Citation(2008) 20 SAcLJ 559
Published date01 December 2008
Date01 December 2008

Dissatisfaction with the lack of accountability in receivership has led the UK Government to virtually abolish the administrative receivership. This article argues that Singapore should address directly the criticisms of receivership and depart from English law where appropriate. It analyses the contents of the duties of good faith and care owed by a mortgagee and a receiver to the mortgagor. In particular, it argues that two principles may be deduced from case law and leading treatises on receivership law from which a general duty of care may be developed and proffers some suggestions on the interactions of the principles in a few typical factual scenarios.

I. Introduction

1 In 2002, the UK Parliament passed the Enterprise Act 2002 which made substantial changes to its insolvency and bankruptcy laws. The Act virtually abolishes administrative receivership,1 an enhanced form of receivership, in favour of the wider application of administration. History has come full circle. Administration, which became law in the UK in 1986, was initially conceived as a stop-gap measure for receivership by the Cork Committee (“Committee”). The Committee argued that receivership had been helpful to preserve viable business capable of being rescued and avoid wasteful liquidation.2 Noting that this option was not available where the company had not granted a global security package or where the charge holder had

refused to appoint a receiver, the Committee recommended the enactment of a new corporate insolvency procedure, the administration, whereby an administrator would be appointed by the court to rescue the business of an insolvent company or achieve a better realisation of the company’s assets than liquidation.3 Since then, the rescue culture began to take root in English insolvency law,4 and 16 years later, has ironically led to the virtual demise of administrative receivership.5

2 The reasons for the dissatisfaction with administrative receivership were set out succinctly in a white paper published by the UK Government as part of the preparations for the Enterprise Act 2002.6 First, the large number of administrative receivership appointments in the early 1990s may have represented precipitate behaviour on the part of lenders, causing companies to fail unnecessarily.7 Secondly, there was widespread concern that administrative receivership failed to provide adequate incentives to maximise economic value and minimise costs. Although recent case law has mitigated this problem to a certain extent,8 an administrative receiver’s principal obligation is to his appointer.9 Thirdly, administrative receivership failed to provide an acceptable level of transparency and accountability to the range of stakeholders with an interest in a company’s affairs, particularly the unsecured creditors.10 It can be seen that the crux of the criticisms is that the duties that mortgagees and receivers owed to mortgagors and other interested parties are minimal and very lax.

3 To enable administration to take on its now broader role, changes were made to the objectives of administration. Whereas previously an administration order might be made to effect a business or corporate rescue or a more advantageous realisation of the company’s assets compared to liquidation, with the administrator given the discretion to decide on which objective to pursue, the new law contains a hierarchical ranking of objectives involving a complex interplay between rescuing the company, achieving a better result for the company’s creditors as a whole than winding up and realising property

to make a distribution to secured or preferential creditors, which the administrator is enjoined to seek to achieve in the manner set out in the statute.

4 The English experience with the administrative receivership and administration holds many valuable lessons for Singapore. Singapore should no doubt evaluate the reforms carefully to determine whether they should be adopted. Although Singapore did not adopt the UK Insolvency Act 1986, her insolvency law remains very similar to English insolvency law. Our judicial management is largely modelled on the pre-Enterprise Act administration, and a receivership which extends to all or substantially all the borrower’s assets is very much like an administrative receivership. Much of receivership law consists of judge made law and Singapore has followed English cases on receivership.11

5 A key consideration of whether to adopt the English reforms is how the benefits of doing that stack up against the costs. At the moment, the benefits are not clear. As the relevant provisions of the Enterprise Act 2002 only came into force about four years ago,12 there is not enough evidence of how it has fared in practice. Next, the legislation whilst virtually abolishing administrative receivership leaves untouched other forms of receivership. So the complaints levelled against receivership remain live issues, although their weight would have been very much reduced. On the other hand, the costs of adopting the Enterprise Act 2002 are quite high. It is a very complex piece of legislation which the insolvency profession, financial institutions and business community will have to expend considerable time and money to be conversant with. And this is not to mention the inevitable opposition from the financial institutions to the abolishment of an institution that they have been using for many years. Therefore, at least for the interim, it would seem that a better solution for Singapore is to take the bull by the horns and address the criticisms of receivership identified in the UK white paper referred to earlier,13 in particular, the lax duties that mortgagees and receivers owed to mortgagors.

6 The main purpose of this article is to argue that the current state of law on the duties that mortgagees and receivers owe to mortgagors is very unsatisfactory and that a general duty to exercise care ought to be imposed on them. The article shall proceed as follows. The second section sets out some of the duties of mortgagees and receivers

and compares their relative positions. The third section discusses the content of the general duty of good faith, arguing that lack of good faith includes not only fraudulent conduct but also deliberate or reckless conduct in causing harm to the mortgagor’s interests gratuitously. The fourth section discusses the specific duties of a mortgagee in possession, where it will be shown that they are not as onerous as commonly portrayed and means no more than that the mortgagee should exercise “due diligence”. The fifth section, which discusses the duties of care of a mortgagee and receiver, is the main part of this article. It explains the interaction between the classical approach, which offers little protection to the interests of mortgagors, and a recent alternative approach that is more sensitive on the need to protect the legitimate interests of mortgagors. It suggests that two principles may be deduced from case law and leading treatises on receivership law from which a general duty of care may be developed. The sixth section proffers some suggestions on how receivership law may be improved, and elaborates on the two principles underlying the proposed general duty of care.

II. Mortgagee and receiver

7 The function of a receiver is to exercise the powers conferred on him, in particular the powers of sale and management, to bring about a situation in which the secured debt is repaid.14 His position is thus very similar to that of a mortgagee in the sense that the rights and powers conferred on the mortgagee were also meant for the purpose of repaying the secured debts. It is, therefore, logical that the duties owed by a receiver to the mortgagor, at any rate the common law duties developed by the judges, should bear a close resemblance to that owed by a mortgagee to the mortgagor. This has been confirmed by the courts, as the following discussion will show.

8 A receiver, like a mortgagee, owes the same general duty to exercise his powers in good faith and for proper purposes, and the specific duty to obtain the true market value when he exercises the power of sale.15 Like a mortgagee, a receiver does not owe any general duty of care to the mortgagor.16 A receiver, like a mortgagee, is entitled to sell the mortgaged property as it is and is under no obligation to improve it or increase its value.17 Neither a receiver nor a mortgagee is under a duty to carry on the business of the mortgagor and both may

decide to close down the business, even though the outcome is disadvantageous to the mortgagor.18

9 Nevertheless, the analogy between a receiver and a mortgagee on the duties owed to the mortgagor is not exact. In Silven Properties Ltd v Royal Bank of Scotland plc,19 the English Court of Appeal pointed out that in a number of respects the receiver is in a very different position from a mortgagee. Whilst a mortgagee has no duty at any time to exercise his powers to enforce his security,20 a receiver has no right to remain passive if that course would be damaging to the interests of the mortgagor or mortgagee. In the absence of a provision to the contrary in the mortgage or his appointment, the receiver must be active in the protection and preservation of the charged property over which he is appointed.21 His management duties will ordinarily impose on him no general duty to exercise the power of sale,22 but a duty may arise if, for example, the goods are perishable and a failure to do so would cause loss to the mortgagee and mortgagor.23

10 It is submitted respectfully that for some of the duties owed to a mortgagor, there is a better analogy between a receiver on the one hand, and a mortgagee in possession, rather than a mortgagee per se, on the other hand. Although a mortgagee is entitled to remain passive, a mortgagee in possession is bound to exercise reasonable care to protect and preserve the mortgaged...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT