Insolvency case study clarifies the relationship between mortgagee, mortgagor and receiver

We review the case of Devon Commercial Property Ltd v (1) Robert Adrian Barnett (2) Robert John Belcher (2019) that highlights and clarifies some interesting points in relation to the relationship between mortgagee, mortgagor and receiver.

Devon Commercial Property Ltd v (1) Robert Adrian Barnett (2) Robert John Belcher (2019)

On the 26 March 2019, the High Court of Justice handed down judgment in the case of Devon Commercial Property Ltd v (1) Robert Adrian Barnett and (2) Robert John Belcher. This case covers the extent of any duties owed to a mortgagor when an insolvency practitioner is acting as Receiver, particularly given the unusual facts in this specific case.

Background

By way of brief background, the Claimant in this case purchased land in Devon (“the Property”). Shortly after purchasing the Property, the Claimant granted a 5 year lease of approximately 70% of the land to Devon Cider Company Ltd (“DCC”), a company connected to the Claimant. Around two years later, the Claimant granted a mortgage over the whole Property to State Securities Limited.

DCC went into administration in 2009, 4 years after being granted a 5 year lease of 70% of the Property. The administrators appointed over DCC sold its business and assets to Aston Manor Brewery Co Ltd (“Aston Manor”) and granted Aston Manor a licence to use the land within the lease with the Claimant. On the same day that Aston Manor purchased the business and assets of DCC, State Securities Limited assigned the mortgage over the Property to Aston Manor.

In December 2009 the Claimant defaulted on the mortgage payments to Aston Manor, and Aston Manor appointed LPA Receivers over the Property. In May 2011, the Property was sold by the LPA Receivers to Aston Manor Freeholds Limited, a newly formed subsidiary of Aston Manor, for a purchase price of £2.75 million excluding VAT.

The Claimant alleged that the LPA Receivers breached their duties to the Claimant by failing to treat Aston Manor as a special purchaser, by failing to act in good faith, by failing to achieve the best price properly obtainable, by placing themselves in a conflict of interest and/or by allowing the receivership to directed or influenced by Aston Manor to the detriment of the Claimant’s shareholders.

Judgment

The crux of the issue before the Court was whether a Receiver, appointed on behalf of a mortgagee, selling to a  party that is connected to the mortgagee was acting in breach of its duties to the mortgagor, whether that be by failing to act in good faith, by self-dealing or by placing themselves in a position of conflict. The Court also had to consider where the burden of proof lies when allegations of failing to act in good faith are raised.

The Court held that, contrary to the Claimant’s position, the burden of proof was with the party alleging bad faith to prove that that was in fact the case. In this instance, the Claimant failed to reach the standard required to prove that the Receivers had acted in bad faith and the Court confirmed that in order to prove an allegation to this effect the Claimant would need to show 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 no amount to dishonesty“.

In addition to the above, in his judgment, HHJ Paul Matthews, stated that the “no breaches of duty have been established by the defendants against the claimant… the defendant did not place themselves in a position of conflict and act under the direction and control of Aston Manor. Nor did they fail to treat Aston Manor as a special purchaser. It was not a breach of their duty that they failed to obtain better terms…”

The judgment makes it clear that a mortgagee and a receiver are two separate persons and, whilst they both have individual duties to act in good faith in relation to any sale, these duties are each their own individual responsibilities. As the Receivers would not benefit from an associate of the mortgagee obtaining the Property, and therefore the Receivers did not stand to benefit from the sale, it follows that the Receivers were not self-dealing or acting in a conflict of interest when the Property was sold to a connected party to the mortgagee. HHJ Paul Matthews goes further to state that “there is obviously no rule… that forbids a receiver to place himself or herself in a position where the mortgagee’s and the mortgagor’s interests conflict… these interests conflict from the outset.”

Commentary

This case highlights and clarifies some interesting points in relation to the relationship between mortgagee, mortgagor and receiver. It makes it clear that the Court will have regard to the fact that there is no benefit to the receiver in a lower price being obtained for the sale of a property, going so far as to clarify that the benefit to the receiver lies only in the fees obtained in dealing with the property, which is not inherently linked to any sale proceeds.

This clearly shows that not only does the burden of proof lie with the Claimant making allegations of bad faith, but the threshold for proving such is particularly high, with evidence needed to show “intentional conduct“. This high threshold should give some reassurance to those LPA Receivers acting in unusual and often highly sensitive circumstances.