QUESTION

If the defined equitable duties attaching to mortgagees and to receivers and

managers appointed by debenture holders are replaced or supplemented by a
liability in negligence the result will be confusion and injustice.
In Downsview Nominees Ltd v First City Corp. [1993] AC 295 at page 315, The
House of Lords has warned against the danger of extending the ambit of
negligence so as to supplant or supplement other torts, contractual obligations,
statutory duties or equitable rules in relation to every kind of damage including
economic loss.
Do you agree with this decision? Discuss.
In discussing the above question, we must first discuss the facts of this case. In this
case, Glen Eden Motors Ltd was a New Zealand company. It gave a first debenture,
securing $230,000 to Westpac, having priority over a second debenture issued to First
City Corporation Ltd ("FCC"). Both loans were secured by a floating charge over all
assets, and each contained the power to appoint a receiver and manager, who would
be deemed to be an agent of the company, authorized to do any acts, which the
company could perform. Glen Eden defaulted on the debenture with FCC, and the
latter appointed receivers. The receivers thought the business was unprofitable and
should be closed down, and removed the manager of Glen Eden. The ousted manager
consulted Russell (the receiver) on the matter. As a result, Downsview Nominees Ltd
(controlled by Russell) was assigned Westpac’s first debenture, and Russell became
the receiver and manager under it. The ousted manager was reinstated, and First
City’s receivers were relegated to a residual role.

Fearing a poor outcome, First City then offered Downsview Nominees all moneys
owing under the first debenture (so it would be redeemed and First City could take
charge), or alternatively to sell its second debenture to Downsview on similar terms,
but this offer was declined. Glen Eden issued a third debenture to Downsview and
Russell carried on the business, losing a further $500,000. First City claimed that
Russell (as receiver) and Downsview Nominees (as prior debenture holder) had
violated their duties to First City to: exercise their powers for proper purposes, act
honest and in good faith, exercise reasonable care, skill and diligence, discharge the
Westpac debenture as soon as they were in a position to do so and to transfer any
surplus assets for First City after such satisfaction of that debenture.

After an initial order in January 1988 to transfer the Westpac debenture on terms
(which Russell contested and sought to avoid), in August 1989, the High Court of
New Zealand held that Russell and Downsview acted for their own purposes, and not
for proper purposes, in the matter and were thus liable in negligence to First City.
Russell was also prohibited from acting as a director, promoter or manager of any
company for five years, under s. 189 of the Companies Act of New Zealand. On
appeal, the Court of Appeal of New Zealand quashed the High Court's order insofar as
it related to Downsview and First City Finance (to which First City had assigned the
second debenture), and also quashed the disqualification order against Russell, as the
court did not have such jurisdiction under the Act.

On application to the Privy Council, Russell appealed the Court of Appeal's order
against him, and First City cross-appealed against Russell and Downsview to have the
High Court orders reinstated. The Privy Council ruled that the High Court's order
against Russell and Downsview should be restored, but upheld the quashing of the
disqualification order against Russell.

In much simpler words, the focus of the case talks about when a receiver exercises the
power of sale he owes a duty to subsequent mortgagees to act in good faith and for the
purpose of securing the mortgage debt. He does not owe a general duty of care in tort.

Lord Templeman basically explained that a receiver exercising a power of sale owes
duties of good faith and to act for the purpose of obtaining the debt due to the
mortgagor. These duties are owed to the mortgagor and to all subsequent
encumbrancers in whose favour the mortgaged property has been charged (at 312).
The receiver does not owe a general duty of care in negligence. (at 315).

In this case there was plentiful evidence that the receiver had been motivated by an
improper purpose. Further the second debenture holder had a right to take a transfer of
the first debenture in return for paying the amount secured by it. The first debenture
holder had no right to reject the offer. The second debenture holder was entitled to
compensation for the loss arising from the breach of duty. He further state that he
debenture holder’s appointment of a receiver was not a proper exercise of the power
of appointment where it was no part of the debenture holder’s purpose to recover the
debt secured by the debenture. The second appointed receiver having acted in bad
faith, became liable in equity to a subsequent chargee. The measure of the
compensation was the difference between what would have been recovered had the
original receivership proceeded undisturbed, and the amount actually recovered under
the subsequent receiverhsip.

Lord Templeman said: ‘The next question is the nature and extent of the duties owed
by a mortgagee and a receiver and manager respectively to subsequent encumbrancers
and the mortgagor. . . Several centuries ago equity evolved principles for the
enforcement of mortgages and the protection of borrowers. The most basic principles
were, first, that a mortgage is security for the repayment of a debt and, secondly, that
a security for repayment of a debt is only a mortgage. From these principles flowed
two rules, first, that powers conferred on a mortgagee must be exercised in good faith
for the purpose of obtaining repayment and secondly that, subject to the first rule,
powers conferred on a mortgagee may be exercised although the consequences may
be disadvantageous to the borrower. These principles and rules apply also to a
receiver and manager appointed by the mortgagee.’ and ‘Their Lordships consider
that it is not possible to measure a duty of care in relation to a primary objective
which is quite inconsistent with the duty of care.’

The law on receivership in Malaysia is mainly based on common law but the
governing legislation is under Companies Act 1965.

A debenture contains terms and provisions of rights for debenture holder and secured
borrower with regard to the loan extended to the borrower, as well as the rights of
debenture holder on the security of the loan. There may be terms in the debenture or
other loan document given by a company that allows the debenture holder as a lender
in the event of default, to appoint a receiver. In this instance, there is no need to make
an application to the court to appoint a receiver. This usually occurs when the
company is insolvent and the debenture holder is a bank; and a scheme of
arrangement is proposed.

However, during a process of winding up, if the terms of the debenture do not state
the right to appoint a receiver; a shareholder or a debenture holder may apply to the
Court to appoint a receiver for the company. A receiver appointed by the court is an
officer of the court, not an officer of the company. A receiver appointed by the
debenture holder owes his duty to the debenture holders and not to the company. A
privately appointed receiver/manager is subject to the Companies Act’s provisions
relating to officers but a privately appointed receiver who is not also a manager is not
subject to the Companies Act.

Upon appointment of receiver, every invoice, order for goods or business letter issued
by or on behalf of the corporation or the receiver or manager (or the liquidator) which
is a document on which or in which the corporation’s name appears, must contain a
statement that a receiver or manager has been appointed.
Upon appointment by the court, a receiver is given such full power and control over
the company’s assets and property. The specific powers and duties of a receiver may
vary and will depend on the reason for the appointment and be ascertained from and
interpreted in accordance with the order. A receiver appointed by the court is
personally liable for debts incurred by him/her in the course of that receivership
for services rendered, debts for goods purchased and debts for property hired, leased,
used or occupied. However, although personally liable, a receiver (but not as a
manager) has the right to indemnify an indemnity out of the assets in respect of all
liabilities is properly incurred. In the case of a receiver/manager, the receiver has a
right to indemnify out of the assets in respect of all liabilities is properly incurred by
the receiver in carrying out the business of the company.

Where the receivership arose from a default in debenture which is secured by a

floating charge, the receiver must pay out any assets debts in priority to any claim for
principal or interest of in respect of the debentures. The priority of debts is similar to
those debts under winding up as set out in Section 292(3) and Section 292(5).

The usual role of a receiver is as protector and enforcer of the rights for a secured
creditor who is usually a debenture holder. The receiver takes possession of the
secured property to collect the income from that property, and thereafter to apply it in
accordance with the terms of the debenture document under which the power of
appointment arose. Receivers are often vested with the power to also act as managers.
There are two distinct ways for a receiver to be appointed, e.g., by the court and out of
court (also known as privately).

Most receivers that are appointed by the court are at the request of the debenture
holders. A shareholder who applies for an order for the receivers to be appointed
should note that before the court appoints an interim receiver of a company, the court
must be satisfied that:
a. the person applying for the appointment has established a good title to the
company’s property
b. the property is in jeopardy, and
c. the applicant will be in a worse position if the appointment is delayed.
Nonetheless, there may be terms in the debenture or other loan document given by a
company that allow the lender in the event of default to appoint a receiver. In this
instance, there is no need to make an application to the court to appoint a receiver.
A debenture document gives the right to appoint not merely a receiver but a
receiver/manager who may continue the business of the company while he/she seeks
to get in the amount due. There is a distinction between a receiver per se , and a
receiver who is also a manager .

The role of the receiver differs according to the source of his/her appointment.
“To some extent the privately appointed receiver, particularly in current commercial
practices, makes an effort to restore the financial prosperity of the company whose
affairs he has been appointed to administer by a debenture holder. A Court appointed
receiver, however, does not fill the same position. He is not so much what might be
described as a company doctor, but rather his function is that of a company caretaker”
per Street J in Duffy v Super Centre Development Corp Ltd (1967) 1 NSWR 382.

A receiver appointed by the court is an officer of the court, not an officer of the
company. Interference with the receiver is contempt of court. The court will exercise
control over the appointed receiver. For example, if the receiver conducts his/her
duties in a defective manner (arising out of a want of good faith or an erroneous
approach to the law) the court will intervene. Mere dissatisfaction of the receiver will
not justify the interference of the court. The appointment of a receiver/manager by the
court terminates the employment of the staff of the company. Thus a receiver
appointed does not need to dismiss the staff of the company but he/she must re-
employ the required staff.

For a privately appointed receiver, the receiver’s primary duty is to the debenture
holders and not to the company. As receiver/manager with ancillary powers of
management, he/she is not, however, a person appointed to manage the
company’s affairs for the benefit of the company. A privately appointed
receiver/manager is subject to the Act’s provisions relating to officers but a privately
appointed receiver who is not also a manager, is not.
“A receiver means a person who receives rents or other income, paying ascertained
outgoings; but he does not manage the property in the sense of buying and selling
anything of that kind. The receiver merely takes the income and pays necessary
outgoings; the manager carries on the trade or business”, per Jessel MR in Re
Manchester & Metford Railway (1880) 14 Ch D 645.

The purpose of making provision for the appointment of a receiver/manager is to keep

the business alive in order to sell it as a going concern, i.e., to restore the company to
financial stability, akin to a company doctor. Unless the receiver is given powers as
manager the receiver is restricted in his/her function. The receiver’s obligation (in the
case of appointment by a debenture holder) is to realise the secured property only; any
exercise of managerial power by a receiver who is not also manager renders him/her
in those actions a trespasser ab initio and his/her acts are unauthorised. The power to
appoint a receiver/manager is bestowed by the debenture document. A manager can,
however, only be appointed where the charge is over the business of the company,
that is, over “the whole of the undertaking” or on “the undertaking and property”. If
the security for the loan is only part of the company’s assets a manager may not be
appointed. A receiver/manager may be appointed by the court or out of court.

Upon appointment by the court, a receiver is given such full power and control over
the company’s assets and property. The directors are left with little, if anything, to
control. Although the directors are powerlessness on the property of the company
which is appointed to the receiver by the court, this does not mean that they are
relieved of their statutory duties as directors. They must continue to carry out their
duty as director. A receiver should therefore provide the directors with such
information as is necessary for them to comply with their obligations under the Act.
The receiver is not under any obligation (other than preparing and verifying the
statement of affairs) to pay anything to the directors towards the costs of meeting their
obligations under the Act.

The specific powers and duties of a receiver may vary and will depend on the reason
for his/her appointment (e.g., to preserve property pending litigation, or for debenture
holders, etc.). The receiver’s powers in any given case must be ascertained from and
interpreted in accordance with the order under which he/she is appointed.
Administrative receivers/managers are the authorised agents of the company under the
debenture and as such are authorised to enter into any sale and purchase agreement on
the assets of the company with prior consent of the debenture holders.

The Court of Appeal (Kuala Lumpur) in Melantrans Sdn Bhd v Carah Enterprise Sdn
Bhd (in receivership) & Anor [2000] 3 MLJ 304 held that the administrative
receivers/managers are to be agents of the company and are thus absolutely free and
empowered to dispose the assets of the company. Their actions bind the company in
the following circumstances:
1. The memorandum and articles of the chargor company has an object clause
to sell its land.
2. The articles of the company have provisions in the granting of the lawful
power of attorney in favour of the receivers/managers.
3. The chargor company is not wound up.
4. The debenture empowers a receiver and manager appointed under the
debenture to act as agent to enable the exercise of the powers accorded to the
receiver and manager.
5. The debenture contains a validly constituted power of attorney clause,
irrevocably appointing the receiver and manager as the lawful attorney of the
chargor company.
6. Such sale is not proceeded by the chargee under its foreclosure proceedings
but the chargor proceeds with the sale with consenting parties.
7. It is the borrower company that has not been wound up that is asking for the
sale.

Section 183 CA imposes a personal liability on a receiver who is appointed by the

court for debts incurred by him/her in the course of that receivership for services
rendered, debts for goods purchased and debts for property hired, leased, used or
occupied. However, although personally liable, a receiver (but not a manager) has a
right to an indemnity to be indemnified out of the assets in respect of all liabilities
properly incurred. However, in the case of a receiver/manager, the receiver has the
right to be indemnified out of the assets in respect of all liabilities properly incurred
by him/ her in carrying out the business of the company.

A receiver is liable to account for money coming into his/her hands. The receiver
shall be made responsible for loss through his/her wilful default, or having the funds
becomes out of his/her control. The receiver must comply with the receiver statutory
duties and fulfil the receiver’s obligations without misconduct. However, a
receiver/manager not appointed by the court is not liable for contracts entered on
behalf of the company under receivership. The receiver is an agent of the company if
he/she is appointed pursuant to the debenture terms and conditions. The cause of
action, if any, against the receiver would belong to the company (as principal) and to
the debenture holder, but not to the third party plaintiff to whom no general duty is
owed by the defendant.

In my opinion, by quoting the House of Lords in this case, “ If the defined equitable
duties attaching to mortgagees and to receivers and managers appointed by debenture
holders are replaced or supplemented by a liability in negligence the result will be
confusion and injustice … A receiver who is brave enough to manage will run the risk
of being sued if the financial position of the company deteriorates, whether that
deterioration be due to imperfect knowledge or bad advice or insufficient time or
other circumstances” I agree with the court’s decision in the case of Downsview
Nominees Ltd v First City Corp [1993] AC 295 as the rationale behind it is that if the
court were to extend the ambit of the liabilities of the receiver to include receiver’s
negligence so as to supplant or supplement other torts, contractual obligations,
statutory duties or equitable rules in relation to every kind of damage including
economic loss, it would hinder and scare away anyone from acting as a receiver for a
company as they would have to be extra cautious as almost every decision they make
might put them into trouble and will attach liability to them and will prevent them
from acting proficiently as a receiver which will later lead to a bigger problem.