Centenary Homes Limited v (1) Jon Howard Gershinson and (2) Victoria Claire Liddell (2017)

Receivers appointed by a bank over a defaulting borrower's property frequently achieve settlement of the outstanding debt (in full or in part) by exercising their power to sell the property. The borrower loses control of the property and is unlikely to have any input in the sale process. What then is the position if the borrower considers that the receivers' sale strategy was not the best option and that they have sold the property for less than the market value? The recent case of Centenary Homes Limited v (1) Jon Howard Gershinson and (2) Victoria Claire Liddell provides a useful recap of the duties of receivers and highlights the relatively high threshold faced by a disgruntled borrower seeking to bring a claim against receivers.

The borrower, Centenary Homes Limited, defaulted on a loan secured against several properties, including a property known as Warne Court, which comprised a number of residential flats. The bank appointed receivers, who sold Warne Court as a single block for £3.25m. Together with sales of several other properties, sufficient funds were realised to discharge the debt owed to the bank in full and the receivers' appointment ended. The borrower subsequently brought a claim against the receivers alleging that they had acted in breach of their duties, including a duty to take reasonable steps to obtain the best price reasonably obtainable. The focus of the borrower's claim was that the receivers should not have sold Warne Court as a block for £3.25m but should have sold the flats individually. The borrower contended that the combined market value for the flats based on individual sales was £3.885m. The receivers' evidence put before the Court outlined the consideration that was given by them to the alternative options of selling Warne Court as a block or selling the flats individually. A sale as a block was considered preferable due to factors including the extended period of time that it would take to market and achieve sales of individual flats and the risk that market conditions could worsen over an extended disposal period.

The receivers successfully applied for summary judgment and strike out of the claim. In reaching a decision, Master Thornett, considered existing case-law addressing the duties owed by receivers, which has established that:

a) A receiver is the agent of the borrower and not the bank;

b) The relationship and duties owed by the receiver are equitable only and not contractual;

c) A receiver's primary duty is to realise the security in the best interests of the bank;

d) A receiver has only a secondary duty to the borrower to exercise care to avoid preventable loss and is only required to protect the interests of the borrower where doing so is consistent with the primary duty to realise the security;

e) A receiver is free to sell a property in the condition it is in;

f) In exercising a power of sale, a receiver will owe a duty to the borrower to take reasonable care to obtain the best price reasonably obtainable at the time of sale and to exercise his powers in good faith and for a proper purpose; and

g) Receivers are afforded a wide margin of professional discretion and flexibility in carrying out their role.

On the basis of the established position, the Master concluded that in bringing its claim the borrower would needed to identify as part of its case from the outset (i) what specific duty or duties are relied upon which can run collaterally and without conflict to the duties owed to the bank and (ii) the facts relied upon as establishing a breach of the duties. He considered that it is not enough to simply identify alternative strategies or decisions the receivers might have made in general terms and then, because they might have been more to the advantage of the borrower, treat those alternatives as defining a duty to the borrower and constituting evidence of breach of that duty. The Master was not satisfied that the borrower had available genuine expert opinion that could sufficiently establish a breach of duty rather than to proffer a counter-strategy and did not consider that the borrower's arguments would become any stronger with the wider evidence that might be available at trial. The receivers had to reach professional decisions to protect and realise the security, which they did having given consideration to the alternative options. The Master therefore struck out the borrower's claim.

This decision will give comfort to receivers that courts continue to recognise that the primary duty of receivers is to realise the security to recover the secured debt and that they should be afforded a wide margin of professional judgment in carrying out their functions. Speculative claims by disgruntled borrowers are at risk of being struck out at a preliminary stage. Receivers should, however, ensure that in reaching decisions as to strategy they give appropriate consideration to the options available and document the reasons for their decisions.