debenture. Despite receiving numerous suggestions for the reform of receivership and numbers of complaints concerning the institution,13 Cork remained unpersuaded that radical legal changes were called for,14 advocating instead that receivership should be strengthened – an exhortation which resulted in the creation of ‘administrative receivership’ to which we now turn.15

Processes, powers and duties: the Insolvency Act 1986 onwards

The Insolvency Act 1986 established the ‘pre-Enterprise Act’ version of administrative receivership. The position after 1986 and before the Enterprise Act 2002 came into effect was that the administrative receiver (hereafter ‘receiver’) could be appointed by a creditor of a company who had taken security over the whole or substantially the whole of a company’s property by a package of security interests that must include a floating charge.16 This meant that a floating charge holder was entitled to appoint a receiver even if a series of fixed charges and preferential debts had priority over the floating charge. All that was necessary was that the floating charge covered a substantial part of the company’s property.17 Such a creditor would normally be present in the case of most troubled companies since it is usual practice for UK companies to rely to a considerable extent on finance from banks and for the latter to take out security packages that will render them eligible to appoint a receiver to protect their loan.

It is common for debentures to set out lists of the situations entitling the debenture holder to appoint a receiver. Typical events include: failures to meet demands to pay principal or interest;18 the presentation of a

13On which see pp. 346–7, 350–1, 356–60 below.

14On Cork’s ‘exaggerated representation of the virtues of receivership’ see G. McCormack, ‘Receiverships and the Rescue Culture’ [2000] 2 CFILR 229, 236. On the efficiencies generated by receiverships, however, see J. Armour and S. Frisby, ‘Rethinking Receivership’ (2001) 21 OJLS 73.

15For cases when receivership could not be used, Cork recommended the creation of a new rescue procedure – administration: see ch. 9 below.

16Insolvency Act 1986 s. 29(2). On the phrase ‘substantially the whole’ see Goode,

Principles of Corporate Insolvency Law, p. 253.

17Note that where the security is composed of fixed and floating charges the AR’s appointment is effected under the floating charge: see Meadrealm Ltd v.

Transcontinental Golf Construction Ltd (1991, unreported).

18On the ‘reasonable opportunity’ to pay test see D. Milman and C. Durrant, Corporate Insolvency: Law and Practice (3rd edn, Sweet & Maxwell, London, 1999) p. 56 and Bank of Baroda v. Panessar [1986] BCLC 497 (‘adequate time’ test preferred to ‘reasonable opportunity’).

winding-up petition or the passing of a resolution to liquidate the company voluntarily;19 the presentation of a petition for administration or the initiation of a CVA; the levying of distress or execution against the company; failure to meet any obligations, or to abide by any restrictions that are set out in the debenture;20 ceasing to trade; placing the assets in jeopardy; or being unable to pay debts. Frequently a bank would appoint a receiver suddenly and against the wishes of the directors.21

A debenture holder who was able to appoint a receiver was also in a position to block the effective operation of other insolvency procedures. The party entitled to appoint a receiver had to be given notice of a petition for administration and could then put in the receiver – a course of action that would lead to the dismissal of the petition for administration.22 Similarly in the case of a CVA, the creditors’ meeting called to consider this may not approve a proposal affecting the enforcement rights of a secured creditor without the latter’s approval.23 Nor may a liquidator take possession of assets under the control of a previously appointed receiver.24

Appointment of a receiver does not bring the company’s trading to a halt since company contracts will generally continue to be enforceable by and against it; its assets remain in its ownership and its directors remain in office.25 Legal control of the company, however, passes to the receiver even though factual control may seem, to an outsider, not to have changed. This legal control means that the receiver is entitled to direct the company as to the conduct of the firm’s management.26 The

19If the court has appointed a liquidator its leave is required before a receiver can be appointed, but such leave will normally be forthcoming: Insolvency Act 1986 s. 130(2);

Henry Pound and Sons Ltd v. Hutchins (1889) 42 Ch D 402.

20An example would be a grant by the company of a new security interest in contravention of the terms of the debenture.

21See Milman and Durrant, Corporate Insolvency, p. 54, who noted also that the directors could occasionally welcome the appointment of a receiver who took the difficult decisions (and was blamed by employees for these). Receivers could also have a ‘better chance of persuading creditors to be patient than the directors who have been promising a cheque for months’.

22Insolvency Act 1986 s. 9(2)(a); s. 9(3). Administrative receivers can still be appointed, even after the reforms of the Enterprise Act 2002, although such appointment is much restricted: see further p. 360 below.

23Insolvency Act 1986, s. 4(3).

24See Armour and Frisby, ‘Rethinking Receivership’, p. 76; Re Crigglestone Coal Co. [1906] 1 Ch 523.

25See L. Doyle, ‘The Residual Status of Directors in Receivership’ (1996) 17 Co. Law. 131.

26Re Joshua Shaw & Sons Ltd [1989] BCLC 362. Directors’ powers of management are suspended as regards assets comprised in the security and the general conduct of the business: see further Goode, Principles of Corporate Insolvency Law, pp. 273–4.

contracts of employment of employees are generally unaffected by the appointment of a receiver out of court, but termination of contracts will be involved if certain events take place, such as sale of the business.27

The powers of the receiver will be stipulated in the relevant debenture and in any subsequent orders.28 A series of implied powers is also set out in Schedule 1 of the Insolvency Act 1986.29 Receivers are thus equipped to take a series of actions for the enforcement of the debenture holder’s rights: to manage the company’s business;30 to borrow using the company’s assets as security;31 and to take possession of the company’s assets.32 They may also institute legal proceedings,33 go to arbitration or settle disputes,34 and prove for debts owed to the company by insolvent debtors.35 Cheques can be issued and documents executed in the company’s name36 and necessary payments made.37 Once the assets are collected the receiver possesses power to sell these in order to create funds for repaying the debenture holder; subsidiary companies can be established and portions of the business transmitted to these as ongoing operations or for sale.38

A receiver may apply to the court for directions in relation to the performance of his or her functions and the court may give directions or make an order declaring the rights of persons (before the court or otherwise) as it thinks fit.39 Receivers can thus apply to the court for directions in order to resolve disputes about entitlement to the secured property.40 Receivers, furthermore, can dispose of property subject to a

27 Or if the receiver arranges for new inconsistent employment contracts and if the continued employment of an employee is incompatible with a receiver taking over the running of the company: see Milman and Durrant, Corporate Insolvency, pp. 61–4.

28The receiver has powers in rem (relating to the company’s assets comprised in the security) and rights in personam (or agency powers) relating to everything else.

29See Insolvency Act 1986 s. 42 which provides that the powers conferred on an administrative receiver by the appointing debentures shall be deemed to include the list of powers set out in Sch. 1 to the 1986 Act and these deemed powers operate ‘except in so far as they are inconsistent with any of the provisions of those debentures’. The list of powers includes, inter alia, the power to carry on the business of the company, to sell or otherwise dispose of the property of the company by public auction or private contract and to raise and borrow money and grant security over the property of the company.

30Insolvency Act 1986 Sch. 1, para. 14.

third-party’s security (which ranks in priority to the rights of the receiver’s appointee) on an order of the court.41

Receivers, however, possess powers not merely to act for the debenture holder, but to act for the company. These follow from the execution of the debenture.42 Receivers are thus placed in a strange position: they have two principals but are not subject to the control of either of them. They cannot be instructed or sacked by the company’s board43 and, as Fox LJ said in Gomba Holdings:44

The relationship set up by the debenture and the appointment of a receiver is tripartite and involves the mortgagor, receiver and debenture holder. The receiver becomes the mortgagor’s agent whether the mortgagor likes it or not. The mortgagor has to pay the receiver’s fees as a matter of contract. The mortgagor cannot dismiss the receiver and cannot instruct him in the course of his receivership.

The debenture holder, in return, is largely protected from responsibility for the acts and omissions of the receiver.45

In summary, it has been said of the receiver: ‘He can best be described as an independent contractor whose primary responsibility is to protect the interests of his appointor, but who also owes a duty to his deemed principal, the company, to refrain from conduct which needlessly damages its business or goodwill, and a separate duty, by statute, to observe the priority given to preferential creditors over claims secured by a floating charge.’46

When receivers agree contracts, employment or otherwise, they act as agents of the company but they may incur personal liabilities (except in so far as the contract provides otherwise). An important issue here concerns the circumstances under which the receiver will be deemed to

41Insolvency Act 1986 s. 43. Note that this would not cover property subject to a ROT clause: see s. 43(7).

42See further Goode, Principles of Corporate Insolvency Law, pp. 276–82.

43ARs can only be removed by an order of the court: Insolvency Act 1986 s. 45(1).

44Gomba Holdings UK Ltd and Others v. Homan and Bird [1986] 1 WLR 1301.

45See Insolvency Act 1986 s. 44(1)(a).

46Goode, Principles of Corporate Insolvency Law, p. 262. For a critique of the receiver as deemed agent see J. S. Ziegel, ‘The Privately Appointed Receiver and the Enforcement of Security Interests: Anomaly or Superior Solution?’ in Ziegel (ed.), Current Developments in International and Comparative Corporate Insolvency Law (Clarendon Press, Oxford, 1994). Ziegel (p. 459) asks: ‘Why not reverse the statutory presumption and declare the receiver to be the secured party’s agent or, alternatively, an independent functionary?’

have adopted an employment contract for which he or she will be personally liable. The Insolvency Act 1986 governed such issues through section 44(1)(b), which made the receiver personally liable on contracts adopted by him in carrying out these functions. Receivers have a statutory indemnity covering such liabilities47 but until the mid-1990s receivers sought to avoid such liabilities by issuing a standardised letter informing each employee that the office holder was not adopting, and would not adopt, their contract of employment. The company, the letter went, would continue to be their employer for the time being (this became known as a Specialised Mouldings letter).48 The validity of Specialised Mouldings letters was, however, put to the test in the Paramount case.49 Lord Browne-Wilkinson, in the House of Lords, was forced to the view that such letters did not exclude adoption once the fourteen-day period of grace50 ran out and that contracts of employment were inevitably adopted if a receiver (or administrator) caused the employment to continue beyond the fourteen days. Paramount thus left receivers in an awkward position since it may be difficult to form a professional judgement on the feasibility of rescue within such a short time.51

The deficiencies of the law in this area were partially addressed before the House of Lords decided Paramount, when the Insolvency Act 1994 was passed. This applied only to employment contracts adopted on or after 15 March 1994 (and thus left Paramount to address contracts adopted between the commencement of the Insolvency Act 1986

47Insolvency Act 1986 s. 44(1)(c). See also I. F. Fletcher, The Law of Insolvency (3rd edn, Sweet & Maxwell, London, 2002), p. 371 and, on employment contracts, see Milman and Durrant, Corporate Insolvency, p. 67; Re Paramount Airways Ltd (No. 3), reported as

Powdrill v. Watson [1995] 2 WLR 312, [1995] BCC 319, [1995] 2 All ER 65 (‘Paramount’); Insolvency Act 1994 amendments. See further P. L. Davies, ‘Employee Claims in Insolvency: Corporate Rescue and Preferential Claims’ (1994) 23 Ins. LJ 141; I. F. Fletcher, ‘Adoption of Contracts of Employment by Receivers and Administrators: The Paramount Case’ [1995] JBL 596.

48See unreported ruling of Harman J in Re Specialised Mouldings (13 February 1987).

49Paramount: the case that laid the foundation for this issue was Nicol v. Cutts [1985] 1 BCC 99.

50Provided for in the Insolvency Act 1986 s. 44(2) which states that an AR is not taken to have adopted a contract of employment by reason of anything done or omitted within fourteen days of his/her appointment.

51Se e F l e tc h e r , ‘ Adoption of Co ntracts’ , p. 602; P. Mudd, ‘ The I nsolvency Paramount Cured?’ (1994) 10 IL&P 38; Mudd, ‘Paramount: The House of Lords

Decision – Is There Still Hope of Avoiding Some of Those Claims?’ (1995) 11 IL&P 78.

(January 1987) and 15 March 1994). Under sections 44 (2A–D) of the Insolvency Act 1986 (as amended by the Insolvency Act 1994), where a contract of employment is adopted, a receiver will only become liable personally for ‘qualifying liabilities’, which are defined (for example, to include liabilities to pay wages or salary or pension contributions incurred when the receiver is in office) and which accrue and relate to services rendered only after the date when the contract was adopted. This means that where services are rendered partly before and partly after adoption of contracts, only such a sum as reflects services rendered after adoption will qualify under sections 44 (2A–D) and will be accorded the enhanced protection that flows from the receiver’s personal liability.52 With regard to payments referable to periods pre-adoption or before the receiver’s appointment, employees will thus stand as unsecured creditors with claims against the company alone.

Turning to the duties of the receiver, the primary obligation is to act bona fide to realise the assets of the company in the interests of the debenture holder.53 The receiver’s powers of management have been said to be ancillary to that duty.54 There is, as indicated, no duty to obey the firm or generally to provide the company with details and information concerning the conduct of the company’s affairs.55 At one time, however, the courts assumed that receivers owed a duty of care in tort to the company and subsequent encumbrancers and guarantors of the company’s debt. The duty was to use care to obtain the best possible price when selling company property.56 In the Downsview Nominees case57 the

52In administration such employees would have ‘super-priority’ by virtue of the Insolvency Act 1986 s. 19(4) and (5) which gives such payments priority over any charges. In receivership there is personal liability of the receiver, who is entitled to indemnity out of the company’s assets: s. 44(1)(c). On the case for a ‘uniform approach which transcends the differences between the various forms of insolvency proceedings’ see H. Anderson, ‘Insolvent Insolvencies’ (2001) 17 IL&P 87.

53Re B. Johnson & Co. (Builders) Ltd [1955] Ch 634, 661–2; Downsview Nominees Ltd v. First City Corporation [1993] AC 295.

54Gomba Holdings UK Ltd and Others v. Homan and Bird [1986] 1 WLR 1301 at 1304–5 (Hoffmann J); [1986] 3 All ER 94.

55Ibid.

56Per Lord Denning MR in Standard Chartered Bank Ltd v. Walker [1982] 1 WLR 1410;

Cuckmere Brick Co. Ltd v. Mutual Finance Ltd [1971] Ch 949; American Express v.

Hurley [1986] BCLC 52. For analysis and criticism see L. Bentley, ‘Mortgagee’s Duties on Sale: No Place for Tort?’ (1990) 54 Conveyancer and Property Lawyer 431. See also H. Rajak, ‘Can a Receiver be Negligent?’ in B. Rider (ed.), The Corporate Dimension: An Exploration of Developing Areas of Company and Commercial Law (Jordans, Bristol, 1998) p. 129; Parker-Tweedale v. Dunbar Bank plc [1991] Ch 12 at 18 (Nourse LJ).

57Downsview Nominees Ltd v. First City Corporation [1993] AC 295.

Privy Council held that a receiver only owed equitable duties to nonappointing debenture holders and to the company to act in good faith. Specific equitable duties were owed to these parties to do such things as keep premises in repair and avoid waste. The Privy Council accepted that a receiver was subject to a specific equitable duty to take reasonable care to obtain a proper price for assets sold, but it denied the existence of a general duty of care in tort to subsequent encumbrances or the company with regard to dealing in the secured assets.58 The Court of Appeal, however, in Medforth v. Blake,59 reasserted that the duties of receivers are equitable rather than tortious but stated that a receiver owed a duty, if managing the mortgaged property, to do so with due diligence, which amounted to an equitable duty of care. In that case, Medforth, the owner–manager of a pig farm, owed sums to the Midland Bank that became unacceptable to the lender. The loan terms provided for the appointment of a receiver and a receiver was appointed with power to run the business. The business was run by the receiver for four years before new terms were agreed between Medforth and the bank. During that period, the receiver had not negotiated with the relevant pre-existing pig feed suppliers in order to obtain the 10 to 15 per cent discounts that Medforth had received and which Medforth had repeatedly advised the receiver to ask for. Around £200,000 of discounts had not been obtained during the receivership. The issue was whether the receiver owed Medforth a duty of care that had been breached or whether there had been a breach of good faith.

Sir Richard Scott VC delivered the sole judgment of the Court of Appeal and stated: ‘The proposition that in managing and carrying on the mortgaged business the receiver owed the mortgagor no duty other than of good faith offends in my opinion commercial sense … If [the

58See further Rajak, ‘Can a Receiver be Negligent?’, pp. 140–3; A. Berg, ‘Duties of a Mortgagee and a Receiver’ [1993] JBL 213; R. Nolan, ‘Downsview Nominees Ltd v. First

City Corporation Ltd – Good News for Receivers – In General’ (1994) 15 Co. Law. 28; A. Hogan, ‘Receivers Revisited’ (1996) 17 Co. Law. 226; L. Doyle, ‘The Receiver’s Duties on a Sale of Charged Assets’ (1997) 10 Insolvency Intelligence 9. See also Huish v. Ellis [1995] BCC 462; C. Pugh, ‘Duties of Care Owed to Mortgagors and Guarantors: The Hidden Liability’ (1995) 11 IL&P 143.

59[2000] Ch 86, [1999] 3 All ER 97. See S. Bulman and L. Fitzsimons, ‘To Run or Not to Run … (the Borrower’s Business)’ [1999] Ins. Law. 306; S. Frisby, ‘Making a Silk Purse out of a Pig’s Ear: Medforth v. Blake and Others’ (2000) 63 MLR 413; McCormack, ‘Receivership and the Rescue Culture’; L. S. Sealy, ‘Mortgagees and Receivers: A Duty of Care Resurrected and Extended’ [2000] CLJ 31; L. Ife, ‘Liability of Receivers and Banks in Selling and Managing Mortgaged Property’ (2000) 13 Insolvency Intelligence 61.

receiver] does decide to carry on the business why should he not be expected to do so with reasonable competence?’60 It was argued for the receiver in Medforth that the cases of Re B. Johnson & Co. (Builders) Ltd61 and Downsview62 established that receivers owed no duty to exercise skill and care and that to go beyond the duty to perform with good faith would undermine receivership by doing away with the judicially sanctioned advantages that receivership as an institution offered.63 Scott VC’s response was that the authorities cited gave non-exhaustive lists of the obligations of receivers and that, since, on strong authority, receivers had to take reasonable steps to obtain proper prices on asset sales, it would be anomalous not to impose a corresponding duty in relation to the management of those assets. Scott VC went on to state that principle and authority supported the following seven propositions:

1.A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption.

2.The duties include, but are not necessarily confined to, a duty of good faith.

3.The extent and scope of any duty additional to that of good faith will depend upon the facts and circumstances of the particular case.

4.In exercising his powers of management the primary duty of the receiver is to try and bring about a situation in which interest on the secured debt can be paid and the debt itself repaid.

5.Subject to that primary duty, the receiver owes a duty to manage the property with due diligence.

6.Due diligence does not oblige the receiver to carry on a business on the mortgaged premises previously carried on by the mortgagor.

7.If the receiver does carry on a business on the mortgaged premises,

due diligence requires reasonable steps to be taken in order to try and do so profitably.64

Whether the imposition of Medforth duties of competence on receivers will enhance the institution of receivership or detract from it will be considered below. Taking the issue of financial competence further, though, another case has considered the receiver’s duty to maximise value before the sale of secured assets. In Silven Properties,65 the Court

60 [1999] 3 All ER 97 at 103. 61 [1955] Ch 634. 62 [1993] AC 295.

63See Frisby, ‘Making a Silk Purse’, p. 415; McCormack, ‘Receivership and the Rescue Culture’, pp. 238–40.

64[1993] 3 All ER 97 at 111 G–J.

65Silven Properties and Another v. The Royal Bank of Scotland plc [2003] BCC 1002.

of Appeal stated that the obligations of a receiver did not extend to postponing the exercise of a power of sale until after the decision of a planning application where the outcome might have been to increase the market value of a mortgaged property. Nor was the receiver, as agent of the mortgagee, obliged to invest time or money in steps designed to increase the value of the mortgaged property. The limit of the receiver’s duty was to take reasonable care to obtain a price that reflected the added value offered by the potential granting of the planning application. The primary duty of the receiver was to secure repayment of the secured debt and the primary obligation was to the bank. In short, the duties of the receiver were the same as those of a mortgagee66 and there was no duty to delay by taking steps to increase the value of the property or by otherwise improving it.67

In addition to the mixture of common law duties owed by a receiver is the set of statutory obligations imposed by the Insolvency Act 1986. Notable among these is the obligation of a receiver appointed to enforce a floating charge68 to ensure that the regime of statutory preferential claims is correctly applied and to retain for the benefit of the general creditors the prescribed part of the net property subject to a floating charge.69 Provisions on disclosure of information include duties to furnish annual accounts to the company’s registry, the company, the appointor and the creditors’ committee;70 a duty to prepare a report within three months of receiving a statement of affairs from the company officers;71 and an obligation to summon a meeting for unsecured

66Thus a receiver cannot remain passive if that would damage the interests of the mortgagee or mortgagor – he must preserve the value of property over which he is appointed. In Bell v. Long and Others [2008] EWHC 1273 (Ch) Patten J confirmed that the receivers were entitled to choose the time of sale even if it turned out to be disadvantageous to the mortgagor who could have recovered more had the properties been sold later. The receiver is not a trustee of his power of sale for the mortgagor.

67See Silven Properties and Another v. The Royal Bank of Scotland plc [2003] BCC 1002: Lightman J (co-opted into the Court of Appeal) went on to list the ‘peculiar’, but ‘significant’, incidents of the receiver’s agency (at 1012 G–H). See further G. Stewart, ‘Legal Update’ (2003) Recovery (Winter) 6.

68But not a fixed charge: Re G. L. Saunders Ltd [1986] 1 WLR 215.

69Insolvency Act 1986 s. 40; IRC v. Goldblatt [1972] Ch 498; Woods v. Winskill [1913] 2 Ch 303; Insolvency Act 1986 s. 176A(2). It is the receiver who is obliged to see that preferential claims are settled when receivership and liquidation coincide: Re Pearl Maintenance Services Ltd [1995] 1 BCLC 449.

70Insolvency Rules 1986 r. 3.32. 71 Insolvency Act 1986 ss. 47 and 48.

creditors to consider this report.72 As for the enforcement of the receiver’s duties, the statutory obligations are usually underpinned by criminal sanctions of fines and the common law duties can be backed up by enforcement actions taken in the ordinary courts. It is now clear that the company can bring a direct action against its receiver.73

Finally, as far as termination of the receivership is concerned, this may result from the receiver’s death,74 removal by court order,75 or ceasing to be a qualified IP.76 The usual process, however, involves the completion of duties, notably realisation of all valuable assets and the making of all possible distributions to interested parties in the order of priority fixed by the law. Notification is then given to the company and the creditors’ committee and any surplus funds are passed to the company. Resignations of receivers require at least seven days’ notice of intention to be given to the appointor company, any liquidator and the creditors’ committee.77 The receiver will also have to vacate office if an administrator is appointed by the court.78 Removal of the receiver by the appointor is, after the Insolvency Act 1986 s. 45(1), only possible following a successful application to the court. The purpose of this reform was to make the receiver independent of the appointing debenture holder.79

Efficiency and creditor considerations

In some regards the administrative receiver may be thought to be particularly well placed to secure the rescue of an ailing company. As noted, the receiver is not necessarily required to go to court in order to act and there is no need to secure the agreement of directors, shareholders or creditors before actions to protect the debenture holders’ interests are taken. The company’s assets can be disposed of free from security interests (apart from those of the appointor) if the court gives leave.80 Receivers owe obligations to report to other creditors but have no duties

72Ibid., s. 48(2); Insolvency Rules 1986 rr. 3.9–3.15; see Milman and Durrant, Corporate Insolvency, p. 73.

73Watts v. Midland Bank plc [1986] BCLC 15.

74The replacing includes giving notice under Insolvency Rule 3.34.

75Insolvency Act 1986 s. 45(1). 76 Ibid., ss. 45(2), 389, 390.

to accede to their wishes or even to listen to their views.81 After appointment they act in a highly independent fashion and, as noted, the debenture holder can only remove them from office by securing an order of the court.82

It could be contended, however, that the independent and swiftly responsive model of receivership may now have been prejudiced by the Medforth v. Blake83 imposition of a duty of care on receivers.84 In Medforth it was argued on behalf of the receivers that imposing a duty of due diligence would undermine receivership. In response, though, it has been noted:

Scott VC was unimpressed by that submission and justifiably so. The advantages of receivership to the modern day financial institutions go far beyond the avoidance of wilful default liability. Statute has [conferred] an array of powers on administrative receivers, all of which will accrue to the benefit of the appointor, so much that escaping liability as mortgagee in possession will be little more than an afterthought to the contemporary debenture holder.85

Receivership as an institution may have had powerful institutional supporters86 but Medforth could give rise to legal uncertainties that are liable to produce defensive attitudes on the part of receivers and which could decrease the efficiency of receivership as an institution. As already noted, Scott VC’s judgment left some doubt as to the scope of the equitable duty owed by the receiver.87 In suggesting that this might ‘depend on the facts and circumstances of the particular case’88 Scott

81See E. Ferran, ‘The Duties of an Administrative Receiver to Unsecured Creditors’ (1988) 9 Co. Law. 58. Ferran suggested that the disclosure requirements could benefit unsecured creditors in an indirect way, namely by providing them with ammunition with which to persuade a liquidator that an action should be brought against the administrative receiver.

82Insolvency Act 1986 s. 45. 83 [1999] 3 All ER 97.

84For a review of the discussion see Frisby, ‘Making a Silk Purse’, pp. 420–2; Sealy, ‘Mortgagees and Receivers’.

85Frisby, ‘Making a Silk Purse’, p. 420.

86See B. G. Carruthers and T. C. Halliday, Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States (Clarendon Press, Oxford, 1998) pp. 134–6, 197–205, 286.

87For criticism of the Medforth reasoning on the equitable duty see Sealy, ‘Mortgagees and Receivers’.

88[1999] 3 All ER 97 at 111: a point taken by Nicholas Warren QC in Hadjipanayi v. Yeldon et al. [2001] BPIR 487 at 492–5, when, in reviewing the duties of a mortgagee-appointed receiver, he deemed it arguable (but no more) that receivers may owe a duty to cooperate with the mortgagor in selling the mortgaged property with its attendant business as a going concern.

VC missed the opportunity to lay down a guiding rule. The facts in Medforth indicated a very high level of negligence in so far as the warnings concerning the pig feed discount were repeatedly not acted upon. The receiver’s behaviour could be construed as close to a breach of good faith and this leaves open a series of questions about receiver failure, notably whether the Medforth type of behaviour would have involved a breach of duty in the absence of the warnings that were given. A number of receivers will, as a result of such uncertainty, be exposed to litigation and, until the law is clarified, the institution of receivership will involve higher transaction costs than would be the case with a more legally definite rule.

Such a process of legal clarification may indeed take some time because Scott VC’s judgment in Medforth contained what has been dubbed some ‘fancy footwork’89 in escaping the constraints of previous case law, in ‘applying an equitable label to a common law concept’90 and by declining to arrive at the just result by reasoning in terms of wilful default and good faith. As one critic of the decision wrote: ‘Medforth is an attempt wholly to outmanoeuvre the Downsview analysis by rewriting the obligations in equity of the receiver by creating an equitable duty of care which can hardly be distinguished in practice from the common law tortious duty of care so comprehensively forsworn in Downsview.’91 Whatever the doctrinal rights and wrongs here, the potential for litigation on these points should not be written off. That is the danger for receivers and for all parties who see legal certainty as serving their interests.

There is a response to such concerns, however, that may offer some reassurance to the parties just mentioned. It can be argued, first, that Medforth does not add significantly to uncertainties for the receiver

89McCormack, ‘Receiverships and the Rescue Culture’, p. 240.

90See J. Anderson, ‘Receivers’ Duties to Mortgagors. Court of Appeal Makes a Pig’s Ear of It’ (1999) 37 CCH Company Law Newsletter 6. On the content of the equitable duty to take care, its history and its existence in other equitable relationships see R. Gregory, ‘Receiver’s Duty of Care Considered’ (1992) CCH Company Law Newsletter 9.

91Anderson, ‘Receivers’ Duties to Mortgagors’, p. 7. But see Medforth v. Blake at [2000] Ch 102 E: Scott VC remonstrated ‘I do not, for my part, think it matters one jot whether the duty is expressed as a common law duty or a duty in equity. The result is the same.’ Lightman and Moss point out that the ‘issue may well be of some significance given the limited application of the Unfair Contracts Terms Act 1977, which only applies to common law duties of care’: see Sir G. Lightman and G. Moss, The Law of Administrators and Receivers of Companies (4th edn, Thomson/Sweet & Maxwell, London, 2007) p. 279.

because the long-established obligation to secure a reasonable price92 is liable to overlap significantly with a Medforth obligation of competence: many instances of lack of competence will mean there is a failure to secure a reasonable price. They might also constitute instances of wilful default per Downsview.93 Second, it can be added that receivers who are wary of Medforth should not find it beyond their capabilities to protect themselves from legal attack by establishing proper procedures that reflect the minimal levels of competence of a reasonable business person.94

A second concern about Medforth might be the belief (consistent with the judgment in Downsview)95 that imposing an equitable duty of care on receivers will compromise the receiver’s primary obligation to act in the interests of the debenture holder. This worry is perhaps readily responded to by stating that a duty to exercise skill and care should not impinge on such a primary obligation or place other interests on a par with those of the debenture holder in the considerations of the receiver: the requirement is merely that ‘decisions be competently taken’.96 (As noted above, the Silven Properties decision, moreover, reaffirmed the primacy of the obligation to the mortgagee.)97 As the Insolvency Service has commented: ‘Some respondents asserted that the effect of [Medforth] was to remind receivers of their wider duties and that, accordingly, this diluted the force of the criticisms that receivership was not a collective procedure. This is arguably an overstatement of the Medforth decision.’98 Medforth does not change the balance of power so much as demand an absence of behaviour lacking in care. This response

92See also Silven Properties and Another v. The Royal Bank of Scotland plc [2003] BCC 1002.

93See also A. Walters, ‘Round Up: Corporate Finance and Receivership’ (1999) 20 Co. Law. 324, who argues, at p. 329, that: ‘Given the possible damage that an incompetent receiver could do to the equity of redemption, it is perhaps not surprising to see the Court of Appeal applying a modern form of equitable duty analogous in some respects to the oldfashioned concept of “wilful default” by a mortgagee in possession.’ Walters thus equates Medforth v. Blake [1999] 3 All ER 97 with Knight v. Lawrence [1991] BCC 411.

94See V. Swain, ‘Taking Care of Business’ (1999) Insolvency Bulletin 9.

95See Frisby, ‘Making a Silk Purse’, p. 420.

96Ibid. Frisby argues that what is being targeted is careless behaviour rather than a deliberate course of conduct that will benefit the mortgagee to the detriment of the mortgagor. Thus Medforth does not overturn the balance of power between the mortgagee and mortgagor (when properly analysed and applied): pp. 420–1.

97Silven Properties and Another v. The Royal Bank of Scotland plc [2003] BCC 1002.

98Insolvency Service, A Review of Company Rescue and Business Reconstruction Mechanisms, Report by the Review Group (DTI, 2000), p. 52 (‘IS 2000’).

also provides an answer to a further concern about Medforth – represented by Lord Templeman’s view in Downsview – that liability in negligence would lead receivers to sell assets ‘as speedily as possible’.99 If there is a clear duty to the appointor, an obligation to act competently should have, at worst, a neutral effect on speed of disposition, and in many cases it will favour a less precipitate, more deliberate, style of decision-making. Whether receivers’ duties to creditors should be broadened is a matter to be returned to below in considering issues of fairness.

Note should now be taken of a number of difficulties that constitute limitations on the collectivity of receivership. Receivership involves no moratorium on the enforcement of claims against the company. This means that a receiver is powerless to stop other creditors from acting to enforce their claim and, in doing so, throwing a spanner in the works of the rescue plan. Nor is there any power in the receiver’s hands to stop the company from entering into liquidation. Liquidation will not stop receivers from acting. They will continue in office, exercising powers in the interests of their appointor (acting as agent for the appointor, no longer for the company). But the chances of a successful rescue will be reduced by the advent of liquidation. Once that stage is reached there is no prospect of corporate survival, although the receiver may succeed in selling off some part of the business as a going concern.

Nor, as we have seen, is the receiver always obliged to attempt to rescue the business. The receiver is only obliged to pursue the rescue option if this course is in the interests of the appointing debenture holder. If the interest of the appointor is best served by a simple realisation of the assets, the administrative receiver is obliged not to attempt to rescue unless the full approval of the appointor is forthcoming. There are reasons for thinking, moreover, that receivers will tend to play safe and to favour simple realisations rather than rescues when in doubt. Receivers are private professionals not public officials and are dependent for their livelihood and appointment on a relatively small group of financial institutions, such as banks, taking floating charges. Although administrative receivers cannot be removed from office once appointed, except by order of the court, they would jeopardise future appointments if they disregarded their appointor’s wishes.100

99[1993] AC 295 at 316.

100A. Clarke, ‘Corporate Rescues and Reorganisations in English Law after the Insolvency Act 1986’ (Mimeo, University College, London, 1993) p. 7.

The statistics of the nineties indicated that receivership resulted in rescue in fewer instances than other formal procedures: the DTI’s 1993 Consultative Document on Company Voluntary Arrangements reported that in 1993, 50 per cent of administrative receiverships terminated with a break-up sale of the company’s assets, but that 67 per cent of all administrations and 75 per cent of all CVAs achieved a complete or partial survival of the enterprise.101 When, indeed, the Royal Bank of Scotland (RBS) adopted a rescue culture, it immediately cut the number of receivers appointed.102 This is perhaps because, as has been pointed out, receivership can only be effectively used for rescue purposes if the company has a dominant creditor (perhaps a bank or consortium of banks); if that creditor is willing actively to support rescue; and if other parties refrain from spoiling actions. If such conditions exist, moreover, it may well be possible to forgo receivership and mount a rescue by means of informal agreements.

When the Insolvency Service consulted on rescue mechanisms for its 2000 Review103 it encountered very different appraisals of receivership. Most of its respondents were favourably disposed towards the institution of receivership, a situation that was not surprising given that most responses came from law firms and trade associations.104 These respondents stressed that administrative receivership was an integral part of the rescue culture in the UK that contributed to rescue and corporate survival. They emphasised the ability of receivers to take rapid and effective actions to prevent deterioration in the viability of businesses (particularly where fraud was evident or suspected); the sizeable number of businesses that go into receivership and then are sold as going concerns; and the relatively low costs of initiating the procedure (as seen by creditors and practitioners). The ‘larger professional service firms’ considered that the banks took a responsible attitude towards receivership and only appointed receivers as a last resort. They conceded, however,

101R3’s Ninth Survey of Business Recovery in the UK (2001) indicated business preservation rates associated with appointments as follows: receiverships 59 per cent; administrators 79 per cent (up from 41 per cent in a small sample); CVAs 74 per cent. Receiverships were found in the SPI’s Eighth Survey, Company Insolvency in the United Kingdom (SPI, London, 1999), to save 31 per cent of jobs compared to 37 per cent for CVAs and 40 per cent for administrators (1997–8).

102In 1992 the RBS appointed 418 receivers (11 per cent of the national total); in 1996 it appointed 48 (5 per cent of the national total): see M. Hunter, ‘The Nature and Functions of a Rescue Culture’ [1999] JBL 491 at 508, n. 66.

103IS 2000, p. 53. 104 Ibid., pp. 15, 48.

that non-bank floating charge holders were ‘more likely to act precipitately as they tended to be less focused on preserving a long term relationship with the debtor’. Research conducted by Franks and Sussman and discussed by the IS105 gives some support to the ‘last resort’ account. The IS noted the key research finding that: ‘It seems clear that banks rarely petition for the liquidation of a company and that, in recent years, they have tended to see administrative receivership as a last resort for a troubled company. Where an administrative receiver is appointed, going concern sales (of the whole of the business or of some part of it) are achieved in about 44 per cent of cases.’106 More recent empirical research has suggested that the displacement of receivers with administrators in the post-Enterprise Act 2002 regime has resulted in very little increase in the number of corporate rescues and no significant difference in outcomes between new style administrations and receiverships under the old law – both in terms of going-concern sales versus break-up sales and in terms of returns for creditors.107

Many business people consulted by the Insolvency Service were, however, concerned about the power of the floating charge holder:

They were very sceptical about the banks’ contentions that receivers would only ever be appointed as a last resort and tended to be wary of their banks in times of difficulty. Some business people told us of personal experiences where the banks appeared to have acted very unreasonably. Many considered that banks were only adopting a more relationship driven style at the larger end of the market and that the banks did not have the same interest in the SME end of the market – with the result that in times of trouble, the banks would be looking to exit the relationship as quickly as possible, via receivership if necessary.108

Respondents who voiced reservations about the effectiveness of administrative receivership as a rescue device emphasised three points.109 The first was that: ‘It can lead to unnecessary business failures and undermines the rescue culture, particularly when the relationship between the

105Ibid., pp. 16–19; Franks and Sussman, ‘Cycle of Corporate Distress’.

106IS 2000, p. 17.

107See Armour, Hsu and Walters, Report for the Insolvency Service (2006); A. Katz and M. Mumford, Report to the Insolvency Service: Study of Administration Cases

(Insolvency Service, London, December 2006); Frisby, Insolvency Outcomes (2006) –

who notes ‘a startling similarity between the performance of receiverships and administrations regarding frequency of outcomes’.

108IS 2000, p. 17. See also Carruthers and Halliday, Rescuing Business, p. 286.

109IS 2000, p. 15. Points relating to the consistency of administrative receivership with international and EU requirements have been left out of account here.

t h e h e a r t o f th i s a r g u m e n t : fi rs t, th a t de bt fi

pre-Enterprise Act receiverships, secured creditors recovered on average 29.3 per cent on debts owed, compared to 34.6 per cent for post-Enterprise Act administrations and 13.4 per cent for pre-Enterprise Act administrations: see S. Frisby, Interim Report to the Insolvency Service on Returns to Creditors from Preand Post-Enterprise Act Insolvency Procedures (Insolvency Service, London, July 2007) (hereafter ‘Returns to Creditors, 20 07’ ).

112 See British Bankers’ Association (BBA), A Statement of Principles: Banks and Businesses – Working Together When You Borrow (BBA, London, 2005). See further D. Milman and D. Mond, Security and Corporate Rescue (Hodgsons, Manchester, 1999).

113 See Armour and Frisby, ‘Rethinking Receivership’.

debt finance in the hands of a relatively small number of creditors can reduce total monitoring and decision-making costs. The suggestion here is that giving control over enforcement to a ‘concentrated creditor’ allows that creditor to utilise the information it has gathered during the course of its deliberations on whether or not to continue to support the debtor, and that this both enhances the disciplining effect of credit and allows for quicker and cheaper enforcement than would take place with the collective insolvency procedure in which an outsider appointee takes over the firm. Consistent with this suggestion are studies published in 2006 suggesting that the direct costs of pre-Enterprise Act 2002 receivership cases are lower than those of post-Enterprise Act administrations.114 They also indicate that the average net recoveries to creditors in receiverships are no lower than in the new administrations.115

The arguments for creditor concentration emphasise that a number of problems are faced in creditor collective actions. First, there is the issue of information. It will cost creditors money to gain information on whether to enforce the debt or renegotiate it, but the benefit of such information will be only a fraction of the total value at stake and so individual creditors will be notionally under-informed. They may, moreover, seek to free-ride on the monitoring of others and, overall, there will be collective underinvestment in monitoring. ‘Hold out’ problems may also affect collective action since collective renegotiation or decisions to sell the firm as a going concern may demand that all creditors agree the course of action. Individual creditors will thus have incentives to hold out against such agreements until their co-operation is bought. If such problems are severe, a race to enforce debts may result as collectivity breaks down.116

The suggested solution to such problems is not to follow Jackson and argue for state-imposed collectivism: this, say Armour and Frisby, will reduce enforcement costs but it will do ‘nothing to ameliorate collective

114Armour, Hsu and Walters, Report for the Insolvency Service, p. iv (who suggest that concentration allows repeat-playing banks to negotiate down the fees of IPs more effectively in a receivership than is possible for dispersed unsecured creditors in an administration).

115Ibid., p. v. But see Frisby’s argument that administration as a procedure is likely to produce better outcomes for all creditors than receivership: Frisby, Returns to Creditors, 2007, p. 34.

116Armour and Frisby, ‘Rethinking Receivership’, p. 84; S. Levmore, ‘Monitors and Freeriders in Commercial and Corporate Settings’ (1982) 92 Yale LJ 49 at 53–4; T. H. Jackson, ‘Bankruptcy, Non-Bankruptcy Entitlements and the Creditors’ Bargain’ (1982) 92 Yale LJ 857 at 859–68.

that concentration may produce inefficient and distorted decisions concerning the continuation of the business as a going concern. Proponents of concentration concede that (consistently with their legal obligations) receivers generally see their role as being to maximise recoveries for the main creditor (hereafter ‘the bank’). The danger, as summarised by one commentator, is:

The receivership system may lead to an equilibrium in which the company is prematurely and inefficiently liquidated. The problem stems from the feature of this system which allows creditors to act in individualistic self-interest. They have the right to recover the value of their claim without considering the overall value of the pool of assets upon which they draw. This may force the company to liquidate its assets even though on efficiency grounds it should continue business.119

Proponents of the creditor concentration theory, however, might respond that there is little evidence that banks tend to act in a precipitate fashion. Franks and Sussman have concluded from a study of 542 financially distressed small and medium-sized companies that there are no clear indications of such a tendency.120

A second defence of receivership might lie in the argument that banks will be unwilling to close marginal businesses since indirect costs will be involved where the closed firm’s customers, suppliers and employees are also bank customers and stand to be adversely affected by closures. It could be added that banks will not act precipitately for reputational reasons, since closing SMEs will not sit well alongside advertising campaigns stressing the banks’ caring and listening characteristics.121 This defence, however, has limited mileage. On the bank’s decision to institute a receivership, it may well be the case that some banks, in buoyant financial conditions, will act in an understanding manner, but it would be rash to design insolvency regimes by presupposing continuing general goodwill in banks. Such goodwill may be sketchily distributed and short lived in hard times when insolvencies will multiply. The incentive will be for banks to put receivers into post with an eye to their own selfish

119D. Webb, ‘An Economic Evaluation of Insolvency Processes in the UK: Does the 1986 Insolvency Act Satisfy the Creditors’ Bargain?’ (1991) Oxford Economic Papers 144.

120Franks and Sussman, ‘Financial Distress and Bank Restructuring’, pp. 91–2.

121British Bankers’ Association, Banks and Business Working Together (London, 1997) sets out a number of principles for dealing with SMEs, stating, inter alia, ‘Banks have long supported a rescue culture and thousands of customers are in business today because of the support of their bank through difficult times’: discussed in Hunter, ‘Nature and Functions of a Rescue Culture’.

interests. Some would argue, moreover, that the general UK trend is for banks to operate in an increasingly hard-nosed manner and to move away from ‘gentlemen’s club’ altruistic stances.122 Once the receiver is appointed, moreover, the bank is not running operations and the receiver has a legal obligation and, as seen above, an inclination to act in the bank’s interests rather than broader interests.

Empirical research, however, suggests that if receivership is compared to post-Enterprise Act administration procedure, concentrated and dispersed creditor governance regimes may prove functionally equivalent. This is because, although gross realisations may have increased with post-Enterprise Act administration’s collective regime, those increases have tended to be eaten up by the increased process costs associated with the collective regime.123

The creditor concentration theory is also open to contest on its assumptions concerning the monitoring of corporate managers. A key assumption is that banks will possess strong incentives through concentration to monitor managerial performance. This will produce benefits to the general body of creditors. There are, however, reasons for thinking that this will not always be the case. In so far as credit is not 100 per cent concentrated in the secured loan from the bank, the bank will under-monitor since its incentive to oversee will relate to the extent of its secured loan and not the total sum owed to creditors and at risk through managerial activities. It is, moreover, the case that where the secured creditor is not first in the queue to be paid (e.g. where there are fixed charges and preferential creditors) any incentive to monitor will be reduced. Thus, if the prospect of recovery of the sum owed stands to be reduced to 25 per cent by the existence of prior

122W. Hutton, The State We’re In (Vintage, London, 1996); Carruthers and Halliday, Rescuing Business, pp. 197–205. But see the argument that banks are now tending to favour administration rather than receivership (even when they have powers to appoint receivers) because of reputational concerns: Armour, Hsu and Walters, Report for the Insolvency Service.

123See Armour, Hsu and Walters, Report for the Insolvency Service. Frisby’s study gives gross returns for pre-EA receiverships as 29.3 per cent for secured creditors and 1.9 per cent for unsecured creditors, and, for post-EA administrations, 34.6 per cent for secured creditors and 2.8 per cent for unsecured creditors: see Frisby, Returns to Creditors, 2007, p. 5. Note, however, Frisby’s caution (p. 4) on drawing such comparisons and her pointing to a series of complicating variables – including the abolition of the Crown’s preferential status by the EA 2002 which might be expected to have increased the body of unsecured creditors and, at the same time, swelled the mass of funds available for secured creditors.

claims, the inducement to monitor will be a quarter of the efficient incentive.

Attention must, in addition, be paid to the purposes to which such monitoring is put. It would be rash to assume that monitoring relates to the general health and well-being of the enterprise rather than the prospect of repayment of the loan.124 The more modest the loan is in relation to overall corporate turnover, the more likely it is that the bank will take its eye off overall business health. It may even be the case that a

generally poorly performing company would, on receivership, be able to meet the sum owing to the bank on the floating charge.125

The monitoring of management, moreover, can be seen as merely one of a number of ways in which a creditor can deal with the risks of lending. Taking increased security offers an alternative way of managing developing risks as do the processes of spreading risks and of adjusting interest rates and associated charges for credit. From the point of view of a creditor, the objective in lending will be to manage risks in the most efficient manner: that is, the one that allows the bank best to compete in the marketplace and best to maximise returns for its own shareholders. Such an objective is likely to be met by the bank adopting a mixture of strategies: perhaps combining some taking of security, some monitoring and some adjustment of interest rates. The problem for the creditor concentration theory is that, even if concentration is assumed, it cannot be taken for granted that the bank’s incentive will be to monitor managerial practice with an eye either to ongoing corporate health or to instituting receivership at the appropriate time. Many banks will often find it cheaper to deal with risks by increasing security and by increasing charge rates.

Nor should the virtues of monitoring be accepted unquestioningly in setting these up as a justification for any unfairness in underprotecting the interests of certain classes of creditor. The notion that monitoring protects creditors assumes that there is a linkage between this and improvements in the management of the firm. It may well be the case that underperforming managers fail to deliver the goods in many instances because of irrationalities, lack of ability, failures of strategy

124See V. Finch, ‘Company Directors: Who Cares About Skill and Care?’ (1992) 55 MLR 179 at 189–95.

125Webb, ‘Economic Evaluation’, p. 145. On variations in the propensity to monitor at different stages of corporate distress see J. Armour, ‘Should We Redistribute in Insolvency?’ in J. Getzler and J. Payne (eds.), Company Charges: Spectrum and Beyond (Oxford University Press, Oxford, 2006) p. 208.