UK: LPA Receiverships - Case Law Update

Last Updated: 15 April 2013
Article by Jessica Lorimer

The Insolvency Service has released statistics for the numbers of insolvency procedures being entered into for the fourth quarter of 2012. It is interesting to note that whilst other insolvency procedures continue to fluctuate in their popularity, the number of receiverships has remained fairly static. Indeed in the fourth quarter of 2012, there were 276 receivership appointments, as compared with 333 and 277 in the previous two quarters (including both administrative receivers and other fixed charge receiver appointments, for example under the Law of Property Act 1925).

Under common law and statute, the primary duty of an LPA receiver is to receive income from the property and use the same to discharge the debt owed by the borrower. However, under the express terms of almost every charge this duty is modified and supplemented by a very wide range of powers far beyond the right to simply “receive income”. There are, therefore, significant additional duties which appointment takers should be aware of.

Maloney v Filtons Limited [2012] EWHC 1395 (CH)

The facts

The claimant receivers brought a claim against the defendant property management company, Filtons Limited (“Filtons”), alleging that Filtons had granted leases of part of a property despite the fact they were merely letting agents rather than then having a proprietary interest that would entitle them to grant leases.

The claimant receiver had been appointed when the registered proprietors of the property, who held it on trust for another company, failed to pay sums due under a legal mortgage. The proprietors had taken out the mortgage in order to secure a loan to a construction company, in which they had an interest.

The defendants asserted that they had been granted a lease over the entire property and that they had granted sub leases of residential units within the property. The claimants obtained documentation which set out the amount of rent which the defendant had collected from the sub leases, as well as the commissions they had taken. The defendants had accounted to the proprietors for these collections prior to the appointment of the receivers.

It was held that the lease in favour of the defendants was a sham. In the vast majority of the sub leases that the defendant had purportedly granted, they were not named as the sub-lessor and instead the sub-lessor was often in fact the construction company.

The evidence demonstrated that the defendants acted as agents for the proprietors which meant that they were entitled to grant sub leases and to obtain deposits but then were required to account to the proprietor for the rent collected less the expenses and commission.

The Judgment

It was held that the burden of establishing that the lease was a sham fell to the receiver.The claimant receivers were also entitled to be repaid the improper payments made by the defendant to the proprietor and any other sums which should properly have gone to the receivers.

Comment

This case provides an illustration of a receiver performing his duty to obtain the best income for the property under his remit.

It is entirely conceivable that had the receiver not sought to have the lease declared a sham, a claim against the receiver for not doing might have followed.

International Leisure Limited v First National Trustee Company UK Limited [2012] EWHC 1971 (CH)

This is a rather useful case for considering the duties owed by receivers. The Judge in this case helpfully dedicated a whole section of his Judgment to the duties which are owed.

By making reference to a number of earlier cases the Judge set out the duties owed as follows:

  • The primary duty of the receiver is to the debenture holders and not to the company. He will be a receiver and manager of the company’s property, not of the company itself. In determining whether a receiver of the company has broken any duty owed by him to the company, regard must be had to the fact that he is receiver for the debenture holders and not simply a person appointed to manage the company’s affairs for the benefit of the company (Jenkins LJ in Re B. Johnson & Co (Builders) Limited [1955] CH)

  • A person appointed as receiver and manager is concerned, not for the benefit of the company but for the benefit of the mortgagee bank, to realise the security: that is the whole purpose of his appointment (Lord Evershed MP in Re B. Johnson & Co (Builders) Limited [1955]).

  • A receiver has a duty to act in good faith in the context of obtaining repayment for the debenture holder and a duty to take due care to obtain a proper price when selling the charged assets (Sir Richard Scott VC in Medforth B Blake [2000] CH86).

  • As long as the receiver acts in good faith it is unlikely that the duties he owes to the mortgagor will be wider in scope than those which he owes to the debenture holder (Edward Bartley Jones QC in International Leisure Limited v First National Trustee Company UK Limited).

Summary

What is clear from these recent cases is that the duties imposed on LPA Receivers are wider in scope to those that relate merely to selling assets. Receivers must ensure that they obtain adequate professional advice to obtain the best possible price for the assets being disposed of and act in good faith at all times.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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