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Court clarifies duties owed to borrowers by LPA receivers

  • Burden of proof lies with the person making an allegation of bad faith
  • Threshold for proving bad faith high, 'intentional conduct' must be shown
  • Devon Commercial Property Ltd v Barnett and another [2019] EWHC 700 (Ch)

15 Apr 2019

Speed Read

LEGAL UPDATE: The High Court has considered and clarified the relationship between a mortgage borrower, lender and receiver, concluding that a receiver and lender have separate duties and the receiver will not have acted in bad faith or in breach of any duties owed to the borrower where they sell to a company linked to the lender. The court determined the burden of proof was on the borrower to show that the receivers had acted in bad faith and set a high standard of proof for doing so.

Devon Commercial Property (DCP) granteda mortgage of a factory to State Securities plc, the mortgage was later assigned to Aston Manor Brewery Co Ltd. Aston Manor appointed receivers, Robert Barnett and Robert Belcher, to the property. The receivers sold the property to a subsidiary of Aston Manor, an action which DCP challenged in court.

The receivers had investigated planning permission options for the property and marketed the property for sale with its continued use as a factory, and as a development opportunity. They sold it to a subsidiary of Aston Manor for £2.75 million after receiving limited interest from others. While the receivers were marketing the property and investigating planning consents, they granted a lease of the whole of the property to Aston Manor to ensure an income stream for paying costs and insurance for the property.

DCP claimed that, by selling to Aston Manor, the receivers breached their duties to DCP as the borrower under the mortgage by failing to obtain the best price for the property; failing to act in good faith; placing themselves in a position of conflict by allowing the receivership to be influenced by Aston Manor, and failing to treat Aston Manor as a special purchaser.

DCP claimed that the property was sold at an undervalue and that because Aston Manor appointed the receivers, the receivers were in a position of conflict in selling to Aston Manor. DCP said that this meant that the burden of proof was reversed, meaning that the receivers had to prove that they had achieved the best price reasonably obtainable.

The judge dismissed DCP's claim and said that the receivers had acted properly.

DCP said that a previous dispute between Silven Properties and the Royal Bank of Scotland meant that the relationship between the receivers and Aston Manor should be treated as being the same as that of a mortgage lender selling to a connected company. DCP argued that this relationship reversed the burden of proof and it was up to the receivers, therefore, to prove that they had not acted in bad faith.

The judge said that this was not what the Silven case meant, and that the receivers were not selling to a party with which they were connected as they would not receive any benefit from preferring Aston Manor over any other party as the purchaser, so the burden of proof remained with DCP.   

DCP said that the property should have been marketed as a bottling plant. The receivers argued that it was just land and buildings because all plant and equipment had already been sold to Aston Manor prior to the receivers being appointed and the judge agreed with the receivers on this. DCP argued that a sealed bid process should have been used because Aston Manor was a special purchaser, as was 'normal' when dealing with a special purchaser. The judge dismissed this argument, ruling that sealed bids were not compulsory and would not have guaranteed a higher price as there were no competitors and Aston Manor knew that.

DCP complained that the grant of the new lease to Aston Manor should not have been made. The judge rejected this complaint on the basis that the receivers owed no duty to DCP to lease or not lease the property, only to obtain a proper price. Ultimately the judge found that DCP had failed to establish that the receivers had breached their duty to obtain a proper price for the property.

DCP argued that the receivers had failed to act in good faith and for a proper purpose, and questioned the independence of the receivers in their dealings with Aston Manor given they had been appointed by Aston Manor. The judge accepted that the receivers owed a duty of good faith to the DCP as the mortgage borrower, but rejected all arguments that the receivers had acted in bad faith and clarified that the DCP would have needed to prove that the receivers were involved in "intentional conduct amounting to more than mere negligence and encompassing either an improper motive or an element of bad faith, but it need not amount to dishonesty." The judge said that the evidence DCP raised in support of its own case in fact demonstrated the receivers' good faith and independence from Aston Manor.

The judge said that the receivers were not prohibited from placing themselves in a position where DCP and Aston Manor's interests would conflict, and determined that those interests are generally present and conflicting from the beginning. He concluded that a receiver does not manage a mortgage borrower's property for the borrower's benefit, but instead manages the lender's security for its benefit and, therefore, will be entitled, or even bound, to exercise its powers in the interests of the lender over those of the borrower, meaning in this case, Aston Manor's interests over DCP's.

The judgment clarifies that while a lender and a receiver both have individual duties of good faith to the borrower, they do not share those duties. The receivers in this case did not stand to gain anything from selling the property to Aston Manor and, therefore, were not acting in bad faith or under a conflict of interest by selling the property to Aston Manor 

The judgment also provides some useful guidance on expert evidence. The court had previously permitted the parties to put forward expert evidence in the field of corporate rescue and recovery, however the judge ruled that opinion evidence put forward by the insolvency practitioners appointed as experts was inadmissible. The judge said that the experts, though very well qualified, had no experience in acting in a case where receivers sold a property to an associate of the appointor, that the role of a receiver was more of a "management function" and did not think the court needed expert assistance in determining whether someone had managed or sold an interest in land badly. This clarifies that even where the court has allowed expert evidence, the expert evidence ultimately provided needs to be helpful to the court, or faces being excluded.

Samantha Poulton is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com