High Court gives useful steer to receivers

Claims alleging breaches of duty by receivers rarely come to court, so a recent and detailed High Court decision is welcome - particularly for the guidance it gives practitioners on:

the duty to verify the validity of their appointment the duty to achieve the best price reasonably obtainable, and the ability to retain funds at the conclusion of a receivership to meet anticipated litigation costs. Justice Panckhurst's decision in Taylor & Ors v Bank of New Zealand & Ors1 will also be of some comfort to receivers for confirming that, in deciding whether a receiver's actions fall short of the standard required, the Court ought to "allow some margin for business and risk assessment by the receiver".

In other words, the receiver will not be liable unless "plainly on the wrong side of the line". Clearly, there is some judicial sympathy for receivers, and recognition that receivers can be required to make difficult judgement calls under pressure.

Verifying appointment

The receivers in the Taylor case did not seek a formal opinion on the validity of their appointment. Instead they relied on the bank to have appointed them appropriately and in accordance with the general security agreement (GSA). Only the appointment documents were given to the receivers' solicitors, who apparently advised the receivers by telephone that "everything was in order".

The Judge described those steps by the receivers as inadequate. One of the first duties of receivers is to verify the validity of their appointment. The Judge said the receivers' solicitors needed to have seen the GSA, the notice of demand and sufficient related documentation in order to verify that an available event of default had occurred.

Although the plaintiff director argued that the appointment was in breach of the contract between the company and the bank, the Judge found in the bank's favour. The bank's interpretation of the relevant clause was preferred and, in any event, the director's co-operation with the receivers prevented him from later alleging that the appointment process had been inadequate.

So the risk that the receivers took, in not verifying the validity of their appointment, did not ultimately harm them in this case.

Duty to obtain best price for the assets

The business in question imported and distributed hair products from an Italian supplier. Rather than continuing to trade the business, the receivers sold the company's assets, not as a going concern, but as inventory and fixed...