Receivership Issues

The following are some issues to be considered by Receivers in the current environment where more and more borrowers are looking to pursue a Receiver for breach of their obligations.

This article looks at the various ways in which a Receiver can be appointed, the duties of Receivers and how Receivers can protect themselves from litigation.

Mode of Appointment

The traditional method of appointing a Receiver is under a Deed of Mortgage/Debenture where the appointment is usually governed by the loan documents.

Under the NAMA Act a Receiver can be appointed by the Court as a statutory Receiver and when appointed he becomes an officer of the Court.  Section 147 and 151 of the NAMA Act sets out the duties of the Receiver in these circumstances. 

General Duties

The general duty of a Receiver is to assume and take control of the assets of the debtor.

Section 316 A of the 1963 Companies Act provides that the Receiver must obtain “the best price reasonably attainable at the time of the sale”.

In the current environment more and more Receivers are opting for the auction route (particularly through the distressed property sale market) .This presumably is to be able to demonstrate to a Court at a later date that he/she has placed the property by way of public auction and the price obtainable was the best in the circumstances.  While it is fair to say that the sale by way of auction does not necessarily insulate a Receiver fully from a threat of legal action it certainly goes a long way to demonstrating that he /she has made all reasonable efforts to obtain the best price reasonably obtainable.

 The Receiver has to make sure that in these circumstances that any sale is at arms length and that any interested bidder has no connection with the borrower or the Receiver.  Indeed if it is a case that an officer of the Company wishes to purchase any of the assets of the Company then certain statutory requirements as set out in section 316(a)(3)(a) of the 1963 Act apply.  These also apply in circumstances where the Receiver may be seeking to sell the Company itself or trade as a going concern and if he does so he must ensure that he sets out a tendering process which is fair and transparent to all prospective bidders.

In certain cases the Receiver may seek the directions of the Court.  This is provided for under Section 316 of the 1963 Act but this is rarely used as it is regarded as being reserved only for particularly complex matters given the additional costs.

Selling Assets

One of the dilemmas facing a Receiver is whether to hold onto assets and rent them or to sell them in a declining market.  There are a number of cases including the “Re Edenfell Holdings Limited” and “Grace v ACC Bank plc” which were decided in 1999 and 2006 respectively which deal with this issue.  Both of these cases established the principle that a Receiver should not postpone a sale of assets simply because he believes the market is at a low point and that it would be better to wait until there is an improvement in market conditions.  The Judgements made clear that a Receiver is not a property speculator.

To whom does the Receiver owe a duty ?

The primary duty of care as established in the case of Bula Limited v Crowley (3) (2003)which held that the Receiver owes the primary duty of care to the Debenture holder.  This is a fiduciary responsibility which means the Receiver must act in good faith and must prioritise the interests of the Debenture holder ahead of the interests of the Receiver.

Where the borrower has also signed personal guarantees the Receiver also has a subsidiary duty to the borrower and needs to careful to be sure that he has obtained the best price which is reasonably obtainable in the circumstances to avoid a legal challenge.

How can the Receiver Protect Himself?

1. Appoint a Property Expert with experience in the particular type property being sold/location being sold with a view to obtaining guidance in relation to optimising value and method of sale.
2. Procure the services of an insolvency practitioner with a view to advising on obligations, duties and the best method of guarding same.
3. Secure any assets i.e. make sure they are insured and are reasonably secure.
4. Ensure compliance with statutory obligations under the Companies Act 1963 and where it is a NAMA appointment under the NAMA Act.

The increasing number of Receiver appointments puts Receivers in the spotlight and it is important that they are careful to ensure that they protect themselves and isolate themselves from possible litigation.

For further information contact Brendan Dillon on brendandillon@dillon.ie or 01 296 0666.