In the case of Medforth v Blake & Others (judgment given 26 May 1999) the Court of Appeal has held that a receiver managing mortgaged property owed to the Borrower not only a duty of good faith but a duty to manage the property with due diligence.
The defendant receivers had been appointed by the lender pursuant to two agricultural charges registered against the pig farming business of the plaintiff. The receivers had continued to run the business rather than sell it and used the profits made to repay the loan and interest to the lender. During the course of their appointment, the receivers, inter alia, failed to obtain discounts for the purchase of pig feed which was used by the receivers in conducting the business.
Hearing a preliminary issue whether the receivers owed the mortgagor a duty of care or simply a duty of good faith in their conduct of the business, Judge McGonigal found that the receivers, when exercising their power of sale, owed the mortgagor, over and above a duty of good faith, an equitable duty of care. He held that no 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.
On appeal, Sir Richard Scott, Vice-Chancellor, in agreeing with Judge McGonigal concluded that the duties owed to those interested in the equity of redemption by a receiver managing mortgaged property were the same under the common law and equity. He also found that by finding the receivers liable it would follow that the mortgagee who had instructed the receivers to carry on a particular course of action would also be liable. He stated that:
- A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption
- The duties include, but are not necessarily confined to, a duty of good faith;
- The extent and scope of any duty additional to that of good faith will depend on the facts and circumstances of the particular case;
- In exercising his powers of management the primary duty of the receiver is to try and bring about a situation in which interest on the secured debt can be paid and the debt itself repaid;
- Subject to that primary duty, the receiver owes a duty to manage the property with due diligence;
- Due diligence does not oblige the receiver to continue to carry on a business with the mortgaged property previously carried on by the mortgagor;
- If the receiver does carry on a business with the mortgaged property, due diligence requires reasonable steps to be taken in order to try to do so profitably.
In addition, the Vice-Chancellor made minor qualifications to Judge McGonigal's answers to the preliminary issues, stating that the power to manage a business is not ancillary to but independent of the power to sell.
Downsview (Practice Note 08/93) reconsidered
The Court of Appeal considered the case of Downsview Nominees Limited -v- First City Corporation reported in our practice note 08/93 which, being a privy counsel case, was of only persuasive authority. In that case, the privy counsel decided that the duty of a receiver lay in equity not in tort and that his duty was limited to acting in good faith. The Court of Appeal in Medforth agreed that the duty of a receiver lay in equity but decided, as stated above, that such duty was not necessarily limited to acting in good faith.
Comment
Receivers and banks which have relied on Downsview should review their position following Medforth. In future, receivers will be far more cautious in deciding a realisation strategy for a business and rather than deciding to run the business, they may well decide to sell it immediately on appointment or close it down for fear of assuming liability to the mortgagor for failing to run the business with due diligence. Banks will also be more cautious in providing their receivers with indemnities for continuing a business. If it transpires that the bank's instructions led to a breach by the receiver in its duty of care to the mortgagor, the bank may well find itself liable as well. As the Vice Chancellor said "what it might do is to promote caution on the part of mortgagees in seeking to direct receivers as to the manner in which they (the receivers) should exercise their powers. I would regard that as salutary".
This note is intended to provide general information about a recent development which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.