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Do Receivers have overreaching powers? - Stanley v a debtor (2019) (unreported)

  • United Kingdom
  • Banking and finance

05-04-2019

Key Points

A disposition by a receiver, whether appointed by the court or under a fixed charge, is not a disposition by a mortgagor for the purposes of s284 Insolvency Act 1986 (“IA”).

The wider implications of the decision may be to limit the circumstances where a mortgagee’s power of sale is employed to overreach certain entries appearing on property titles at the Land Registry.

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Introduction

Stanley v a debtor 2019 (unreported) was an application by receivers for a validation order pursuant to s284 IA to approve the disposal of certain properties belonging to a person facing a bankruptcy petition. The judgment was unusual in that it appeared to dismiss the application on the ground that the receiver was not acting as agent of the mortgagor when determining whether a disposition falls within s284 IA. Although the case may be interpreted narrowly to apply only to s284 IA, it may also be seen in a wider context of security enforcement and in particular current conveyancing practice in receiverships.

Receiver’s Agency

It is a well-established principle of receivership law and practice that fixed charge receivers act as agent of the mortgagor until a person is made bankrupt (or a company put into liquidation). That agency is usually expressly stated in the mortgage deed and/or incorporated into the mortgage deed by s109(2) Law of Property Act 1925. The agency principle is used to disassociate the receiver from the liabilities arising in relation to the property and ultimately to maximise a return for the mortgagee.

It is also accepted that upon the mortgagor’s bankruptcy/liquidation the receiver’s agency is severed but that the receiver retains his powers to deal with the property. From the point of severance the receiver acts only in his capacity as “receiver” rather than agent (Sowman v David Samuel Trust Ltd. ([1978] 1 All ER 616.) and Barrows v Chief Land Registrar (The Times, 20 October 1977). So it can be said that the receiver wears two hats prior to the bankruptcy/winding-up order, but only one after the agency is severed. The sale contract will usually make it clear whether the receiver is contracting as agent or not.

s284 Insolvency Act 1986

s284 IA provides that a disposition of property by a person is void upon that person being made bankrupt provided that the disposition is made following the presentation of a bankruptcy petition against them. An allowance is made in s284 IA for the Court to approve the disposition. The intention of s284 IA is to prevent a person disposing of his/her assets during the period they are facing a petition against them without the Court’s oversight. The provision applies to any disposition and it is not unusual for validation orders to be sought to allow for a person to continue trading (subject to certain boundaries and/or oversight).

When a person is subject to a bankruptcy petition the Land Registry will place a notice on titles to any property that person owns to give warning that such person is subject to a live petition, and therefore the need for a court order to prevent a disposition of that property being void upon any eventual bankruptcy.

Stanley v a Debtor

The case contained a relatively unusual set of facts, complicated property structure and multiple receivership appointments. It is suffice to say that two receivers were jointly appointed over 5 freehold titles (owned by companies incorporated in the British Virgin Islands) and 103 leasehold titles (owned by an individual, D). The leasehold titles were derived immediately below the 5 freehold titles but did not capture the freeholds in their entirety, leaving some value to the freeholds. The receivers held office by virtue of a mixture of fixed charge receivership appointments and a court receivership appointment over property subject to a charging order. The result of the various appointments was that the receivers controlled and had a power to sell the whole of the 5 freehold properties and each leasehold interest thereunder.

After a lengthy marketing process the receivers had found a buyer for the properties. However, during the period of their appointment a creditor had petitioned for D’s bankruptcy and the Land Registry had accordingly entered the usual bankruptcy notices on the titles to the leasehold properties. Although contracts were exchanged the buyer made it a condition of completion that the receivers apply for a validation order so as to remove the risk that the sale of the leasehold titles was deemed void pursuant to s284 IA.

In relation to the dispositions by the court receivers, the Deputy Judge stated that as the court receivers’ powers derives from the court order the exercise of a power of sale by the receivers pursuant to that order was not a disposition by D and so s284 IA was not engaged. The existing case law suggests that a court receivership does not benefit from the same agency principle as the fixed charge receiverships. Accordingly, it may have been the Deputy Judge’s interpretation that the disposition of the properties belonging to D which were subject to the court receivership would be a disposition by the receivers in their capacity as “receivers”, there being no other capacity in which they could act.

It was thought that the position of the fixed charge receivers as D’s agents meant that the disposition of the leasehold properties subject to the fixed charge receiverships would be dispositions by D acting via his agents (the receivers). If so, the dispositions would have fallen within the provisions of s284 IA. The Deputy Judge found otherwise and it is worth setting out the relevant part of the judgment in full to understand the reasoning:

Although not perhaps as straightforward as the position in relation to a court appointed receiver I have come to the conclusion that the same also applies to the Applicants as [fixed charge] receivers. In this regard a sale by the holder of security over a debtor’s asset would not be a disposition by [D]. Is the position any different where the security enforcement mechanism employed is the appointment by the secured creditor of a receiver followed by a sale by him or her? In my view the answer is no. It is not a disposition by [D]. I appreciate that the [fixed charge] receivers are to be regarded as agents of [D] whether by virtue of the security documentation or indeed under s.109 (2) Law of Property Act 1925 but this does not mean that such agency relationship means that for the purpose of s.284 a disposition by them is to be regarded as a disposition by [D] It may be that other statutes would operate differently e.g. in respect of taxation. However if the disposition is part of security enforcement I do not see how s. 284 can operate. Again s.284 is not engaged.

In the event, by dismissing the application on the grounds that s284 IA was not engaged (so stating there was no risk of the dispositions being void under s284 IA) the buyer was satisfied that the condition in the contract was met by the order and the sale completed. However, the grounds for dismissal on the basis of the finding as to receivers’ agency may also have a wider application as will be discussed below.

Wider application – receivers’ overreaching

The vast majority of receiverships are fixed charge receiverships over real property subject to a mortgage. This means that in cases where the mortgagor’s title is encumbered by interests which post-date the mortgage it is possible for a mortgagee to exercise its power of sale so as to overreach such interests and facilitate the sale.

The mortgagee’s power of sale obtains its overreaching capability due to the fact that the estate conveyed by the mortgagee is distinct from the estate which can be conveyed by the mortgagor (or the receiver as agent for mortgagor). In other words the mortgagee’s estate exists free from any subsequently ranking financial charges and/or interests subsequently created by the mortgagor to which the mortgagee has not consented. Therefore when the mortgagee exercises its power of sale the estate conveyed is also free of those interests. Accordingly, in the case of a transfer of registered land, the Land Registry will remove certain interests automatically from the register upon receipt of a transfer under a mortgagee’s power of sale.

It may be a stretch of the judgment to state that a sale by a receiver (whether before or after the agency is severed) has the same overreaching power as a sale by a mortgagee. The Deputy Judge clearly drew his references back to s284 IA and did not say that the receivers conveyed the same estate as a mortgagee. So it is unlikely that future sales by receivers will be deemed to overreach second ranking charges or subsequent estate contracts as a result of the case. However, the same may not be said in relation to bankruptcy notices (or other analogous notices and restrictions) which appear on title to registered land. A bankruptcy notice does not relate to an interest created by the mortgagor. Instead the bankruptcy notice simply gives notice to prospective purchasers that there is a petition pending against the mortgagor and that there is a corresponding risk of s284 IA applying to void the transaction. Following the clear finding that a sale by a receiver will not be caught by s284 IA it follows that the Land Registry should remove the bankruptcy notices from the title completely upon registration of a transfer by a receiver (whether or not acting as agent).

If correct the point would have an immediate impact on current receivership practice. Often to obtain an automatic removal of a bankruptcy notice the receivers (acting as agent or otherwise) will contract to sell but provide within the sale contract for possible completion by way of the mortgagee exercising its power of sale so as to overreach the bankruptcy notices. Of course, upon the mortgagee exercising its power of sale the mortgagee then picks up a potential liability to the mortgagor (i) in the case that the sale for less than the best price reasonably obtainable and (ii) in relation to the obligations which then fall upon a mortgagee as to distribution to persons entitled to any surplus. While mortgagees may well be content to accept such liabilities in order to effect a quick sale and repayment of debt, they are the very liabilities that the mortgagee wishes to avoid by appointing a receiver and making such receiver agent of the mortgagor.

Conclusion

Although only at first instance the judgment points towards two useful conclusions:

firstly, that a sale by a receiver is not a disposition which is captured by the provisions of s284 IA. This removes the need for a mortgagee to step in to complete the sale and take on risks it has sought to avoid. It also clarifies that a receiver need not be put to the cost of a validation application and the associated cost of obtaining a formal valuation (the cost of which may not be insignificant); and

secondly, that a sale by a receiver should overreach any bankruptcy notices (or other analogous notices/restrictions) which appear on title and would otherwise hinder a sale by receivers.

Although read one way the judgment appears to cast doubt on the status of a receivers’ agency, the law as to a receivers’ agency is well established and the judgment is unlikely to have an impact on such well-established principles. Instead, in the writer’s view, the judgment is a useful clarification of which dispositions are intended to be captured by s284 IA and offers a useful method to overreach bankruptcy notices without drawing a mortgagee into a process it sought to avoid.

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