Challenges to security enforcement set scope of duties

Insolvency Bitesize - September 2019

The High Court has confirmed that a sale by a receiver to a buyer connected with the mortgagee does not engage the self-dealing rule and further considered the extent of the duties on an enforcement sale.

The long-standing self-dealing rule prevents a mortgagee from selling to itself or a trustee for itself. But, the High Court has confirmed that the rule does not apply to a sale by a receiver to a company in which the mortgagee has an interest, since there are then two real parties to the transaction – the receiver sells as agent of the mortgagor. The High Court also confirmed that the fair dealing rule would not apply in those circumstances. That rule provides that a conflict of interest makes a sale voidable (rather than void like the self-dealing rule) unless it can be shown that the sale was at full market value.

In relation to security enforcement sales, the decision in DCP Ltd v Barnett and Belcher [2019] EWHC 700 (Ch) usefully also confirms that:

  • a mortgagee has no duty to sell - whether at a particular time or at all. However, if they do sell, then they must take reasonable care to obtain a proper price. The position of a receiver is the same;
  • while not under a duty to sell, a receiver has no right to remain passive if that would damage the interests of the mortgagor or mortgagee. But, any active protection or preservation of the charged land does not extend to effecting or awaiting any increase in value before selling. A receiver does not manage the mortgagor's property for the mortgagor's benefit. Instead, they manage the mortgagee's security for the mortgagee's benefit; and
  • when a receiver exercises their power of sale and management conferred by the mortgage, they must do so in good faith and to secure repayment of the debt. A breach of this duty would have to involve intentional conduct amounting to more than mere negligence. It would have to encompass an improper motive or an element of bad faith, although not actual dishonesty.

In the current climate, challenges to enforcement sales are to be expected. We’ve reported previously about the receiver’s duties when selling secured property in a portfolio sale (see March 2019 edition).

Clearly, it’s vital to understand the extent of the duties that arise on a distressed disposal, but it’s not just receivership sales that are attracting attention. Sales by administrators – pre-pack or not – are facing increasing scrutiny, leading to disputes concerning conflicts and the scope of administrators’ powers in executing distressed sales. Both the recent Dunbar v Davey litigation involving Angel House and the claims in Re Zinc Hotels about the enforcement sale of certain hotels in the Hilton group are prime examples. The current multi-million-pound challenge brought by the liquidators against the former administrators of the developer of the high-profile ‘One Blackfriars’ tower is widely anticipated to further develop the law in this area. No doubt this will be a topic we return to in future editions.