Medforth v. Blake & Others - Court of Appeal widens duty owed by receivers

In the recent case of Medforth v. Blake & Others, the Court of Appeal widened the duty owed by receivers to a mortgagor when managing the mortgagor's business.

Facts:

This case concerned a bank which appointed LPA receivers to carry on the farming business of a pig farmer ("M"), whose borrowings from the bank were secured by two agricultural charges and had exceeded £800,000. The receivers were to apply any profit from trading in reduction of M's overdraft. Four years later M repaid his indebtedness to the bank and the receivers were discharged. M instigated proceedings against the receivers alleging breach of duty by them in running the business because they had failed to ask for and obtain discounts from feed suppliers amounting to substantial sums. The Court of Appeal considered the nature and extent of the receivers' duty to the mortgagor when managing the business.

Held:

The Court of Appeal held that the proposition that in managing the business the receiver only owed the mortgagor a duty of good faith did not make commercial sense. A mortgagee exercising a power of sale owed a duty to take reasonable care. This duty applied to receivers as well as mortgagees and applied to the conduct of the business as well as the exercise of the power of sale. An absence of good faith would always be a breach of duty but this was not the limit of the duty, which depended on the circumstances in each case. Although the duty of good faith did not include negligence and was confined to dishonesty or improper motive, the Court of Appeal held that the receivers were not compelled to carry on the business but if they did so they owed a duty to manage the business with due diligence. The receivers, having failed to obtain a discount on the price of pig feed, had failed to manage the business with due diligence and had breached the duty owed to M.

Comment:

This decision shows that, when managing a mortgagor's business, a receiver owes the mortgagor not only a duty to act in good faith, but also a duty of care in equity to act diligently. This case (in common with recent decisions) operates to broaden the scope of a receiver's duties to a mortgagor.