RECEIVERSHIP, LIQUIDATION AND TORRENS LAND: MAPPING THE BOUNDARIES

Date01 December 1997
Published date01 December 1997

Kimlin Housing Development Sdn Bhd v Bank Bhumiputra Malaysia Bhd 1

The Malaysian Federal Court in the above case made its pronouncements on two simple issues in relation to the powers of a company receiver and manager. The first was whether a receiver and manager could exercise the power of sale conferred by the debenture in relation to land registered under the National Land Code 19652 (‘the Code’). The second was whether a receiver and manager could exercise such power of sale after the company had gone into liquidation. To both issues the Federal Court gave a negative answer. On the facts, the respondent bank had, prior to the winding up of the appellant company, taken as security two statutory charges under the Code in respect of the company’s registered land as well as a debenture containing, inter alia, a floating charge over the same land. Receivers and managers of the company were appointed under the debenture and the company subsequently went into liquidation. The receivers and managers then sought to exercise their power of sale over the registered land and the two issues outlined above arose for determination. The result of the Federal Court’s decision on both issues was therefore that the receivers and managers could not dispose of the land.

The Court’s views address long-standing and fundamental issues underlying the private receivership regime. To properly evaluate their potentially far-reaching consequences and the extent to which they are applicable in Singapore, it may be useful to recapitulate the somewhat curious features of that regime.

The artificialities and tensions of the receivership regime

A modern debenture creating a floating charge over the whole of a borrower company’s undertaking invariably contains a power to appoint a receiver and manager.3 The power to appoint a private receiver and manager is

entirely contractual4 and does not exist unless it is expressly or impliedly spelt out in the debenture.5 Although in reality the debenture-holder is appointing the receiver and manager to enforce his security, the debenture usually provides that he is exercising the power of appointment on behalf of the company and the appointment is thus deemed as having been made by the company itself.6 The company gets the loan on terms that the lenders shall be entitled, for the purpose of making their security effective, to appoint a receiver and manager;7 the company thus agrees to commit, for valuable consideration, the management of its property to an attorney whose appointment it cannot interfere with.8

It is standard practice for the debenture to provide that the receiver and manager is an agent of the company.9 He is, however, not an ordinary agent;10 his ‘primary duty’ is owed to the debenture holder and not to the company,11 and this duty is to realize the company’s assets, to distribute the proceeds to the debenture holders in satisfaction of their claims and to return any surplus assets to the company.12 He is managing not on the company’s behalf but in order to facilitate the exercise of the debenture holder’s power to enforce the security, for the benefit of the debenture holder.13 The agency of a receiver is therefore not an ordinary agency but

primarily a device to protect the debenture holder.14 This agency, in the eyes of the law, protects the debenture-holder from liability for the acts of the receiver and manager15 and prevents him from assuming the duties of a mortgagee in possession.16

Thus, the receiver and manager has all of the powers of an agent of the company, including the power to carry on business and enter into obligations on behalf of the company, but is under very few of the usual obligations of such an agent,17 as the company has irrevocably undertaken to allow its own interests to be subordinated to those of the debenture holder. He is a peculiar creature whose legal status as an agent of the company bears little resemblance to his real function. Further, while receivership has come to be regarded as one of the main corporate insolvency regimes, it is starkly and fundamentally different from liquidation and judicial management in that it is not a creditors’collective insolvency proceeding. It is put into place at the instance of the debenture holder and its predominant purpose is to ensure that the debenture holder is repaid his debt. With these observations in mind, the decision of the Federal Court may now be examined.

Receivership and Torrens land

The Federal Court highlighted the various features of the Code which afforded protection to statutory chargors in the context of the exercise of the power of sale by a statutory chargee and, after referring to certain Australian and Canadian authorities,18 concluded that the operation of

these protective provisions could not be negatived by contract. Accordingly, the private power of sale conferred by the debenture was invalid. Apparently, the Federal Court did not think it relevant that the receiver and manager was the agent of the company and could be seen, from a strictly legal standpoint, as disposing of the company’s property as such. It appears that the Federal Court preferred to view the receiver and manager in his true commercial role, that is, as a person put in charge of the company by the debenture holder to realise the security; hence the perception was that to allow the receiver and manager to sell the property would be to allow the debenture holder to evade the statutory safeguards imposed by the Code.

It must be immediately noted that, in Singapore, the provisions regulating the exercise of the power of sale by a mortgagee or chargee over registered land are expressly qualified so as to be liable to exclusion or modification by contract.19 Thus, the argument against ‘contracting out’ relied on by the Federal Court does not work in Singapore in so far as the receiver and manager’s private power of sale is concerned. It may raise problems, however, with regard to the taking of possession of registered land by a receiver and manager. There is a mandatory requirement of one month’s notice to be given by a mortgagor or chargor of Torrens land to the mortgagor or chargor when the former intends to exercise his power of entry into possession.20 Would the appointment of a receiver and manager and his taking possession of the company’s registered land amount to ‘contracting out’ of the notice requirement? This depends on whether the courts are willing to regard him as merely an agent of the company, in which case there is no taking of possession at all, or as an appendage of the debenture holder. If one adopts the approach of the Federal Court and treats the receiver and manager as the latter, his taking of possession may amount to the tort of trespass unless the statutory notice requirement is complied with. Until the matter is clarified, it may be prudent for a debenture holder who also holds a fixed charge or mortgage over the registered land21 to serve the requisite notice before appointing a receiver and manager to take possession of registered land.

Although the ‘contracting out’ argument does not apply a receiver and manager in Singapore with regard to his power of sale, another aspect of

the Federal Court’s decision may have bearing on this question. In practice, a lender who holds a floating charge over the undertaking of the company would usually also take a charge or mortgage over any registered land belonging to the company. Obviously, in such a case, the lender may exercise his power of sale as a registered chargee or mortgagee. It is also probably the case that a receiver and manager appointed under the floating charge may exercise such power of sale under the registered charge or mortgage, but as the agent of the chargee or mortgagee. This will, of course, negate a substantial purpose of the appointment of the receiver and manager, as the chargee or mortgagee may become liable for the acts and defaults of the receiver and manager. What is not clear is whether the receiver and manager may exercise the private power of sale conferred by the debenture and sell the registered land as the agent of the company, so that the debenture holder will generally not be liable for any acts and omissions of the receiver and manager. If the legal artifice of the receiver and manager’s agency vis-a-vis the company is rejected, as it was implicitly rejected by the Federal Court, then it may be that he will not be able to sell the land as the agent of the company.

One possible solution is for the lender to require the company to execute a power of attorney in favour of the receiver and manager to execute instruments of transfer with respect to the registered land. In the case before the Federal Court, no such power of attorney had been obtained and, indeed, this was noted by the Court. Arguably, if such a power of attorney is obtained, it may be more difficult to deny that the receiver and manager is acting as the company’s agent. Of course, this argument is not insurmountable; a court may nevertheless prefer to view the power of attorney as a quasi-security instrument and refuse to treat the receiver and manager as a true attorney of the company.

The court may also be anxious that the existence of a floating charge is usually not reflected on the register, and to allow its enforcement through the receiver and manager may undermine the fundamental principle of indefeasibility of title underlying the Torrens system.22 To allay this concern, a holder of a floating charge over registered land may want to consider lodging a caveat.23 A caveat may be lodged in respect of an interest in land,24 that is, any interest in land recognised as such by law,25 and it is

well-established that the interest conferred by a floating charge (whilst still hovering) is a present and existing equitable security interest.26 If a caveat is lodged in respect of a floating charge, its existence will...

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