Receivers: Duties, Powers and Pitfalls
15 August 2013
There has been an evident increase in the number of fixed charge receivers appointed by banks over mortgaged property which is largely due to recent economic conditions.
It is common practice that lenders to companies will take security over significant assets and this will typically take the form of a fixed charge over property. Should the company fail then the lender has something to fall back on to recover their loss.
The role of a receiver does not come without its hazards however as there will be at least one other party with an interest in the property over which the receiver has been appointed. In tandem with the increase in receivers appointed there must also be an increase in the challenges brought to actions taken during a period of receivership. In order to avoid these challenges we must therefore examine what a receiver’s job is, what powers he contains and what duties does he owe (and to whom).
The receiver’s role is somewhat unusual in that although he is acts as an agent of the company who owns the property his function is to realise the property secured by the charge and bring about repayment of the debt secured by it; therefore he is an agent for the company but he exercises his function for the benefit of the lender.
It has been established that in realising this asset the receiver duties not only to the company but also to other parties with an interest in the equity of redemption and as such he must act in good faith, manage the property with due diligence, to carry on the business reasonably and profitably (where required to do so) and to take reasonable steps to obtain a proper price for the asset.
Generally speaking the powers of a receiver are defined and limited to the deed containing the power of appointment and will set out in detail what the receiver can and cannot do (in certain circumstances a receiver will be appointed by the court in which case the Court Order will define the extent of the receiver’s powers).
The powers held by the receiver will generally depend on the type of property subject to the deed. For example, if the property is a commercial unit the receiver will generally have the power to arrange for the letting of the property if it is considered to be the best way of repaying the debt, or even to generate an income until a sale can be agreed.
The receiver will also have powers relating to the maintenance and upkeep of a property, including any planning applications required or an application for vacant possession in the event that the occupier has defaulted on rental obligations or is otherwise in illegal occupancy.
As to specific duties a receiver owes the same duty in equity to the borrower company, all subsequent charge holders and guarantors as a mortgagee would and to exercise these powers in good faith and for the purposes of securing repayment of the debt owing to the lender. In certain ways however a receiver has a different role to that of a mortgagee; whilst a mortgage has no duty at any time to exercise his powers to enforce security a receiver must be pro-active in circumstances where to remain inactive would have a negative effect on the interests of other affected parties. It is therefore incumbent on the receiver to be active in the protection and preservation of the property over which he has been appointed.
In most cases a receiver’s primary function will be to market and sell the property and given that this affects other interested parties (charge holders) it follows that there is a duty to obtain a reasonable and proper price for that asset. If a receiver decides to carry on a certain business he must do so profitably.
Whichever course of action a receiver chooses to take he must ensure that his decisions are taken in good faith. Therefore a receiver will not be held liable for decisions taken which turned out to be disadvantageous for the company as long as the decisions were made in good faith. Where a receiver is in breach of his duty he may find himself liable to the mortgagee unless such liability is expressly precluded in the contract of agency.
Given the nature of his job and the fact that other parties can claim to be impacted by the actions of a receiver it is inevitable that challenges will be made to their actions. The most common challenge to a receivership is by that of a guarantor to the original loan who becomes liable for any shortfall following the sale of the asset and who will in many cases allege that the property was sold at an undervalue, thereby increasing their liability under the guarantee.
Thankfully for receivers it is quite difficult to challenge receiverships as the actions taken by them will generally be covered by the wide powers and limited restrictions which are usually granted under the provisions of the charge.
The decision in Jumani v. Mortgage Express highlights the problems faced by borrowers when challenging receiverships wherein it was established that
i. The courts will take a strict contractual approach where there is a claim that terms have been varied; and
ii. It is unlikely that any representations made by the receivers will be binding on the bank unless it can be shown that the bank expressly took responsibility for the actions of the receiver or the actions of the receiver created a new binding contract between them and the borrower.
Perhaps the most common challenge to receivers relates to their duty to obtain the best proper price reasonably obtainable at the time of sale. Encompassed within this duty is the duty to ensure that properties are adequately marketed and proper valuations received prior to sale.
The question of the extent of these duties was considered in the 2011 case of Glatt v. Sinclair. In short, the receiver Mr. Sinclair was appointed by the Court to manage a number of Mr. Sinclair’s properties. Mr. Sinclair had obtained two independent valuations for the property in question and both, prepared by reputable firms, independently valued the property at £330,000 and the property was subsequently sold for this price. On the day the property was sold the purchaser immediately remarketed the property for £449,500 and quickly managed to sell the property for £455,000. Mr. Glatt therefore challenged the receiver’s decision to sell at £330,000.
The Court of Appeal held that the best price reasonably attainable at the time of the sale is the relevant question. It was accepted that in making the initial valuation the inspection of the property had been carried out by a Corporate Member of the Royal Institution of Chartered Surveyors who had knowledge of the market and the skills and competences to make such a valuation. However, the appeal judge found that there was no evidence to suggest that Mr. Sinclair took steps to evaluate the state of the market and had failed to, inter alia, discuss marketing strategies with estate agents and consider for how long and in what manner the property should be advertised.
Ultimately the Court held that a receiver cannot escape liability merely by saying that they had instructed competent professionals to carry out certain tasks. In other words, their duty was not delegable, and in failing to obtain advice on marketing of the property he was in breach of his duty.
So while we observe an increase in the number of receivers appointed over property the requirement to act in good faith is as pronounced as ever. Receiver’s should know by their deed of appointment what powers they do and do not hold over the property however a vigilant approach is needed to ensure that claims from other interested parties do not arrive at their door.