Duty of receiver to borrower Medforth v Blake and Others

Before Sir Richard Scott, Vice Chancellor, Lord Justice Swinton Thomas and Lord Justice Tuckey  [Judgment May 26]

The duties which a receiver managing mortgaged property owed to the borrower included, but were not necessarily confined to, a duty of good faith.

 Subject to the receiver's primary duty to try to bring about a situation in which interest on the
 secured debt could be paid and the debt itself  re-paid, the receiver owed a duty to manage  the property with due diligence.

 Due diligence did not oblige the receiver to continue to carry on the business on the mortgaged property previously carried on by the borrower, but if he did do so, the receiver was required to take reasonable steps to try to do so profitably.

 The Court of Appeal so held in a reserved judgment dismissing an appeal by the defendants, James Peter Blake and others, receivers and managers appointed by the lender over the pig farming business of the plaintiff, Douglas Medforth, from the decision of Judge McGonigal, sitting as a deputy judge of the Queen's Bench Division, in the action brought by the plaintiff alleging, inter alia, that the failure of the receivers to obtain discounts for the purchase of pig feed when they were conducting the business constituted a breach of their duty of care.

 Hearing a preliminary issue whether the receivers owed the plaintiff a duty of care or simply a duty of good faith in their conduct of the business, the judge concluded, inter alia, that the defendants when exercising their power of sale owed to the plaintiff, over and above a duty of good faith, an equitable duty of care, that no distinction could be drawn between the exercise of a power of sale and the exercise of a power to manage a business, and that the power to manage was ancillary to the power of sale and that the equitable duty of care was applicable to both.

 Mr Peter Smith, QC and Ms Lesley Anderson for the receivers; Mr Patrick Hamlin and Mr Toby Watkin for the plaintiff.

 THE VICE-CHANCELLOR said that counsel for the receivers had made a sustained attack on the proposition that a receiver of mortgaged property owed to the mortgagor any duty other than a duty of good faith.

 He had accepted that in Cuckmere Brick Co Ltd v Mutual Finance Ltd ([1971] Ch 949) the court had held that a mortgagee, when exercising his power of sale, owed a duty to the mortgagor to take reasonable care to obtain a proper price.

 He had reserved the right, however, to contend in a higher court that the Cuckmere case was
 wrongly decided.

 The three authorities on which counsel had particularly relied were In re Johnson (B) & Co (Builders) Ltd ([1955] Ch 634), Downsview Nominees Ltd v First City Corporation ([1993] AC 295) and Yorkshire Bank plc v Hall ([1999] 1 All ER 879).

 His Lordship did not accept that there was any difference between the answer that would be given by the common law to the question what duties were owed by a receiver managing a
 mortgaged property to those interested in the equity of redemption and the answer that would be given by equity to that question.

 In principle and on the authorities, the following propositions could be stated:

 1 A receiver managing mortgaged property owed duties to the mortgagor and anyone else with an interest in the equity of redemption.

 2 The duties included, but were not necessarily confined to a duty of good faith.

 3 The extent and scope of any duty additional to that of good faith depended on the facts and circumstances of the particular case.

 4 In exercising his powers of management the primary duty of the receiver was to try to bring
 about a situation in which interest on the secured debt could be paid and the debt itself re-paid.

 5 Subject to that primary duty, the receiver owed a duty to manage the property with due diligence.

 6 Due diligence did not oblige the receiver to continue to carry on a business on the
 mortgaged premises previously carried on by the mortgagor.

 7 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 answers to the preliminary issue were in accordance with principle and correct,
 with one or two minor qualifications:

 1 The power to manage was independent of the power to sell.

 2 The breach of a duty of good faith should, in that area as in all others, require some
 dishonesty or improper motive, some element of bad faith, to be established.

 His Lordship would dismiss the appeal.

 Lord Justice Swinton Thomas and Lord
 Justice Tuckey agreed.

 Solicitors: Dibb Lupton Alsop, Leeds; Drivers,
 York.