Receivers’ duties, conflicts of interest and the meaning of bad faith

Devon Commercial Property Limited v Barnett & Belcher [26.03.19]

On 26 March 2019, judgment was handed down in the above case. The outcome, in which Kennedys was instructed on behalf of the successful defendants, provides further clarity on how LPA receivers can fulfil their duties to act in good faith and to avoid conflicts of interest.

Background

In 2005, Devon Commercial Property Limited (the claimant), acquired the freehold land of a cider bottling plant in Devon (the Property), which it leased to its sister company Devon Cider Company Limited (DCC). In 2007, the claimant granted a mortgage over the Property.

In September 2009, DCC went into administration and shortly after, in November 2009, administrators sold the business and its assets to Aston Manor Brewery (Aston), who were granted a license to use the Property. In addition, Aston took an assignment of the mortgage over the Property, thus taking effective control of the Property as both occupier and mortgagee.

In December 2009, the claimant defaulted on its mortgage interest payments and pursuant to the terms of the mortgage, Aston appointed Mr Barnett and Mr Belcher of GVA Grimley (the defendants) as LPA receivers. The defendants granted a three-year lease of the Property to Aston in February 2010 and in April 2011 sold the Property to Aston.

The claim

The claimant alleged that the defendants had breached their duties in the following ways:

  • Had failed to obtain the best price for the Property and acted for an improper purpose (bad faith)
  • The defendants knew, or should have known, that Aston presented a conflict to their objectivity – having appointed the defendants and being the most likely purchaser (conflict of interest)
  • Wrongly allowed themselves to be directed and/or influenced by Aston for their own benefit to the detriment of the claimant (bad faith).

As a result, the claimant believed the Property was sold at an undervalue and they suffered significant losses. The defendants denied all allegations.

The decision

The court dismissed the claim.

The court confirmed that to prove bad faith, a party needs to show that there was intentional conduct amounting to more than mere negligence - there must be an improper motive, although it need not amount to dishonesty.

Turning to the allegation of a conflict of interest, the court confirmed that an LPA receiver is not precluded from placing themselves in a position where the mortgagee’s and the mortgagor’s respective interests conflict. Those interests are frequently present and in conflict from the outset, and:

The receiver is entitled, indeed will usually be bound, in exercising the power for a proper purpose, to prefer the interests of the mortgagee.

In dismissing the claim, the court found that the claim had been fuelled by a sense of grievance that a rival had bought their assets, undertaking, mortgage and ultimately the Property. The claim was also bolstered, by the careful inclusion of certain emails and other correspondence to create the false impression of a conspiracy.

Comment

The decision will be welcome news to both insolvency practitioners and their professional indemnity insurers. It provides a helpful summary of the duties owed by a receiver to a mortgagor and what conduct would amount to acting in bad faith. It also recognises the inherent conflict of interest between a mortgagee and mortgagor.

In addition, it serves as a timely reminder to claimants and their advisors to view claims objectively and not allow personal grievances to bias their perspective, and it was therefore pleasing to see that this behaviour was not condoned by the court who sanctioned the claimant with additional costs.

Counsel were Simon Davenport QC and Daniel Lewis of 3 Hare Court

Read other items in Professions and Financial Lines Brief - June 2019

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