Receivers

Entitlement to claim possession

Availability of s36 AJA 1970 to the borrower?

Menon v Pask and Goode

[2019] EWHC 2611 (Ch)

Summary

Receivers appointed by a bank as mortgagee were entitled to sue for possession, notwithstanding that they acted as agents of the mortgagor, and in such a case it was still open to the mortgagor to rely on s36 Administration of Justice Act 1970.

Facts

Menon (M) charged a property to a bank as security for the payment on demand of certain liabilities of a company. The charge was in standard form. It contained a contractual power for the bank to appoint receivers and conferred on the receivers a power to take possession.

The company defaulted and the bank made formal demand of M, and in default of payment, appointed receivers, who started proceedings for possession of the property, initially by suing in the name of the company, but following amendment, in the name of M. By a late amendment, M pleaded that the receivers did not have the right to claim possession; alternatively, that M should be allowed to rely on s 36 Administration of Justice Act 1970.

First instance

The judge held that the receivers were entitled to possession, but that since s36 only operated when a mortgagee (or a person deriving title under him) was claiming possession, M was not entitled to rely upon s36. M appealed, contending that since the receivers were acting as agents of the mortgagor, they could not claim possession against the mortgagor. Only the mortgagee could do that, but the receivers were not acting for and on behalf of the mortgagee.

Decision on appeal

Following a review of the authorities, including the effect of the special nature of the agency of the receivers, the reality of the situation is that a receivership is carried out in the interests of the mortgagee; the property most likely in the occupation of the mortgagor would be needed in the event of enforcement; the receiver had a power of sale which it would be expected to exercise by obtaining vacant possession; overall, the powers given to the receivers only make business sense if they have possession of the property. It would be odd if the one person in possession of the property (the mortgagor) was the one person against whom the receivers were unable to get possession.

Alternatively, there may be an implied term that the mortgagors would give up possession to the receivers if required to do so, which term could be enforced by the receivers (although not parties to the mortgage) under the Contracts (Rights of Third Parties) Act 1999.

As to s 36, the expressions ‘mortgagor’ and ‘mortgagee’ used in that section includes any person deriving title under the original mortgagor or mortgagee. Although in a traditional sense the receivers did not derive title under the mortgagee, they are nonetheless appointed by the mortgagee to enforce the mortgagee’s security. ‘Title’ for these purposes means their right to possession. M should therefore have the same opportunities of resisting possession under s36 as they would have had if the bank had been the claimant. The court invited further directions to deal with any application. 

The court acknowledged that the points in issue had not been decided before. The argument appears to have centered around the ‘peculiar’ agency of receivers; it may have side-tracked the parties and, to an extent, the court. The position is that a receiver appointed by a mortgagee pursuant to a contractual power in the mortgage, is usually given a range of powers of enforcement, including the right to take possession, which are binding on the mortgagor as a matter of contract (although the same cannot be said if the appointment is made pursuant to the statutory power in s 101(1)(iii) Law of Property Act 1925 – see s 109 LPA 1925).

 

Duty on sale

Requirement of good faith – sale at undervalue

Centenary Homes Ltd v Liddell and Gershinson

[2020] EWHC 1080 (QB)

Summary

A claim for damages against fixed charge receivers for breach of various duties was largely dismissed. The court clarified how the requirement of ‘good faith’ was to be applied.

Facts

Following default by CHL in repayment of £4.4M, a bank appointed L & G as fixed charge receivers over two development properties. One was sold, and four flats in the other were subsequently sold at auction, leaving a surplus which was returned to CHL. CHL sued L & G for breach of duty in respect of both properties.

Issue

The main issue was to define the duties owed by the receivers.

Decision

A receiver owed a duty:

  • To act in good faith and for proper purposes, namely for the purpose of preserving, exploiting and realising assets comprised in the security.
  • If selling a property, a duty to take reasonable care to obtain the best price reasonably obtainable.
  • A second duty (subordinate to a receiver’s primary duty to manage the security for the benefit of the mortgagee) to exercise care to avoid preventable loss.

The equitable duties in (2) and (3) did not require a claimant to show something akin to bad faith. They were separate from, and independent of, a receiver’s duty to act in good faith and for a proper purpose (Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 1 Ch 949; Silven Properties Ltd v Royal Bank of Scotland [2004] 1 WLR 997; Ahmad v Bank of Scotland [2016] EWCA Civ 602; McDonagh v Bank of Scotland [2019] 4 WLR 12 applied).

The receivers were entitled to sell the properties in the condition they were in and without awaiting or effecting any increase in value or improvement to the property. This meant that they were not required to diagnose and rectify a damp problem or carry out repairs, or to obtain an indemnity policy in respect of the lack of formal consent for change of use (Silven applied).

On the evidence, there was no sale at an undervalue, save for a conveyancing error in the description of one property for which CHL was entitled to £10,000.00.

 

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