Claimant running mortgaged pig farm – Receivers appointed by mortgagors as managers of farm – Whether receivers owed duty to mortgagor over and above good faith – Judge finding duty of care of reasonably competent receiver required – Appeal dismissed
The claimant ran a large-scale pig farm. He had borrowing arrangements with Midland Bank plc secured by two agricultural charges made under the provisions of the Agricultural Credits Acts 1928. Each charge entitled the bank to appoint receivers of the farm and contained provisions relating to their powers. By February 1984 the claimant’s indebtedness to the bank exceeded £800,000 and the bank appointed two chartered accountants as receivers. The appointments expressly stated that “the receivers shall be Agents of the Farmer who alone shall be responsible for their acts and defaults”.
After their appointment, the receivers exercised their power to carry on the farming business. In September 1988 the bank entered into new financial arrangements with the claimant under which the secured indebtedness was repaid and the receivers were discharged. The claimant issued proceedings against the receivers claiming that they had managed the farm in a manner that had resulted in a loss of profits. An issue arose as to the scope of the receivers’ duty of care. The claimant alleged that, in conducting the farm business, the receivers had owed him a duty of care and that their failure to request or obtain discounts for pig feed was a breach of that duty. The receivers contended that they only owed the claimant a duty to exercise their powers in good faith, and denied that their failure to obtain discounts constituted a breach of that duty.
The matter was heard as a preliminary issue. The judge held: first, that receivers, when exercising their power of sale, owed the claimant, over and above a duty of good faith, an equitable duty of care; second, that the standard of the duty of care was that of a reasonably competent receiver; and, third, that the power to manage was ancillary to the power of sale, and that the equitable duty of care was applicable to both. He concluded that if the evidence showed that the receivers had acted in a wholly unreasonable way in failing to seek discounts, the failure would be a breach of their duty. The respondents appealed.
Held: The appeal was dismissed.
A receiver managing mortgaged property owed duties to the mortgagor and anyone else with an equitable interest. The duties included, but were not confined to, a duty of good faith. The extent and scope of any duty additional to that of good faith depended on the facts and circumstances of the particular case. In exercising his power of management, the primary duty of the receiver was to try to bring about a situation in which interest on the secured debt could be paid and the debt itself repaid. Subject to that primary duty, the receiver owed a duty to manage the property with due diligence, which did not oblige the receiver to continue to carry on business on the mortgaged premises previously carried on by the mortgagor. If the receiver did carry on a business on the mortgaged premises, due diligence required reasonable steps to be taken in order to try to do so profitably. Accordingly, it could be concluded that the facts pleaded would, if proved, constitute a breach by the receivers of the duty they owed to the claimant: Re B Johnson & Co (Builders) Ltd [1955] Ch 634, Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, Yorkshire Bank plc v Hall [1999] 1 All ER 879 and Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 considered.
Patrick Hamlin and Toby Watkin (instructed by Drivers, of York) appeared for the claimant; Peter Smith QC and Lesley Anderson (instructed by Dibb Lupton Alsop, of Leeds) appeared for the defendants.
Thomas Elliott, barrister
