Receivership Appointment
Cases
McCann -v- Halpin & anor
[2016] IESC 11
Supreme Court Laffoy J.
“Judgment and order of the High Court
16. In his judgment, the trial judge succinctly outlined the submissions made on behalf of the Appellants in the High Court on the point in issue on this appeal as follows (at para. 17):
“The [Appellants] have rested their arguments firmly upon the contention that the Receiver was not appointed in conformity with the letters of demand, as he was appointed at 4pm, which they contend is not ‘close of business’. Ross Maguire SC submits that there can be no question but that the doors of IBRC remain open beyond 4pm. They do not contend that if the bank had waited another hour or even an hour and a half the money could have been repaid. It is contended that since no event of default was committed by the [Appellants] until after the expiration of the deadline, namely until after ‘close of business’ the bank was not entitled to appoint the receiver and his appointment is therefore invalid. It is submitted in other words that the demand made is faulty and of no lawful effect because the bank failed to comply with the terms of the demand i.e. wait until close of business before taking any enforcement step.”
The trial judge also recorded that the Appellants submitted that a court should be vigilant to ensure that there is scrupulous compliance with legal requirements for the appointment of a receiver, given the serious consequences for any company by such appointment, citing the decision of the High Court (Gilligan J.) in The Merrow Limited v. Bank of Scotland Plc [2013] IEHC 130.
28. At the core of the assertions made in paragraphs (a) to (c) in para. 27 above is the contention that it was not necessary for IBRC to await any default in repayment of the monies demanded by the Demand Letter, but rather the legal entitlement to appoint a receiver under Clause 9A of the 1998 Mortgage arose as and when the sums became payable and the security was enforceable, which, it was contended arose on the service of the Demand Letter without anything further having to occur.
29. The relevance of what is stated in paragraph (d) of the summary in para. 27 above was elaborated on by counsel for the Receiver by reference to a line of authorities of the courts of England and Wales in which the so-called “mechanics of payment test” has been applied as to when a receiver may be appointed following a demand for payment where the secured monies are contractually repayable on demand. In particular, counsel for the Receiver relied on the decision of the Chancery Division of the English High Court in Sheppard & Cooper Limited v. TSB Bank Plc [1996] 2 All ER 654. In that case, the plaintiff company was liable under a debenture to pay or discharge its indebtedness to the bank in whose favour the debenture was given on demand and the debenture further provided that the bank might appoint administrative receivers of the charged assets at any time after all or any of the indebtedness became immediately payable. On the facts, a period of approximately one hour passed between a written demand requiring repayment of the plaintiff company’s indebtedness and the appointment of administrative receivers. In his judgment Blackburne J. explained what he referred to as the so-called mechanics of payment test by reference to the following passage from the judgment of Walton J. in Bank of Baroda v. Panessar [1986] 3 All ER 751 at p. 759 – 760:
“Money payable ‘on demand’ is repayable immediately upon demand being made . . . Nevertheless, it is physically impossible in most cases for a person to keep the money required to discharge the debt about his person. He may in a simple case keep it in a box under his bed; it may be at the bank or with a bailee. The debtor is therefore not in default in making the payment demanded unless and until he has had a reasonable opportunity of implementing whatever reasonable mechanics of payment he may need to employ to discharge the debt. Of course, this is limited to the time necessary for the mechanics of payment. It does not extend to any time to raise the money if it is not there to be paid.”
30. Blackburne J. elaborated on the last sentence in that passage later in his judgment, where he stated (at p. 660):
“. . . the court must in all circumstances allow a minimum period to elapse before the debtor’s default can be established. The requirement that sufficient time be permitted to elapse to enable the debtor to effect the mechanics of payment assumes that that is the period needed if the debtor has the necessary moneys available. If, however, he has made it clear to the creditor that the necessary moneys are not available, then, provided a proper demand has been made, I cannot see that the creditor need allow any time to elapse before being at liberty to treat the debtor as in default.”
Discussion and conclusions
33. The approach adopted by the trial judge in first addressing the meaning of the phrase “by close of business” in the seventh paragraph of the Demand Letter and in considering whether the prerequisite stipulated in that paragraph as to non-receipt by IBRC of the payment demanded had been satisfied by the time stipulated, so as to give rise to the entitlement of IBRC to enforce its security, in my view, was a logical approach to adopt. If that prerequisite had been satisfied, irrespective of the legal or equitable implications, if any, arising from what was stipulated in the seventh paragraph, the case made by the Appellants that the Receiver was not validly appointed would fall asunder and, accordingly, it would not be necessary to reach any conclusion on the argument advanced on behalf of the Receiver that IBRC was entitled to appoint the Receiver after the demand for payment was made and before the close of business on 17th February, 2012. As has been recorded earlier, the trial judge concluded that the Receiver had been validly appointed but did so without having to consider the argument advanced on behalf of the Receiver that IBRC was entitled to appoint the Receiver at any time after the demand was made and before 4pm on 17th February, 2012.
34. Adopting the same logical approach, the first question which this Court has to consider is whether the trial judge was correct in finding, in the context of the Demand Letter, that the expression “by close of business on 17 February 2012” in the seventh paragraph meant by 4pm on that day. In my view, he was correct and the reasoning underlying his conclusion wholly supports it.
35. On the hearing of the appeal, counsel for the Appellants could not identify any statutory provision (for example, any provision of the Interpretation Act 2005) or any authority which would be of assistance in the proper interpretation of the phrase “by close of business”. Moreover, as the trial judge stated, the phrase does not come within the category of “terms of art”, which were described in the enlightening observations of Diplock L.J. in Sydall v. Castings Limited [1966] 3 All ER 770 (at p. 774) as constituent words and phrases which “are more precise in their meaning than they are in the language of Shakespeare or of any of the passengers on the Clapham omnibus”, being part of an English language evolved by lawyers whose profession it is to draft and construe documents which are intended to give rise to legally enforceable rights and duties. That being the case, the phrase must be given its ordinary meaning, but what its ordinary meaning is must be interpreted in the particular context in which it is used, as the trial judge stated.
36. The context in which the phrase “by close of business” is used is that the seventh paragraph of the Demand Letter, in the case of both Elektron and Crossplan, is preceded by a demand by IBRC for payment by the addressees, Elektron and Crossplan, forthwith of very substantial sums of money, in the case of Crossplan, sums aggregating in excess of €25m. Those demands are succeeded by specific directions as to how payment of those very substantial sums of money could be effected – by electronic transfer to a specific account of IBRC, or by “delivery” to IBRC at a specific address. The reference in the seventh paragraph to the payment not being “received” by close of business must be interpreted by reference to the nature of the demand for payment and the manner in which payment could be made to IBRC. That the object of the demand is that IBRC will receive by electronic transfer or by “delivery” of a bank draft in the case of each company a substantial sum of money “by close of business”, must lead to the interpretation of the phrase “by close of business” as meaning the end of the business banking day, as the trial judge found. The reality is that beyond the end of the banking business day, the objective could not be achieved, in that, for example, there would be no way of delivering a bank draft to IBRC, as the doors would be closed to bank customers.
37. The end of the banking business day is the point in time when the relevant bank ceases to do banking business with its customers. As the trial judge found, in the case of IBRC, the end of banking business occurred at 4pm on Friday, 17th February, 2012. That is what any customer of IBRC would have understood to be the meaning of “close of business” used in a document, such as its use in the seventh paragraph of the Demand Letter. Moreover, in the light of what happened at the meeting on the morning of 17th February, 2012, as outlined by Ms. Kelly, it cannot be doubted that it must have been the understanding of the Appellants that “close of business” meant 4pm on that day.
38. As regards the Appellants’ alternative argument, the starting point is that the phrase in the seventh paragraph of the Demand Letter under consideration is properly interpreted as meaning by 4pm on 17th February, 2012. Applying its ordinary meaning to the preposition “by”, it indicates that 4pm is the deadline for receipt of the payment demanded. In accordance with the wording of the seventh paragraph, when that deadline was reached, IBRC was entitled to enforce its security. In particular, the Appellants’ argument that, when the deadline was reached at 4pm, IBRC had to wait for some period of time after 4pm to exercise its power to enforce the security does not stand up to scrutiny. If IBRC was in a position to move to make the appointment once the deadline was reached, applying the ordinary meaning of “by” 4pm, it must have been entitled to do so when the deadline was reached and the prerequisite of non-receipt by IBRC of the payment demanded was satisfied. Apart from that, one might ask why should IBRC have to wait a minute, as distinct, from, say, a nanosecond, which I understand means one thousand millionth of a second, before exercising its power? That rather facetious question does not have to be answered because once the deadline is reached and the prerequisite is satisfied by non-receipt by IBRC of the payment demanded, the power to enforce the security is exercisable.
39. No ambiguity, either internally within the seventh paragraph of the Demand Letter or between that paragraph and the remainder of the Demand Letter has been pointed to on behalf of the Appellants. There is no such ambiguity and, therefore, the contra proferentem rule of construction has no application.
40. Accordingly, the Appellants’ submission that the Receiver was not validly appointed must be rejected on both bases on which it was argued. In summary, the trial judge was correct in interpreting “by close of business” as meaning by 4pm. The proper interpretation of the preposition “by” in the phrase is that it indicates the deadline for receipt by IBRC of the payment demanded. The deadline occurred at 4pm, whereupon IBRC was entitled to enforce its security.
41. On the basis of the foregoing conclusions, as happened in the High Court, it has not been necessary to address the argument made on behalf of IBRC that it was entitled to appoint a receiver after the demand for payment was made and before the close of business on 17th February, 2012. While the submissions made on behalf of the Receiver have been outlined, no view is expressed as to the correctness or otherwise of any of the arguments advanced on behalf of the Receiver as to the effect or otherwise of the seventh paragraph of the Demand Letter. In particular, no view is expressed as to the application of the so-called “mechanics of payment test” to the circumstances which prevailed in relation to the banker/customer relationship of IBRC, on the one hand, and Elektron and Crossplan, on the other hand, between 15th February, 2012 and 4pm on 17th February, 2012. However, I feel constrained to observe that, if this Court had to consider that matter, it is difficult to see how the Court could ignore the seventh paragraph of the Demand Letter.
42. It follows from the conclusions outlined, that the Receiver was validly appointed receiver of the assets of Elektron and the assets of Crossplan on 17th February, 2012.
Order
O’Flynn & Anor -v- Carbon Finance Ltd & Ors
[2014] IEHC 458
Irvine J.
“Lack of Time to Meet Demands
122. The plaintiffs contend that there are two legitimate but differing schools of thought as to how the word “forthwith” should be construed in the context of a loan which is repayable on demand. The first is what is referred to in the relevant judgments as the mechanics of payment test. This is a very stringent test and the one that has been universally adopted by the English Courts in recent times. This test allows only such time as is reasonable in all of the circumstances to enable the debtor contact his bank and make the necessary arrangements for the sum in question to be transferred to the account of the creditor. The alternative test is what is described as the reasonable time or reasonable time in the circumstances test which has, according to the plaintiffs been applied in other jurisdictions. Applying that test the plaintiffs maintain that in determining what is a reasonable time the Court can take into account matters such as whether the debtor had any warning of a borrowers intended action and perhaps the time necessary to arrange for alternative finance to be put in place.
123. Notwithstanding an obiter statement by Charleton J. in National Asset Loan Management Limited v. Barden [2013] IEHC 32, to the effect that it might be possible for a borrower, who was trading in a satisfactory manner, to argue for an entitlement to reasonable notice of any contemplated demand for repayment of a commercial loan, the plaintiffs did not seek to argue that the demands for repayment of the personal loans could potentially be found to be invalid merely because of a lack of any prior notice of Carbon’s intention to call for their repayment. It was however submitted that the lack of any prior notice was something that the Court would arguably be entitled to take into account in determining whether the time allowed for payment was sufficient if the reasonable time test were applied.
125. There is some divergent case law on the question of how much time must pass following a demand by a creditor, where money is payable on demand, before the debtor who fails to make payment can be said to be in default. However, one principle seems to be well established and about which there is no dispute and that is that if the borrowers have made known to the lender that they are unable to pay the monies outstanding, then it is not necessary for the lender to allow any time to elapse after demand before seeking to enforce their security. As Blackburne J. stated in Sheppard & Cooper Limited v. TSB Bank Plc [1996] 2 All E.R. 654 at 660:-
“The requirement that sufficient time be permitted to elapse to enable the debtor to effect the mechanics of payment assumes that that is the period needed if the debtor has the necessary moneys available. If, however, he has made it clear to the creditors that the necessary moneys are not available, then, provided a proper demand has been made, I cannot see that the creditor need allow any time to elapse before being at liberty to treat the debtor as in default.”
126. This approach was adopted by McGovern J. in Allied Irish Bank Plc & Anor v. Moran [2012] IEHC 323, where at para. 23 of his judgment he adopted the observations of Harmon J. on the interlocutory application in Sheppard & Cooper when he stated:-
“The question of notice becomes irrelevant in circumstances where the defendants are unable to pay the sums due. The law does nothing in vain and it would be pointless, in the circumstances of this case, to require further steps to be taken by the second named plaintiff before it can recover its debt where the claim would inevitably be brought again and the defendants would, on their own admission, have no answer to it.”
128. The plaintiffs have found some small support for their contention that they may reasonably argue for the application of the reasonable time test by reference to the obiter decision of Charleton J. in National Asset Loan Management Limited v. Barden [2013] IEHC 32, where at para. 13 of his judgment he stated as follows:-
“Were it to be the case that the bank jumped ahead of the business situation contemplated to be a success and demanded repayment notwithstanding that sales were progressing in a reasonable fashion it is possible that another argument might succeed. It might also be that a borrower would be entitled to reasonable notice of the change in the attitude of the bank and reasonable time to arrange another facility.”
129. The proposition advanced by the plaintiffs that a borrower served with the demand for payment forthwith can be afforded some latitude beyond the time required to meet the mechanics of payment test does not, I believe, get any support from the decision of McGovern J. in Allied Irish Banks Plc & AIB Mortgage Bank v. Moran. In that case, the learned trial judge was dealing with loans which required the lenders to give prior notice to the borrowers of any default under the agreement and a time to remedy that default prior to making a demand for repayment. While the learned trial judge did indeed say that “in the absence of a fixed time, the notice should be reasonable”, I read that statement as being one requiring the lender to provide the borrower with a reasonable time to remedy the default prior to the demand as opposed to a requirement that the lender afford the borrower additional time to meet a demand for payment.
130. While the plaintiffs rely upon the decision of Hogan J. in Re Belohn Limited [2013] IEHC 157 to support their submission that they have a reasonable argument to make that the Court should apply the reasonable time test, I feel this decision does not really advance their position. That judgment relates to an application to discharge an order appointing an interim examiner to Belohn. In the course of his judgment, Hogan J. referred to the manner in which Bank of Scotland had called in the personal loan of a Mr. Foley who was a director of Merrow, the sole shareholder of Belohn. Regarding the demand for payment of slightly over €1 million which was made by letter handed to Mr. Foley at 4:15pm and in respect of which it demanded repayment by 5pm the same day, Hogan J. stated as follows:-
“Second, the time allowed for payment was quite impossibly and quite unrealistically short. Even if Mr. Foley’s bank had actually been open at the time he received the letter, it would have represented an heroic feet of efficiency for Mr. Foley and his own bank to have ensured that the money was actually received in a particular account by the Bank of Scotland by 5pm, as anyone who has ever stood in a bank queue or tried to effect even the simplest banking transaction such as transferring money from one account to another would immediately understand. Of course, depending on the circumstances on the contractual terms governing the loan agreements, a demand letter may reasonably request payment within a matter of hours during the course of a banking day. But the time permitted for repayment must nonetheless be reasonable and realistic and in this case it was neither.”
131. I do not believe this passage can be used to suggest that Hogan J. did not believe that mechanics of payment test was the one to be applied in the case of a borrower seeking to call in a loan facility that was repayable on demand particularly in circumstances where he expressed himself satisfied that it might be reasonable for a lender to demand payment within hours during the course of a banking day depending on the contractual terms. All that he was explaining was that at 4.15pm on a Friday, it would be simply impossible, in a practical sense, for anyone to make a transfer within 45 minutes given that it was outside normal banking hours, a timeframe which would not meet the mechanics of payment test.
132. In the plaintiffs’ written submissions when referring to a number of judgments significant emphasis was placed on words such as “reasonable” and “reasonable in the circumstances of the case” by referencing them in bold type. However, when the quotes concerned are read in the context of the overall decisions from which they are taken, it is clear that the Court in each instance was not departing from the mechanics of payment test but merely looking at what was reasonable in the circumstances of that test. An example of this is to be seen in the decision of Blackburne J. in Sheppard & Cooper Limited v. TSB Bank Plc where at 659, in considering the submissions of counsel, he states as follows:-
“In my view, the question how much time must elapse after demand before a debtor can be said to be in default is essentially a practical one. As Goff J. observed in the Crypts case [1973] 2 All E.R. 606 at 616, [1973] 1 WLR 994 at 955:-
‘the cases show [where money is payable on demand] all the creditor has to do is to give the debtor time to get it from some convenient place, not to negotiate a deal which he hopes will produce the money.’
What that time is must, in my view, depend on the circumstances of the case. If the sum demanded is of an amount which the debtor, if he has it, will be likely to have in a bank account – which will be the position in 99 cases out 100 – the time permitted must be reasonable in all the circumstances to enable the debtor to contact his bank and make the necessary arrangements for the sum in question to be transferred from his bank to the creditor. If the demand is made out of banking hours, the period of time is likely to be longer – involving waiting until banks reopen – than if the demand is made during banking hours.”
To make his position crystal clear he then advises:-
“In so stating, I do not consider that I am abandoning the mechanics of payment test in favour of some wider and less practical approach.”
133. Insofar as the plaintiffs rely upon the decision in Bunbury Foods PTY Limited v. National Bank of Australia Limited [1984] HCA 10; (1984) 153 CLR 491, it is clear on reading that decision that the Court was in fact endorsing the mechanics of payment test rather than departing from it in favour of the more subjective test for which the plaintiffs contend, as appears from para. 28 of the Court’s judgment where it was stated as follows:-
“However, it is now a well established principle of law that a debtor required to pay a debt payable on demand must be allowed a reasonable time to meet the demand. Even in a case where a deed provided that the debt was payable ‘immediately upon demand thereof in writing’ it was held that the provision must be given a reasonable construction so that the debtor had a reasonable time to get the money from some convenient place (Toms v. Wilson [1862] 4 B&S 442, at pp. 453 – 455) [1863 EngR 991; (122 E.R. 524, at p. 529]. This does not mean that the notice calling up the debt is invalid unless it requires payment ‘within a reasonable time’. It means no more than that the debtor must be allowed a reasonable opportunity to pay before it can be said that he has failed to comply with the demand. A notice requiring payment forthwith will be regarded as allowing the debtor a reasonable time within which to comply. Until a reasonable time in the sense discussed has elapsed the creditor cannot enforce his security.”
The reference in this decision to the time required by the debtor “to get the money from some convenient place” again endorses the applicability of the mechanics of payment test.
134. Likewise in Parras Holdings PTY Limited & Ors v. Bank of Australia [1998] FCA 682, contrary to what was asserted on the plaintiffs’ behalf, the Court did not conclude that a reasonable time for payment in the context of a demand for payment with immediate effect was considered to be fourteen days. In that case, the letter of demand under consideration by the Federal Court of Australia on its face allowed the borrower 14 days for repayment. Accordingly, the decision is no authority for the proposition that anything other than the mechanics of payment test is the one to be applied where monies are repayable on demand. Indeed, in upholding the validity of the demand notice, the Court endorsed the mechanics of payment test that had been applied in Cripps (R.A.) & Son Limited v. Wickenden [1973] 1 WLR 944 and Bank of Baroda v. Panessar [1987] 1 Ch. 335, both decisions which were subsequently approved of in Sheppard & Cooper.
135. From these authorities it is easy to see why the mechanics of payment test has proved itself so attractive to the Courts and why there is an almost complete dearth of authority to support an alternative test. This is probably because the mechanics of payment test involves the application of relatively objective criteria. Applying this test, a borrower can without too much difficulty determine when it is likely to be safe to proceed to enforce its security. This cannot be said of the reasonable time test which involves a great deal of subjectivity and is one that the Courts have considered imprecise and undesirable in the commercial context in which it usually arises.
136. Taking into account all that was submitted to the Court by way of written and oral submission regardless of the obiter pronouncement of Charleton J. in Barden, I am not satisfied that the plaintiffs may reasonably argue for a test other than the mechanics of payment test. Accordingly, the question I must now answer is, whether, applying that test, the plaintiffs may reasonably argue at the trial of the action that the letters of demand are unlawful and the consequential appointment of the receivers invalid.
McCleary -v- McPhillips & ors
[2015] IEHC 591
Cregan J.
“125. The central issue in this case is, and always has been, whether the receiver was validly appointed under the deed of mortgage/charge. That central issue has been made more complicated in this case because the first receiver, Mr. Tennant, was discharged and a second receiver, Mr. McCleary, was appointed on 17th January, 2014.
Therefore the central issues in these proceedings are:
1. The validity of the deed of appointment of Mr. Tennant as first receiver
2. The validity of the deed of discharge of Mr. Stephen Tennant as receiver on 17th January, 2014
3. The validity of the appointment of Mr. McCleary as receiver on 17th January, 2014.
126. Moreover, the central issue in the challenge to the validity of the appointment of the receiver is whether the receiver was appointed in accordance with the deed of mortgage/charge entered into between ACC Bank and the borrower Mr. McPhillips.
127. The relevant clause of the deed of mortgage/charge dealing with the appointment of receiver is clause 10 which provides as follows:
“10. The Bank at any time or times after the execution of these presents may without any further consent from or notice to the Borrower or any other person or persons
a. (1) By writing under its hand appoint such person as it thinks fit to be the receiver of the income of the mortgaged premises or any part thereof or of the rent and profits of the mortgaged premises or any part thereof similarly to remove any such receiver and to appoint another in his place and to require any such receiver to insure the mortgaged premises or any part thereof in such manner as the Bank shall from time to time direct. The receiver so appointed shall be deemed to be the agent of the borrower and may carry on the business of the borrower in or on the mortgaged premises and manage the same and pay and receive debts due to or from the borrower in respect thereof.
(Emphasis added).
128. Paragraph 11 of the deed of charge/mortgage provides as follows:
“The Bank may at any time after entering into possession of the mortgaged premises or any part thereof or receipt of the rents and profits of any part thereof or appointing a receiver of the mortgaged premises or over the rents and profits or any part thereof relinquish such possession or remove such receiver on giving notice to the borrower.” (Emphasis added).
129. It is clear therefore from para. 10 that the exact terms of the deed of charge/mortgage entered into between the borrower and the Bank provide that the Bank may appoint such person as it thinks fit to be the receiver by writing under its hand. The deed of mortgage/charge does not provide that the appointment of the receiver by the Bank should be under seal. It could have done so but it does not in fact do so.
Review of case law on Bank’s obligation to appoint receivers in accordance with Debentures
130. In the Merrow Ltd v. Bank of Scotland Plc & Anor [2013] IEHC 130 Gilligan J. considered the legal principles in relation to a Bank’s obligation to appoint receivers in accordance with debentures and engaged in an extensive review of the authorities in the common law world. In that case, the company had loan facilities with Bank of Scotland and the balance due on the loans amounted to a sum of approximately €4 million. The Bank had a charge over the premises of the company and the Bank appointed a receiver on 10th October, 2012. The company challenged the receiver’s appointment as being invalid. At para. 28 and following of his judgment Gilligan J. stated as follows:
“28. Bank’s obligation to appoint in accordance with Debentures.
The Bank purported to appoint the Receiver without reference to the court and pursuant to its contractual rights under the 1981 and 2008 Debentures and it is clear that the Receiver’s authority is derived from those contracts. In R Jaffe Ltd. (in liquidation) v. Jaffe (No.2) (1932) NZLR 195 Smith J. considered the law in this area and held:
“The receiver and manager here to be appointed is to be appointed without the aid of the Court. He is to be appointed according to the terms of the contract between the parties. In my opinion, the position is governed by the terms of the contract. Palmer, in his Company Precedents, speaking of a receiver appointed without the aid of the Court, says: “The receiver derives his appointment and authority from the parties themselves in pursuance of the powers of the contract. This is the point to be attended to.”
In Kerr & Hunter on Receivers and Administrators it is also said with reference to a receiver appointed out of court by the debenture-holders of a company that “the position and powers of such receivers are derived from and depend upon the contract between the parties expressed in the authorising instrument”.
29. Since a receiver’s authority is derived from the instrument under which he is appointed, an appointment is not valid unless it is made in accordance with the terms of that instrument. This principle has been recognised by the leading commentators in this area and accepted and applied by the courts throughout the common law world.
30. Courtney, in The Law of Private Companies (3rd Ed.) has observed that:
“[t]he validity of the appointment of a receiver is dependent upon compliance with the terms contained in the debenture and the capacity of the company and authority of its officers to create the debenture ab initio.”
31. Lynch-Fannon Corporate Insolvency and Rescue (2nd ed.) has noted that “[t]he penalty for non-compliance with the formalities for the appointment of the receiver is that such appointment is void”. She has also observed that non-compliance with formalities of appointment amounts to an abuse of process.
32. In The Law of Company Insolvency (2008), Forde has commented that “[t]here is no prescribed form for appointing an out-of-court receiver. Formalities set out in the security instrument must be scrupulously followed; if they are deviated from to any appreciable extent the appointment will be a nullity and the so-called receiver will be a trespasser on the company’s property”.
33. In The Law of Administrators and Receivers of Companies (2007), Lightman & Moss have noted that “[a] receiver must be appointed in accordance with the terms of the debenture.” Finally, in The Law Relating to Receivers, Managers and Administrators (4th Ed.) Picarda has observed that:-
“There is no set statutory form for the appointment of a receiver and manager out of court. On the other hand any formalities laid down by the relevant debentures or trust deed must be followed. If the debenture requires the appointment to be made in writing or under hand an oral appointment is not sufficient. Again, if the appointment is required to be by deed that formality must be observed”.
44. Penalty for non-compliance with Debenture.
It is clear from the foregoing that a receiver who is not appointed in accordance with the terms of the debenture is not validly appointed. In addition, an invalidly appointed receiver may be a trespasser on Company property.
45. Rationale for strict compliance with Debenture
The applicant submits that there are good reasons why the Bank ought to be held to the terms of the Debenture. While basic fairness implies that the Bank should be obliged to comply with the terms it chose to impose upon itself, several policy considerations were also identified by Smith J. in R Jaffe Ltd. (in liquidation) v. Joffe (No.2):
“The importance of the strict observance of these requirements is shown, I think, by other considerations. A receiver is not an officer of the Court, but, if he is duly appointed, his title is superior to that of a person interfering with the assets under his control, and the Court will then grant an injunction…. If a receiver were unable to prove his title according to the terms of his contract, then I doubt whether he would be entitled to an injunction. Furthermore, while the company is a going concern, a receiver, if the conditions of the debenture so provide, may be the agent of the company, and the company will then be responsible for his contracts. This is particularly important if the debenture-holder has power to appoint not merely a receiver, but a receiver and manager. Under such circumstances the company must be entitled to insist I think, upon the fulfilment of the terms of appointment as a condition of its liability”.
Summary of principles from above case law
131. It appears therefore, that the following is a summary of the applicable principles in relation to this matter:
1. The receiver’s authority to act is derived from the contracts, or mortgages, or deeds of charge, entered into between the Bank and the borrower.
2. The receiver is to be appointed according to the terms of the contract between the parties.
3. Because a receiver’s authority is derived from the instrument under which he is appointed, an appointment is not valid unless it is made in accordance with the terms of that instrument.
4. The consequence of non– compliance with the formalities for the appointment of a receiver, in accordance with the terms of the instrument, is that the appointment is void.
5. If the instrument provides that the appointment is required to be by deed, or under seal, that formality must be observed.
6. If the instrument requires that the appointment is to be made in writing under hand, that formality must also be observed.
7. An invalidly appointed receiver may be a trespasser on company property.
8. Considerations of basic fairness and contractual interpretation mean that the Bank should be obliged to comply with the terms it chooses to impose in the instrument involved.
“By writing under its hand”
132. It is clear therefore, that where the appointment of a receiver is challenged, the receiver and/or the Bank must establish that the receiver has been appointed in exact compliance with the terms of the mortgage or charge. In this case, it must establish that the receiver has been appointed by the Bank in writing under its hand.
Invalid appointments
160. In this case the deed of appointment of Stephen Tennant signed on 4th February, 2013 was signed by Rosa Montgomery. She is not the Chief Executive or Secretary or Law Agent of the Bank. Ms. Montgomery had authority to witness the affixing of the seal but did not have authority to sign on behalf of the Bank for documents which are required to be in writing under the Bank’s hand. In those circumstances, I must conclude that this deed of appointment of Mr. Tennant as receiver was invalid.
161. The deed of discharge of Mr. Tennant dated 17th January, 2014 was signed by Loretta McAuley. Ms. McAuley is also not the Chief Executive or Secretary or the Law Agent of the Bank. Therefore this deed of discharge is invalid.
162. Likewise the deed of appointment of Mr. McCleary as receiver dated 17th January, 2014 was signed by Loretta McAuley. Again Ms. McAuley is not the Chief Executive or Secretary or the Law Agent of the Bank. Therefore, this deed of appointment of Mr. McCleary was not signed under hand on behalf of the Bank by any person duly authorised to do so. In those circumstances I must conclude that this deed of appointment is also invalid.”
The Merrow Ltd -v- Bank of Scotland Plc & Anor
[2013] IEHC 130
Mr. Justice Gilligan
“The Appointment of the Receiver not being under Seal
26. Because the appointment of the receiver was not under seal in accordance with Clause 7 of the 1981 debenture, it is contended on the applicant’s behalf that the appointment of the second named respondent as receiver pursuant to the two debentures is void.
28. Bank’s obligation to appoint in accordance with Debentures.
The Bank purported to appoint the Receiver without reference to the court and pursuant to its contractual rights under the 1981 and 2008 Debentures and it is clear that the Receiver’s authority is derived from those contracts. In R Jaffe Ltd. (in liquidation) v. Jaffe (No.2) (1932) NZLR 195 Smith J. considered the law in this area and held:
“The receiver and manager here to be appointed is to be appointed without the aid of the Court. He is to be appointed according to the terms of the contract between the parties. In my opinion, the position is governed by the terms of the contract. Palmer, in his Company Precedents, speaking of a receiver appointed without the aid of the Court, says: “The receiver derives his appointment and authority from the parties themselves in pursuance of the powers of the contract. This is the point to be attended to.”
In Kerr & Hunter on Receivers and Administrators it is also said with reference to a receiver appointed out of court by the debenture-holders of a company that “the position and powers of such receivers are derived from and depend upon the contract between the parties expressed in the authorising instrument”.
29. Since a receiver’s authority is derived from the instrument under which he is appointed, an appointment is not valid unless it is made in accordance with the terms of that instrument. This principle has been recognised by the leading commentators in this area and accepted and applied by the courts throughout the common law world.
30. Courtney, in The Law of Private Companies (3rd Ed.) has observed that:
“[t]he validity of the appointment of a receiver is dependent upon compliance with the terms contained in the debenture and the capacity of the company and authority of its officers to create the debenture ab initio.”
31. Lynch-Fannon Corporate Insolvency and Rescue (2nd ed.) has noted that “[t]he penalty for non-compliance with the formalities for the appointment of the receiver is that such appointment is void”. She has also observed that non-compliance with formalities of appointment amounts to an abuse of process.
32. In The Law of Company Insolvency (2008), Forde has commented that “[t]here is no prescribed form for appointing an out-of-court receiver. Formalities set out in the security instrument must be scrupulously followed; if they are deviated from to any appreciable extent the appointment will be a nullity and the so-called receiver will be a trespasser on the company’s property”.
33. In The Law of Administrators and Receivers of Companies (2007), Lightman & Moss have noted that “[a] receiver must be appointed in accordance with the terms of the debenture.” Finally, in The Law Relating to Receivers, Managers and Administrators (4th Ed.) Picarda has observed that:-
“There is no set statutory form for the appointment of a receiver and manager out of court. On the other hand any formalities laid down by the relevant debentures or trust deed must be followed. If the debenture requires the appointment to be made in writing or under hand an oral appointment is not sufficient. Again, if the appointment is required to be by deed that formality must be observed”.
44. Penalty for non-compliance with Debenture.
It is clear from the foregoing that a receiver who is not appointed in accordance with the terms of the debenture is not validly appointed. In addition, an invalidly appointed receiver may be a trespasser on Company property. In Wrights Hardware v Evans [1988] 13 A.C.L.R.631 Franklyn J. held that:
“…2. The existence of a power in the debenture holder to appoint in a particular manner will not relieve a de facto receiver from liability for trespass if the appropriate appointment procedure is not strictly observed: Harold Meggitt Ltd v Discount and Finance Ltd (1938) 56 WN (NSW) 23; Blanchard, supra, para 402; Donovan, supra, pp 19-20…”
45. Rationale for strict compliance with Debenture
The applicant submits that there are good reasons why the Bank ought to be held to the terms of the Debenture. While basic fairness implies that the Bank should be obliged to comply with the terms it chose to impose upon itself, several policy considerations were also identified by Smith J. in R Jaffe Ltd. (in liquidation) v. Joffe (No.2):
“The importance of the strict observance of these requirements is shown, 1 think, by other considerations. A receiver is not an officer of the Court, but, if he is duly appointed, his title is superior to that of a person interfering with the assets under his control, and the Court will then grant an injunction: Polmerl6. If a receiver were unable to prove his title according to the terms of his contract, then I doubt whether he would be entitled to an injunction. Furthermore, while the company is a going concern, a receiver, if the conditions of the debenture so provide, may be the agent of the company, and the company will then be responsible for his contracts. This is particularly important if the debenture-holder has power to appoint not merely a receiver, but a receiver and manager. Under such circumstances the company must be entitled to insist 1 think, upon the fulfilment of the terms of appointment as a condition of its liability”.
46. In Windsor Refrigerator Co. Ltd. v. Branch Nominees Ltd Donovan L.J. noted the far reaching effects of a receiver’s appointment and emphasised that precision was required in this context:
“As to the second question, the argument is that the receiver was appointed the moment the document was signed, and so before the debt became payable. I agree that in a context where precision is not required, one might speak of the document loosely as appointing a receiver. But in this context precision is required. What the debenture holder wants to do is to levy equitable execution, and for that purpose to have some person in being clothed with the necessary authority to take possession of the company’s property, to carry on its business, to act in its name, and pay the debt, and the company has to submit to the exercise of these powers by the person having such authority…”.
47. Even if no policy considerations applied, the Applicant submits that the Company would still be entitled, as a matter of principle, to insist that the Receiver be appointed in accordance with the Debentures. Support for this submission may be found in R (on the application of Mercury Tax Group Ltd) v. Revenue and Customs Commissioners [2008] EWHC 2721 where Underhill J. saw nothing wrong with holding parties to strict formal requirements when it came to the execution of certain agreements.
48. There, the respondents had successfully argued that there was a reasonable suspicion that a serious tax fraud had occurred and had obtained warrants under s. 20C (1) of the Taxes Management Act 1970, to enter a number of premises associated with the claimants and its clients to search for documents. The claimant sought judicial review of the decision to grant the warrants.
49. The claimant operated a tax avoidance scheme under which clients had to sign documents intended to be deeds. Its practice was to ask clients to sign incomplete drafts of the documents and when the final versions came into being, to detach the signature pages from the previous versions and attach them to the final versions. The defendants believed that this practice impugned the validity of the documents giving rise to a suspicion that a tax fraud had occurred. The claimants argued that there was nothing wrong with the practice provided that the alterations to the documents were authorised by the relevant party. Underhill J. noted the reason why the respondents were entitled to rely upon “formal” flaws in the deeds:-
“…I see nothing wrong in applying a strict test of formality to the validity of the agreements with which we are concerned in this case. Their entire raison d’etre is to create–and demonstrably to create–a series of formal legal relationships: if they do not do that, they do nothing.””