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.