointed. Between November, 1960, and January, 1961, that is, before the appointment of the receiver, the plaintiff company purchased goods from a company called English Spinners Ltd. to the value of £852. After the appointment of the receiver English Spinners Ltd., on the 6th October, 1961, assigned the benefit of their debt to the defendant company. The plaintiffs sued the defendants for the sum of £1,346 due to then. The defendant company, admitting that the balance of £494 was due, claimed to set off the sum of £852. It was held that it was not entitled to do so by a majority of the Court.
Russell L.J., in the course of his judgment, with which Sellers L.J. concurred, stated certain reasons for the decision which are relevant, in my view, to the present case. At p. 1336, he stated his view of the facts as follows:
“The facts giving rise to the present problem may be shortly stated. First: the mortgage created a floating charge which ceased to float, or crystallised, when the receiver and manager was appointed on July 6, 1961, under the power contained in the debenture dated January 26, 1960. Secondly: with the exception of £95 worth (as to which no special point is taken) the debts for goods delivered totalling £1,346 now sued upon arose as choses in action after the appointment of the receiver and manager, and the goods sold were all in stock when he was appointed. Thirdly: the debt of £852 due from the company which the defendants as assignees thereof seek to set off, arose before the appointment of the receiver and manager, was unsecured, and was assigned to the defendants after the last of the debts constituting the total of £1,346 came into existence.”
He then said:”The first question for consideration is whether on the true construction of the debenture the debt owed by the defendants as it arose became a chose in action of the company subject to an equitable charge in favour of the debenture-holders. I consider that it did.”
Having dealt with certain matters on the construction of the debenture, he then gave reasons why the debt owing by the plaintiff company and assigned by English Spinners Ltd. to the defendant company could not be set off against the plaintiffs’ claim. I quote from p. 1338 of the judgment:”Thus far, in my judgment, by force of the debenture charge an equitable charge attached in favour of the debenture-holders not only on the £95 debt existing at the date of the appointment of the receiver and manager, but also upon the other debts constituting the total of £1,346 as they came into existence on delivery of goods to the defendants after such appointment. These choses in action belonging to the company became thus assigned in equity to the debenture-holders, at times when the defendants had no cross-claim of any kind against the company and consequently no right of set-off. Before the defendants acquired by assignment this cross-claim the defendants must be fixed with knowledge of this equitable assignment to the debenture-holders (by way of charge) of the debt owed by the defendants to the company. A debtor cannot set off his claim against X against a claim by X against him which the debtor knows has been assigned by X to Y before the debtor’s claims arose. Just as an assignee of a chose in action takes subject to an already existing right of set-off, so a debtor with no existing right of set-off cannot assert set-off of a cross-claim which he first acquires after he has notice of the assignment of the claim against him; here, for instance, no part of the £852 could have been set off against the £95.
Applying these considerations to the present case, at the time when the defendants first acquired the claim for £852, the choses in action sought to be enforced against the defendants had been assigned to the debenture-holders by way of charge, but the £852 claim in no way involved the debenture-holders. There was, consequently, at the first moment of assertion of set-off, no identity between the persons beneficially interested in the claim and the person against whom the cross-claim existed. There was, therefore, not that prerequisite of set-off, mutuality, to use a word which though perhaps not very exact, was made by Parliament philologically acceptable in the statutes of set-off.”
Later, at p. 1339, he states his conclusions in these words:
“I conclude, therefore, that there is in this particular case no right of set-off because there is no ‘mutuality’ in beneficial interest. The claimants are primarily the debenture-holders: the cross-claim is against the company alone, and is indeed one which in its origin could not be met and was not entitled to be met until the debenture-holders had been paid off in full.”
The decision is founded on the following reasoning, neatly summarised in the head-note of the report of the case in the All England Reports, 1963, vol. 3, at p. 613, which I have paraphrased somewhat. The charge created by the debenture crystallises on assets including choses in action, as they come into existence. Therefore debts as they became due became subject to the equitable charge (tantamount to an equitable assignment) to the debenture holder. Thus, the debts due to the plaintiff company became assigned in equity to the debenture holder before the cross-claim arose.
There was therefore no mutuality at the first moment of assertion of the set-off because the cross-claim by the defendant company did not involve the debenture holder, being against the plaintiff company alone, and consequently there was no right of set-off.
The plaintiffs submitted that the decisions of the Court of Appeal in England in both the cases I have referred to ran counter to the decision of the House of Lords in Gosling v.Gaskell (1). In that case trustees for debenture holders had appointed a receiver under the terms of a deed of a debenture so empowering them, the deed inter alia providing that the receiver in carrying on the business of the company should be the agent of the company. Soon after his appointment, the company was ordered to be wound up compulsorily. The receiver continued to carry on the business and ordered goods from the respondents. The trustees were sued for the price of the goods. It was held that, although the receiver ceased to be the agent of the company after the winding-up order, he did not thereby or at any tine receive any implied or actual authority from the trustees to act as their agent so that the trustees were not liable for the goods. There are certain observations in the speeches of the Law Lords relating to the beneficial interest in the profits made by the receiver as belonging to the company and as to the business being carried on by and on behalf of the company which were strongly relied on as showing that assets acquired by a receiver in a case such as the present were the beneficial property of the company so that a debt of the company could properly be set off against them. The words particularly relied on were those of the Lord Chancellor, Lord Halsbury, at p. 583:”The company is still the person solely interested in the profits, save only that it has mortgaged them to its creditors. It receives the benefit of the profits as they accrue, though it has precluded itself from applying them to any other purpose than the discharge of its debts. The trade is not carried on by, or on account of, the creditors, though their consent is necessary in such a case, but the trade still remains the trade-of the company. The company is the person by, or on whose behalf, the business is carried on.”
These observations must be read in the light of what the House was deciding. The actual decision was that the receiver was not the agent of the trustees in ordering the goods. It was assumed that up to the time of the winding-up order he was the agent of the company in carrying on the business. The fact that he ceased to be so on the winding-up order being made did not make him the agent of the trustees.
In my view the decision itself turns on the matter of liability to third parties, and the matters dealt with in the decisions of the Court of Appeal were not involved in the decision of the House of Lords. Something outside and beyond the decision in the House of Lords was dealt with. Lord Evershed M.R., in In re B. Johnson & Co. (Builders)(1), in that part of his judgment to which I have referred, said that it has long been recognised that receivers and managers for debenture holders are treated as agents of the company to enable them to deal effectively with third parties. Moreover, the Court of Appeal actually applied Gosling v. Gaskell (2)in its decision in N. W. Robbie & Co. Ltd. v. Witney Warehouse Co. Ltd. (3) and clearly did not regard it as contrary to the view it formed. The answer to the arguments of the plaintiffs herein, based on the observations of the Lord Chancellor which I have quoted, are, I consider, to be found in certain observations of Russell L.J. in the course of his judgment in that case in which he refers to arguments founded on the provision in the debenture that the receiver should be considered the agent of the company. At p. 1340 he says:”The argument for the defendants depended very largely upon the fact that in this case the receiver and manager was appointed by the debenture-holders and that, as is normal, it was provided that the receiver and manager so appointed should be considered to be the agent of the company. Of course, the purpose of this agreement between the company and the debenture-holders is that the latter should avoid the responsibilities of a mortgagee in possession: but this agency is a reality, as was pointed out in Goslingv. Gaskell (2). It was, however, accepted that if the receiver and manager had been appointed by the Court, the set-off in this case could not have been successfully asserted, because, since such receiver and manager would not have been agent of the company there would be no ‘mutuality.’ It would, I think, be a defect in the law if there was in the present context such a distinction between a receiver and manager appointed by the debenture-holders under the common form which makes him agent for the company and a receiver and manager appointed by the Court, more especially since at any time the latter may be substituted for the former, and where possible the costs of litigation should be avoided. In both cases the receiver and manager is a piece of administrative machinery designed to enforce a charge, in the present case (as in most) an equitable charge, on property of the company. For myself I am not prepared to accept this distinction in the field of set-off; and this would work both ways. In each case proceedings necessary to enforce a claim would be brought by the company, the writ being issued in the name of the company by solicitors instructed by the receiver and manager. In each case the purpose is to recover that which is the property of the company subject to the fact that it is also the beneficial concern of the debenture-holders to whom it has been assigned in equity by way of charge. The substance of the situation is the same in each case, and it is, I venture to think, by the substance and not by the form that the existence or non-existence of a right to set-off is to be ascertained.”
In the last two sentences the very situation referred to by Lord Halsbury is adverted to and accepted; the matter is, however, carried a step further in that the substance of the situation relating to the beneficial interest of the debenture holder arising by reason of the assignment of the charge in equity is recognised in considering whether or not a right of set-off exists. In my opinion therefore the decision in Gosling v. Gaskell (1) does not run contrary to the decision of the Court of Appeal in England in N. W. Robbie & Co. Ltd. v. Witney Warehouse Co. Ltd. (2).
I find myself, with respect, in accord with the reasoning and decision in N. W. Robbie & Co. Ltd. v. Witney Warehouse Co. Ltd. (2) and, applying the reasoning to the present case, the position is this: the first-named defendants in these proceedings (being the plaintiffs in the second action) recovered a judgment for costs amounting to the sum of £1,208 0s. 8d. That was a judgment debt owing to the Company. The charge created by the debenture crystallised on that asset of the Company when it came into existence and it became assigned in equity to the debenture holder at latest upon the taxation of the costs on the 5th August, 1965. That was before the assignment of the cross-debt of the costs in the first action on the 15th October, 1965. At the time of the assertion of the set-off on the 27th October, 1965, there was no mutuality, because the claim founded upon the judgment in the first action involved the Company alone and did not involve the debenture holder. Accordingly, following the decision in N. W. Robbie & Co. Ltd. v. Witney Warehouse Co. Ltd. (2), I am of the view that there can be no valid set-off of the nature claimed by the plaintiffs.
Apart entirely from the conclusions I have come to following the decision of the Court of Appeal in England, I am fortified in the view I have taken by the fact that the same conclusions in principle were arrived at by Mr. Justice McLoughlin in deciding the second action in which the Company were plaintiffs (1). Having cited much the same passages from the judgments in In re B. Johnson & Co. (Builders) Ltd. (2) as I have, he stated his view in so many words that the receiver was not bound by all the Company’s contracts entered into before he became receiver, and in particular was not bound by an alleged agreement with the Electrical Trades Union (Ireland), thus indicating that the obligations of the Company were distinct from those of the receiver put in by the debenture holder.
Since in my view no set-off is available to the plaintiffs in these proceedings, it follows that the defendant Company is entitled to levy execution on foot of its judgment against the plaintiffs and that I must refuse the relief sought and dismiss the proceedings.