Receivers – Duty of care – Bankrupt mortgagor – Appellant owning residential property as buy-to-let investment – Respondents appointed as receivers of property by mortgagee – Bankruptcy order made against appellant and later discharged – Appellant claiming damages against respondents for breach of duty by failing to bring insurance claim promptly in respect of water damage to property – Whether receivers owing relevant duty to appellant during currency of bankruptcy order – Appeal dismissed
The appellant owned a residential property which he had purchased as a buy-to-let investment and which was subject to a mortgage in favour of a bank. In 2009, the appellant fell into arrears with the mortgage payments and the bank appointed the second and third respondents as receivers in respect of the property. The receivers informed the appellant that they had taken out their own buildings insurance over the property and that the appellant should therefore cancel his own policy, which he duly did.
In September 2009, a bankruptcy order was made against the appellant. About that time, he visited the property, which was then vacant, and discovered that water was leaking from a cistern and had caused a considerable amount of damage. He informed the receivers, who, however, took no action to remedy the situation before February 2010, when the appellant contacted them again. The receivers took the view that, by that time, they would be unable to pursue an insurance claim in respect of the damage, since the insurance policy would have included a condition requiring that any claim be made promptly.
The bank terminated the receivers’ appointment in April 2010. The appellant was discharged from bankruptcy in April 2011 and, in August 2011, his trustee in bankruptcy transferred the property back to him. Meanwhile, in May 2011 the appellant had carried out some works to the property at his own expense, after which the property was let to a new tenant.
The appellant brought a claim against the second and third respondents, and against the first respondent as their employer, for damages for breach of duty in failing to submit a timely insurance claim in respect of the water leak. The sum claimed was £16,000, representing the amount which the appellant had expended on the repair of the property.
The judge dismissed the claim on the grounds that: (i) the appellant had no cause of action since, after the making of the bankruptcy order, any relevant duty was owed to his trustee in bankruptcy not to the appellant himself; and (ii) it would not be fair to hold the receivers liable in respect of repairs which the appellant had carried out, as a volunteer and without the agreement of the trustee, before the property had been transferred back to him.
The appellant appealed, contending that the receivers had continued to owe a duty to him by virtue of his legal status as the mortgagor liable during under the mortgage during the period of his bankruptcy.
Held: The appeal was dismissed.
(1) The duty which receivers owed to the mortgagor of property, to manage the property with a view to securing repayment of the secured debt, was owed by virtue of the mortgagor’s continued interest in the equity of redemption under the mortgage. The duty to take account of the mortgagor’s interests stemmed from the fact that he retained the right either to receive the property back free from the charge on payment of what was due to the mortgagee, or to any surplus proceeds of sale in the event that the security was realised, and that he therefore retained a direct interest in the management of the property by the receivers. It followed that the receivers did not owe the duty to a bankrupt mortgagor, since, on bankruptcy, the mortgagor ceased to have any interest in the equity of redemption, which instead became vested in the trustee in bankruptcy. Although the bankrupt mortgagor retained a legal liability under the mortgage, it was limited and finite in nature and was automatically extinguished on discharge from the bankruptcy. The mortgagor could not be sued for the mortgage debt and would have no personal liability for any shortfall in the security. The mortgagor walked free from the mortgage and the benefit of the equity of redemption remained vested in the trustee for the benefit of the general creditors. In those circumstances, there was no justification for imposing a duty on the receivers. The appellant had ceased to have any interest in the equity of redemption. He had no right to the mortgaged property as such and his interest in any possible surplus could be, and was, protected by the duties which the receivers and the mortgagee owed to the trustee in bankruptcy in relation to their management of the property and its realisation: Medforth v Blake [2000] Ch 86 and Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409; [2004] 1 WLR 99; [2003] 3 EGLR 497 distinguished.
(2) Per curiam: Had the receivers been under a duty to the appellant, his claim would probably still have failed on the issue of causation. For the claim to succeed, the appellant would have had to establish that, but for the breach of duty, the property would have been repaired. That presupposed that the receivers would have been obliged to spend the insurance moneys on making good the water damage. However, there was no evidence to show that the bank would necessarily have directed the receivers to expend the money on repairs as opposed to the reduction of the mortgage liabilities.
Matthew Weaver (instructed by Sydney Mitchell LLP, of Birmingham) appeared for the appellant; Mark Halliwell (instructed by QualitySolicitors Lockings) appeared for the respondents.
Sally Dobson, barrister
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