Does a Receiver owe a Duty of Care to the Mortgagor once declared Bankrupt?

April 8, 2016

In the case of Purewal v Countrywide Residential Letting Ltd and other [2015] EWCA Civ 1122 the Court considered if Receivers appointed over the property of an individual mortgagor owe a duty of care to the mortgagor once he has been declared bankrupt.

Background

Receivers were appointed by Bank of Scotland in March 2009 arising from mortgage arrears. The Receivers informed the mortgagor that they had taken out their own buildings insurance and that he should cancel his own policy. Following appointment, the mortgagor was declared bankrupt on 9th September 2009.

On 18th September 2009 a water leak was discovered which caused a considerable amount of damage to the property. This was brought to the attention of the Receivers by the mortgagor as he still had access to the property. As the Receivers did not make a claim on their insurance policy, the Mortgagor repaired the damage at his own expense. Upon his discharge from bankruptcy the property was transferred back to him for a nominal sum.

Issues

The mortgagor claimed:

  • Damages in sum of £28,584 for costs of repair incurred by him;
  • Damages in the sum of £14,250 for loss of rental income between 2009 and 2011 when the property remained in a state of disrepair and could not be rented out;
  • Receivers failed to submit a timely claim on their insurance policy for damage caused by the leak;
  • Receivers would have been obliged, or authorised by the mortgagee, to use monies received to repair damage to the property.

The mortgagor discontinued the claim for loss of rental income when he became aware that any monies lost in rent would be claimed by the Trustee.

County Court Judgment

The County Court dismissed the mortgagor’s claim on two grounds:

  1. The mortgagor had no cause of action as any right to a duty of care vested in the Trustee on the making of a bankruptcy order;
  2. Repairs carried out by the mortgagor were before the property was transferred back to him by his Trustee and therefore amounted to work volunteered without agreement.

Appeal

The mortgagor appealed the decision. The Court of Appeal considered the following cases:

(i) Medforth v Blake and others [1999] EWCA Civ 1482

  • Although not a case involving bankruptcy, it involved a claim against Receivers appointed over the plaintiff’s pig farming business. It was claimed the Receivers had mismanaged that business by failing to obtain proper discounts on the purchase of animal feed. In this case, the mortgagor retained title to the property and therefore retained the equity of redemption.
  • The court found that there was a duty of care as “the duty to take account of his interests stems from the fact he retains the right either to receive the property back free from the charge upon payment of what is due to the mortgagee or to any surplus proceeds of sale in the event that the security is realised”.

(ii) Silven Properties Ltd & Anor v Royal Bank of Scotland plc and Ors [2004] 1 WLR 997

  • The court discussed the significance of the fact that Receivers, although appointed by the mortgagee, act as agents of the mortgagor. The Court considered the relationship between the mortgagor, Receiver and mortgagee:
    • The mortgagor, has no say in the appointment or identity of the Receiver and is not entitled to give any instructions to the Receiver or to dismiss the Receiver;
    • There is no contractual relationship or duty owed in tort by the Receiver to the mortgagor;
    • An equitable duty is owed by the Receiver to the mortgagee as well as the mortgagor;
    • The duty owed by the Receiver to the mortgagor is not owed to him individually but as one of the persons interested in the equity of redemption;
    • Not merely does the Receiver owe a duty of care to the mortgagee as well as the mortgagor, but his primary duty in exercising his powers of management is to try and bring about a situation in which the secured debt is repaid;
    • The Receiver is not managing the mortgagor’s property for the benefit of the mortgagor, but the security, the property of the mortgagee, for the benefit of the mortgagee.

Court of Appeal Judgment – Lord Justice Patton

Lord Justice Patton concluded that a Receiver’s duty of care is owed to the mortgagor only if and to the extent that he retains an interest in the equity of redemption.  When a mortgagor is declared bankrupt, the equity of redemption becomes vested in the Trustee. On the facts presented there was no justification to widen the beneficiaries of the duty of care to anyone beyond the Trustee. Finally, it was held “there is no evidence to show that the Bank would necessarily have directed the Receivers to expend money on repairs as opposed to reduction of the mortgage liabilities.”

The Court dismissed the mortgagor’s appeal.