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BERG
Challenging LPA
Receivers
Overview
Receivers !
• The holder of a fixed charge may appoint a receiver as a way of enforcing that security. • The purpose of appointing a receiver is for the receiver to take charge of the assets, to realise them (usually by a sale to a third party purchaser) and use the realisation proceeds to repay the monies due to the appointing lender from the borrower.
Appointment
How is the Receiver Appointed? !
A lender holding a fixed charge can appoint a receiver under: • Express contractual powers (contained in a security document); and / or !
• Statutory powers (Law of Property Act 1925 “LPA 1925”) (generally weaker than express powers) 1. Section 260 Companies Act 2006
Express Contractual Powers
• A security document will almost always contain an express power for the lender to appoint a receiver. !
• If a receiver is appointed under the express powers in a security document, when that appointment can be made will depend on the terms of the security document. Usually, it will provide that the lender can appoint a receiver at any time after the security constituted by the security document has become enforceable
Statutory Powers
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However, if a security document does not contain an express power to appoint a receiver, and the security created is a mortgage (or a charge since the term "mortgage" in the LPA 1925 includes a "charge" under section 205 of the LPA 1925) made by way of deed, then the lender could appoint a receiver of the income of the asset under the statutory powers contained in section 101 of the LPA 1925. !
Duty to Appointor
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• It is well established that the primary duty of the receiver is to his appointor (normally the Bank). • This means that, if there is any conflict between the interests of the lender and those of the borrower, the receiver can give preference to the lender's interest. • The only duty to the borrower in these circumstances is a duty to act in good faith (Re Potters Oil Ltd (No 2)).
Duty of Good Faith
• The lender or the receiver owes a duty to the borrower, but it is a duty in equity, which is restricted: !
• the lender/receiver must act in good faith with the object of preserving and realising assets for the benefit of the lender; !
• it must take reasonable care to sell the property for a proper price. !
• If it carries out its duties in good faith, it cannot be criticised further, even if incompetent.
Best Price
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• A receiver owes a duty to the borrower to obtain the best price reasonably available in the circumstances (Cuckmere Brick Company v Mutual Finance Ltd [1971] Ch 949) !
• It does not have to defer selling the secured property to ensure that (as well as the lender getting paid) there is a return to the borrower under the equity of redemption (Silven Properties Ltd and another v Royal Bank of Scotland PLC [2003] EWCA Civ 1409).
Challenges to Appointment
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• Whilst the appointment of Receivers has become fairly commonplace appointments are normally to the detriment of the borrower as the Receiver shall primarily be concerned with realising a potentially valuable asset for a single purpose, repayment of the lender. !
• There are still ways in which errors can arise in the process or other considerations can be used to avoid or challenge the appointment. Challenges to Appointment
Invalid Appointment !
• The first step in challenging the potential appointment of a Receiver is to confirm that it has been appointed correctly under the pertinent authority (whether statutory or express). !
• Ask “has the necessary right to appoint actually arisen?”
Challenges to Appointment
Payment of Underlying Debt !
• This approach depends upon the viability of raising the funds/re-­‐financing immediately or within a very short time frame. • This option may not be possible immediately however it may be possible to ‘buy time’ utilising one or more of the other challenges if the realistic possibility exists that funds may be obtained in the near future.
Challenges to Appointment
Administration !
• Appointment of an Administrator may prevent the appointment of an LPA receiver (subject to the terms of the security). • This would not negate the security or charge but may allow consideration of alternative ways to move forward for the business as a whole including potentially an asset sale or “pre-­‐pack” with or without refinancing. • An insolvency professional should also help advise on the consequences of this route.
Challenges to Appointment
Unreasonable Rejection of Offer !
• It may be possible to contest that the decision to appoint a receiver is so unreasonable that no reasonable lender would have made the decision in the circumstances. • This is a very high burden as any element of doubt as to the absolute unreasonableness will defeat it. • In practice it may require an offer of security for the full sum in order to prove unreasonableness.
Challenging Receivers
Breach of Duty of Good faith !
• If the Receiver can be proven to have breached its duty to the borrower to obtain the best price then it can be found liable for the loss. • It is important to note however that the Receiver will normally be relying upon professional valuations. • Valuers will be allowed a margin of error on any valuations of that property. These margins are normally in the range of 5%-­‐10% but can be much higher in specific circumstances and shall depend on the facts of each particular case.
Transactions at Undervalue
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Sales of property, particularly to connected parties, should always be subject to scrutiny and it is notable that the court has often found that the Receiver has failed to comply with its duties in instances where a transaction at an undervalue has occurred. !
Such as in the case of Glatt v Sinclair [2011] EWCA Civ 1317
Transactions at Undervalue
Glatt v Sinclair [2011] EWCA Civ 1317 !
Receiver sold a property for £330,000 having obtained a reputable and independent valuation at that level. The Property was remarketed the same day and sold shortly thereafter for £455,000. !
A second valuation, obtained post sale, but carried out by an independent agent (who had inspected the property previously for the purpose of a mortgage) confirmed £330,000 as being the correct open market value. !
Glatt v Sinclair
The Court held that whilst the independent valuations had been obtained there was no evidence to suggest that the Receiver (Mr Sinclair) took any steps to ascertain the state of the market nor: !
• discussed a marketing strategy with the estate agents; • considered what would be an appropriate asking price; • ascertained whether or not the sales particulars should be produced and what form they would take; • considered how long and in what manner the property should be advertised; or • any other aspect of the sales strategy to be adopted. !
Glatt v Sinclair
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The Court held that the obligation on the mortgagee or receiver appointed is to ensure that the property is sold at the best price reasonably available, and this duty is not delegable. !
The applicant was therefore granted leave to pursue a claim against the Receiver for breach of duty. Challenging Lenders
Receiver as Agent of Lender not Borrower !
• The Receiver is to be the agent of the borrower, if it is shown that the receiver is being instructed by the lender then this changes and the lender may be found liable for any losses incurred. • In the event that the Receiver breaches that duty then it may be possible to seek to bring a claim against the lender also if it has been ‘directing’ the strategy.
Challenging Receivers
Effective Challenges !
An effective approach might be to argue a combination of the above such as • disputing the existence or validity of any breaches whilst simultaneously • reminding the Receivers of their duties to the Company/borrower To ensure that no “hasty” decisions are made as regards sales etc. and to facilitate time for a re-­‐finance to be achieved or at least for a better price to be obtained.
Final Thoughts
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Challenging the actions of lenders and Receivers can be difficult but it is often possible to slow down any “hasty” sale to allow a more beneficial resolution whether that is a better sale price or an avoidance of the sale altogether. !
In any event it is important that the LPA Receiver be made aware that any decision it makes may be subject to professional scrutiny and challenge and therefore specialist legal advice should be sought at the earliest opportunity.
Questions?
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Contact details: !
☎ 0161 833 9211 ✉ alisonl@berg.co.uk