This thorny question was discussed in The Accountant of January 31st 1980 following Smiths Ltd v Middleton [1979] 3 All ER 842. Unfortunately, it remains unsolved. A company had executed a debenture in favour of a bank in order to get an overdraft. A receiver was appointed by the bank and he acted in that capacity until the debt owed to the bank was discharged and his receivership was terminated. He then submitted two abstracts of his receipts and payments to the company that continued in business. Doubting the truth of the abstracts, the company required more information. The receiver refused and the company brought an action against him. In the Chancery Division, the Vice-Chancellor advanced that a receiver appointed under a debenture is an agent of the debtor company because he managed the affairs of the company on behalf of its directors. Thus, the receiver was treated as an accounting agent of the company that owes a duty of good faith which is both a common law duty and a duty in equity.Some twenty years later, Medforth, a large scale pig farmer was unable to pay his debts as they fell due and his bank appointed a receiver who managed his affairs for four and half years. The receivers failed to heed to Medforth’s advice to claim discounts from the suppliers of feedstuff and the Court held that the receivers owed a duty to manage the business with due diligence and were therefore liable to Medforth (Medforth v Blake [1999] 3 All ER 97 CA). Sir Richard Scott, V-C noted that “the receiver/manager owes the same specific duties when exercising the power of sale as are owed by a mortgagee when exercising the power of sale.” He cites with approval Yorkshire Bank plc v Hall [1999] 1 WLR 1713 to the effect that a receiver/manager who sells but fails to take reasonable care to obtain the proper price may incur liability notwithstanding the absence of fraud or mala fides.” He then asks “why should the approach be any different if what is under review is not the conduct of a sale but conduct in carrying on a business?”
It therefore seems the receiver’s duty to act in the best interest of the debenture holder also extends to acting in the best interest of the debtor given that he also becomes the debtor’s agent (Re Henry Pound, Son & Hutchins (1889) 4 Ch. D. 402, 423 per Fry LJ). Thus, he owes an equitable and a common law duty of good faith and ought to take reasonable care to obtain the proper price. One may ask whether a solvent company’s agent would be liable to such an extent when conducting the company’s business. Also, it is uncertain whether this is the nature of the duty of all receivers given that it has been held that where a receiver is appointed by the court at the instance of the debenture holders, no question of agency arises given that the receiver is an officer of the court (Parsons v Sovereign Bank of Canada [1913] AC 160, 167 as per Viscount Haldane L.C.).
What is certain is that the receiver’s duty of good faith includes full disclosure. In Re Delberry [2008] EWHC 925 (Ch), the liquidator was able to force the receivers to disclose documents revealing their strategic management and decision to sell within a short period of time.
What remains uncertain is the shrewdness that is expected of receivers acting in good faith. They are expected to demand remuneration that is market-related, heed to the farmer’s advice on how to claim large discounts and implement a rigorous strategic financial management plan. Nonetheless, in Philip Bell v Philip Long, Andrew Thomson, PKF and Weatherall Green & Smith (North) Limited [2008] EWHC 1273 (Ch), where the administrative receivers sold a portfolio of four properties for the aggregate price of £775,000 and the company’s director argued that the receivers had failed to take reasonable care to obtain the proper price since the properties would have generated a higher return had they been sold individually, Mr. Justice Pattern held otherwise. He asserted that “I do not see how as a matter of law it can be suggested in this case that they were bound to wait for an indefinite period in the hope of obtaining a higher return........The duties they owed to the company do not require them to take those kind of risks.” As such, it seems that the nature of the receiver’s duty will remain a thorny question since it rests on the court’s interpretation of terms such as “reasonable” and “equitable” in the circumstances.
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