Ivor Collett successfully defends LPA Receivers in professional negligence trial
After four years of acrimonious and hard-fought litigation, Ivor Collett has just secured a High Court judgment in favour of his clients, two LPA receivers sued by a disgruntled borrower whose properties they took over and set about selling after his company defaulted on mortgage loan repayments. This was a decision in the Queen’s Bench Division: Centenary Homes Ltd v (1) Liddell and (2) Gershinson [2020] EWHC 1080 (QB).
The decision has emphasised the very limited scope of the duties owed by LPA receivers to borrowers in conducting a receivership, and the high hurdle to be overcome in order to establish liability against receivers. After two strike-out / summary judgment hearings and an acrimonious trial, the Court rejected all but one very narrow complaint by the borrower, who made multiple allegations of breach of duty against LPA receivers appointed by the bank to manage and sell off commercial properties to repay the outstanding debt.
If we are about to see a significant increase in corporate insolvencies arising from the economic fall-out of the Covid crisis, the focus on receivers’ duties may be very timely.
Background
The Claimant (“Centenary“) was a property development business which had developed two blocks of flats in London, some of which it rented out and some of which had been sold on long leases. The properties stood as security for Centenary’s bank loans, and when Centenary defaulted on debts of around £4.4 million in March 2012, the defendants were appointed by the Bank as fixed charge (LPA) receivers (“the Receivers”). Although the two Receivers were both partners in one of the country’s largest property consultancies, the appointments were personal to each of them and they were sued personally. They were both chartered surveyors and experienced in acting as receivers for mortgagees.
The receivership lasted 16 months, which was longer than expected because of the unusual market conditions following the financial crisis and because of various defects which emerged with the properties. The Receivers quickly sold off one block entirely, and then sold off a number of the flats at the other block to repay the outstanding debt before returning the remaining properties to Centenary in 2013.
Centenary sued the Receivers and made multiple allegations about the way the receivership had been undertaken in respect of both blocks. Over the course of two substantial strike-out / summary judgment hearings in 2017 and 2018 most of the allegations and around 90% of the claim by value were dismissed, including the entirety of the allegations about the first block. Amongst other things, the Court held that the Receivers had been entitled to sell that part of Centenary’s portfolio off in one single sale of the whole block.
By the time of the trial in January 2020 the residual claim was valued at around £1 million, and Centenary’s complained that the Receivers had:
(1) failed to obtain indemnity insurance for a defect in planning status;
(2) mis-managed the properties and were liable for poor maintenance;
(3) sold properties at an undervalue;
(4) sold one more flat than was necessary to clear the debt (as the last two flats to be sold were disposed of at the same auction and they each achieved higher prices than expected); and
(5) erroneously sold off a janitor’s cupboard from the common parts with one of the flats.
Some of the flats were plagued by chronic problems of damp and it was alleged that the Receivers should have undertaken substantial works of investigation and repair. Some of the properties had also been converted by Centenary to residential use without planning consent, which made them harder to sell, even though no enforcement action could any longer be taken by the planning authority. One flat sale erroneously included a janitor’s storeroom which had belonged to the freeholder (Centenary).
The Receivers’ duties
It was common ground, that all of the relevant duties owed to the borrower were equitable, as established in previous case law. For the Receivers, it was additionally argued that all of the Receivers’ duties were subject to the obligation to exercise them in good faith and for a proper purpose – so that bad faith or improper motive was required to establish a breach of duty. However, the Court rejected that argument, and instead held that this onerous feature applied solely to the Receivers’ primary duty to act for the purpose of preserving, exploiting and realising the assets comprised in the security.
The Court held that Receivers’ owed other duties as follows.
- If selling a property, a duty to take reasonable care to obtain the best price reasonably obtainable.
- To exercise care to avoid preventable loss.
However, while the mortgagor did not have to prove bad faith, dishonesty or an improper motive to establish breaches of these duties, they were nevertheless subject to the Bolam requirement to show that no reasonably competent receiver would have acted in the same way. In addition to that, it was always to be borne in mind that:
(1) the Receivers were entitled at all times to prefer the interest of the mortgagee (ie the bank), since the Receivers’ principle obligation was to secure the realisation of the security and repayment of the debt; and
(2) when scrutinising the Receivers’ discharge of the secondary duties – obtaining the best price reasonably obtainable, and avoiding preventable loss – the Court must allow a broad margin and should make a finding of breach only where the Receivers are “plainly on the wrong side of the line”.
The Court also held that there was also no duty on the Receivers to sell only so much of the charged property as was required to repay the mortgagee. Imposing such a duty would conflict with the general principle that when deciding whether and, if so, how, to exercise powers vested in him a receiver is entitled (and indeed obliged) to give priority to the interests of the mortgagee in securing payment.
The Court’s findings
(1) On the indemnity policy issue, there was no obligation on Receivers to obtain a policy to deal with any concerns about defects in the planning status of the subject properties, and hence to make them more readily marketable. Receivers are entitled to sell a property in the condition it was in when they were appointed without effecting any increase in value or improvement to the property. (This allegation was also criticised as an attempt to relitigate a similar allegation previously struck out.)
(2) The Receivers had not mis-managed the properties. They had not been obliged to carry out extensive and intrusive investigations or to incur substantial cost in carrying out works to rectify problems (such as removing and replacing wooden floors and finding the cause of chronic damp). Nor were they obliged to make insurance claims to deal with those problems. The Receivers had been entitled to sell off the less problematic flats to clear the debt to the bank.
(3) Since the allegations based on improving the planning status and the physical condition of the properties had been rejected, Centenary’s case on sale at an undervalue faced serious difficulties. Its expert valuation evidence was premised on the assumption that the Receivers could and should have obtained better sale prices by dealing with those negative features which affected the flats. That case started in the wrong place, and no sale at an undervalue was made out.
(4) The Receivers had not acted unreasonably (so as to fail the Bolam test) in placing the last two flats to sell in the same auction and allowing both sales to go through, even though each of them achieved a greater price than expected. They had been trying to achieve flat sales by private treaty for six months without success and were entitled to prioritise clearing the debt. They must be allowed latitude in both the timing and the mode of sale. What is more, an agreed sale at auction was still capable of falling through at any time before it later completes.
(5) The Receivers did not contest breach of duty for the erroneous sale of the janitor’s cupboard (a conveyancing error), but the loss to Centenary – and the way it was claimed – was questionable, and the Court awarded damages of just £10,000.
Ivor Collett appeared for the defendants in this professional negligence trial. Read the judgment here.
