· Receivers owe duties to both
mortgagee and mortgagor
· Where receivers manage a business,
their duty is not just one of good faith
One of the most
fascinating legal developments over the past half-century has been the attempts
by the ever-growing tort of negligence to take over relationships in which the
duties of one party to the other have traditionally been mapped out on a
different basis. More and more of those relationships have succumbed to the
proposition that, whatever other finely drawn duties may be owed, there will
also be a duty of care. The latest battlefield concerns the position of a
receiver appointed by a mortgagee and, as will be seen, negligence has once
again come out on top.
The case of Medforth
v Blake [1999] 29 EG 119 concerned a pig-farming business owned by
the claimant. The business was a substantial one, with a turnover in 1985 in
excess of £2m. However, it was run on money borrowed from Midland Bank, and the
loan was secured by two agricultural charges in the bank’s favour made in July
1982. These charges, which were in identical terms, entitled the bank to
appoint receivers of the property subject to the charge, and provided that such
receivers should have a number of powers, including:
(a) to take
possession of collect and get in any property hereby charged;
(b) to carry on manage
or concur in carrying on or managing the business of the Farmer and… to raise
or borrow any money that may be required;
(c) to sell or
concur in selling all or any of the property hereby charged;
(d) to do any other
acts as may be considered incidental or conducive to any of the matters
aforesaid and which they can do as Agent for the Farmer.
There then followed
a crucial provision:
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.
In 1984, when the
claimant’s indebtedness to the bank was running at more than £800,000, the bank
exercised its power to appoint receivers, naming two partners in a major firm
of accountants. These receivers then ran the pig-farming business until
September 1988 when, under a revised financial arrangement with the bank, the
claimant paid off the charges and the receivers were duly discharged.
On retaking control
of his business, the claimant made a number of complaints about the way it had
been handled by the receivers. The current litigation related to just one of
these, namely his assertion that the receivers had failed to negotiate
discounts (which would have amounted to some £1,000 per week) on large-scale
purchases of pig food. In February 1990 the claimant started proceedings
against the receivers, alleging that their failure to request or obtain
discounts was a breach of their duty of care. The receivers countered by
arguing that the only duty they owed to the claimant was a duty to act in good
faith, and this they had fulfilled. The question of the extent of a receiver’s
duty was then ordered to be tried as a preliminary issue, and the trial judge
ruled that it included an equitable duty of care. The defendants appealed
against this ruling.
In arguing their
case before the Court of Appeal, the defendants reluctantly conceded that a
mortgagee, when exercising a power to sell the mortgaged property, owes a duty
of care to the mortgagor to get the best price, and also that a mortgagee who
takes possession of the property must account for the income he could have
generated by exercising due diligence. Further, it was accepted that a receiver
would owe a duty of care to the mortgagee in respect of his handling of the
property. And yet, argued the defendants, a receiver’s duty to the mortgagor
extended no further than a requirement to act in good faith.
As to what the
legal position ought to be, Sir Richard Scott V-C was in no doubt:
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?
Having carried out
a careful review of the case law that was said to support the defendants’ case,
his lordship concluded that the true legal position was as follows:
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 to bring
about a situation in which interest on the secured debt can be paid and the debt itself repaid.
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.
Whether the
defendants were actually in breach of their duty of care was, of course, not in
issue in the preliminary proceedings. Nevertheless, the Court of Appeal’s
ruling will undoubtedly send shockwaves through the accountancy and legal
professions from whom receivers are usually drawn.
