Law report: Receiver's duty owed to mortgagor

A RECEIVER and manager of a business, appointed by a mortgagee, owed duties to the mortgagor which included, but were not necessarily confined to, a duty of good faith as to the manner in which he conducted the business.

The Court of Appeal dismissed the appeal of the defendant receivers against a decision that they owed the plaintiff an equitable duty of care in the management of his business.

The plaintiff was a pig farmer on a very large scale. He had borrowing arrangements with a bank secured by two agricultural charges, each of which entitled the bank to appoint receivers of the property subject to the charge, and provided that the receivers should have power, inter alia, to carry on or manage the plaintiff's business and to sell all or any of the property charged. Each charge also provided that the receivers should be deemed to be the agent of the plaintiff.

In 1984 the bank appointed the defendants as receivers. After their appointment the receivers exercised their power to carry on the pig farming business. Initially they made a profit, but subsequently made losses. The receivers were discharged in 1988 after the plaintiff and the bank entered into new financial arrangements.

The plaintiff commenced proceedings against the receivers, alleging that they owed him a duty of care, and that their failure to request or obtain discounts when buying pig feed was a breach of that duty. Alternatively, he alleged that if the receivers owed him only a duty of good faith, notwithstanding that they had not been guilty of deceit or of any conscious or deliberate impropriety, they had nonetheless been in breach of that duty.

The issue whether the receivers owed the plaintiff a duty of care or simply a duty of good faith was tried as a preliminary issue, and the judge found in the plaintiff's favour, holding, inter alia, that the receivers, when exercising the power of sale, owed the plaintiff an equitable duty of care over and above a duty of good faith; 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. The receivers appealed.

Peter Smith QC and Lesley Anderson (Dibb Lupton Alsop) for the receivers; Patrick Hamlin and Toby Watkin (Drivers, York) for the plaintiff.

Sir Richard Scott V-C said that a receiver managing mortgaged property owed duties to the mortgagor and anyone else with an interest in the equity of redemption, which included, but were not necessarily confined to, a duty of good faith. The extent and scope of any duty additional to that of good faith would depend on the facts and circumstances of the particular case.

In exercising his powers of management the primary duty of the receiver was to try and 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.

Due diligence did not oblige the receiver to continue to carry on a 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.

The judge's decision on the preliminary issue was in accordance with principle and correct, with the following minor qualifications. Although in many cases a receiver would manage a business in order to bring the mortgaged property to a state in which the business could be sold as a going concern, the power to manage was independent of, not ancillary to, the power to sell; and the concept of good faith should not be diluted by treating it as capable of being breached by conduct that was not dishonest or otherwise tainted by bad faith. The concepts of negligence on the one hand and fraud or bad faith on the other should be kept strictly apart.

Kate O'Hanlon

Barrister