Downsview Nominees Ltd and Another v First City Corporation Ltd and Another

JurisdictionUK Non-devolved
Judgment Date15 December 1992
Date15 December 1992
CourtPrivy Council

Company - Receiver - Duties - Receiver appointed by first debenture holder - First debenture holder refusing to assign debenture to second debenture holder - Receiver exercising powers to prevent enforcement of second debenture - Whether receiver and first debenture holder owing duty to subsequent encumbrancer or to company - Whether breach of duty by first debenture holder and receiver

A company issued a first debenture to a bank and a second debenture to the first plaintiff. Pursuant to its powers under the second debenture the first plaintiff appointed receivers and managers of the company. The first debenture was assigned to the first defendant, which was controlled by the second defendant, who was appointed receiver and manager under that debenture not for the purpose of enforcing the security thereunder but to disrupt the receivership under the second debenture and to prevent the enforcement of the second debenture by the first plaintiff. The receivers appointed by the first plaintiff relinquished control to the second defendant. Four days later the first plaintiff offered to purchase the first debenture from the first defendant at a price equivalent to the amounts outstanding and secured under the debenture, but that offer was not accepted. The company continued trading and during the second defendant's receivership substantial losses were incurred. Eventually, as directed by the court, the first defendant assigned the first debenture to the first plaintiff and the second defendant ceased to act as receiver. The first plaintiff assigned the second debenture to the second plaintiff. On an action by the plaintiffs the judge held that the defendants were liable in negligence for breach of duty to the plaintiffs, and awarded damages against both defendants. The Court of Appeal of New Zealand allowed the defendants' appeal in part and quashed the judge's orders in so far as they related to the first defendant and the second plaintiff.

On the defendants' appeal and the plaintiffs' cross-appeal to the Judicial Committee: —

Held, dismissing the appeal and allowing the cross-appeal, that a mortgagee and a receiver and manager appointed by him owed no general duty in negligence to subsequent encumbrancers or the mortgagor to use reasonable care in the exercise of their powers and in dealing with the assets of the mortgagor; but that equity imposed on a mortgagee and a receiver and manager specific duties including the duty to exercise their powers in good faith for the purpose of obtaining repayment although, subject to that duty, the exercise of their powers might cause detrimental consequences to the mortgagor; that the equitable duty was owed both to the mortgagor and to any subsequent encumbrancer, whether he was a mortgagee, debenture holder or charge holder; that, accordingly, since the receivership of the second defendant had been instigated by him for improper purposes and conducted in bad faith, and the first defendant had been in breach of its duty in failing to transfer the first debenture to the first plaintiff when so requested by the first plaintiff, both defendants were liable to both plaintiffs; and that since the proper measure of damages for breach of their equitable duties was the same as that which would have been applicable if they had been liable in negligence, the judge's award of damages would be restored (post, pp. 94F–G, 95A–B, G–96C, 97H–98A, F–G, 100D–E, G–H, 101B, D–E, F, 102B).

Tomlin v. Luce (1889) 43 Ch.D. 191, C.A. and dicta of Jenkins L.J. in In re B. Johnson & Co. (Builders) Ltd. [1955] Ch. 634, 661–663, C.A. applied.

Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] Ch. 949, C.A. explained.

Quaere. Whether a mortgagee who appoints a receiver and manager, knowing that the receiver and manager intends to exercise his powers for the purpose of frustrating the activities of the second mortgagee or for some other improper purpose, or who fails to revoke the appointment of the receiver and manager when the mortgagee knows that the receiver and manager is abusing his powers, may himself be guilty of bad faith (post, p. 100E–F).

Decision of the Court of Appeal of New Zealand [1990] 3 N.Z.L.R. 265 affirmed in part on different grounds.

The following cases are referred to in the judgment of their Lordships:

C.B.S. Songs Ltd. v. Amstrad Consumer Electronics Plc. [1988] A.C. 1013; [1988] 2 W.L.R. 1191; [1988] 2 All E.R. 484, H.L.(E.)

Caparo Industries Plc. v. Dickman [1990] 2 A.C. 605; [1990] 2 W.L.R. 358; [1990] 1 All E.R. 568, H.L.(E.)

Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] Ch. 949; [1971] 2 W.L.R. 1207; [1971] 2 All E.R. 633, C.A.

Johnson (B.) & Co. (Builders) Ltd., In re [1955] Ch. 634; [1955] 3 W.L.R. 269; [1955] 2 All E.R. 775, C.A.

Murphy v. Brentwood District Council [1991] 1 A.C. 398; [1990] 3 W.L.R. 414; [1990] 2 All E.R. 908, H.L.(E.)

Tomlin v. Luce (1889) 43 Ch.D. 191, C.A.

The following additional cases were cited in argument:

Adams v. Cape Industries Plc. [1990] Ch. 433; [1990] 2 W.L.R. 657; [1991] 1 All E.R. 929, C.A.

Attorney-General v. Cheng Yick Chi (unreported), 21 June 1983, (Appeal No. 32 of 1982), P.C.

China and South Sea Bank Ltd. v. Tan Soon Gin (alias George Tan) [1990] 1 A.C. 536; [1990] 2 W.L.R. 56; [1989] 3 All E.R. 839, P.C.

Expo International Pty. Ltd. v. Chant [1979] 2 N.S.W.L.R. 820

Gaskell v. Gosling [1896] 1 Q.B. 669, C.A.; [1897] A.C. 575, H.L.(E.)

Gomba Holdings U.K. Ltd. v. Minories Finance Ltd. [1988] 1 W.L.R. 1231, C.A.

Jefferys v. Dickson (1866) L.R. 1 Ch.App. 183

Kelly v. Cooper [1992] 3 W.L.R. 936, P.C.

Kennedy v. De Trafford [1897] A.C. 180, H.L.(E.)

Kuwait Asia Bank E.C. v. National Mutual Life Nominees Ltd. [1991] 1 A.C. 187; [1990] 3 W.L.R. 297; [1990] 3 All E.R. 404, P.C.

Lathia v. Dronsfield Bros. Ltd. [1987] B.C.L.C. 321

Lawson v. Hosemaster Co. Ltd. [1966] 1 W.L.R. 1300; [1966] 2 All E.R. 944, C.A.

Leigh and Sillavan Ltd. v. Aliakmon Shipping Co. Ltd. [1986] A.C. 785; [1986] 2 W.L.R. 902; [1986] 2 All E.R. 145, H.L.(E.)

McHugh v. Union Bank of Canada [1913] A.C. 299, P.C.

Newdigate Colliery Ltd., In re [1912] 1 Ch. 468, C.A.

Newhart Developments Ltd. v. Co-operative Commercial Bank Ltd. [1978] Q.B. 814; [1978] 2 W.L.R. 636; [1978] 2 All E.R. 896, C.A.

Parker-Tweedale v. Dunbar Bank Plc. [1991] Ch. 12; [1990] 3 W.L.R. 767; [1990] 2 All E.R. 577, C.A.

Practice Note [1973] 2 N.Z.L.R. 357

Rayner (J.H.) (Mincing Lane) Ltd. v. Department of Trade and Industry [1990] 2 A.C. 418; [1989] 3 W.L.R. 969; [1989] 3 All E.R. 523, H.L.(E.)

Reg. v. Board of Trade, Ex parte St. Martins Preserving Co. Ltd. [1965] 1 Q.B. 603; [1964] 3 W.L.R. 262; [1964] 2 All E.R. 561, D.C.

Rowling v. Takaro Properties Ltd. [1988] A.C. 473; [1983] 2 W.L.R. 418; [1988] 1 All E.R. 163, P.C.

Southard & Co. Ltd., In re [1979] 1 W.L.R. 1198; [1979] 3 All E.R. 556, C.A.

Sutherland Shire Council v. Heyman (1985) 157 C.L.R. 424

Tarn v. Turner (1888) 39 Ch.D. 456, C.A.

Visbord v. Federal Commissioner of Taxation (1943) 68 C.L.R. 354

Watts v. Midland Bank Plc. (1986) 2 B.C.C. 98,961

Wilson v. Lord Bury (1880) 5 Q.B.D. 518, C.A.

Woolfson v. Strathclyde Regional Council, 1978 S.L.T. 159

APPEAL (No. 13 of 1991) with leave of the Court of Appeal of New Zealand by the defendants, Downsview Nominees Ltd. and J. G. Russell, from that part of the judgment of the Court of Appeal of New Zealand [1990] 3 N.Z.L.R. 265 (Cooke P., Richardson and Casey JJ.) given on 12 March 1990 which had dismissed the second defendant's appeal against the judgment of Gault J. delivered on 4 August 1989 in the High Court of New Zealand [1989] 3 N.Z.L.R. 710, whereby judgment had been entered against the defendants in favour of the plaintiffs, First City Corporation Ltd. and First City Finance Ltd., for $554,566.33. The plaintiffs cross-appealed from that part of the judgment of the Court of Appeal which had in part allowed the defendants' appeal against the decision of Gault J. and quashed Gault J.'s orders in so far as they related to the first defendant and the second plaintiff.

The facts are stated in the judgment of their Lordships.

Gary Judd and Robert Chambers Q.C. (both of the New Zealand Bar) for the defendants.

Rhys Harrison and Ralph Simpson (both of the New Zealand Bar) for the plaintiffs.

Cur. adv. vult.

19 November. The judgment of their Lordships was delivered by LORD TEMPLEMAN.

This appeal requires consideration of the duties, if any, which a first debenture holder and a receiver and manager appointed by a first debenture holder owe to a second debenture holder.

The mortgagor company, Glen Eden Motors Ltd., (formerly Glen Eden Fiat Centre (1975) Ltd. and hereafter called “G.E.M.”) carried on business as new and used motor vehicle dealers and held Fiat and Mazda franchises for the sale of their vehicles and spare parts. The principal shareholder and manager of the company was Mr. Pedersen.

On 11 August 1975 G.E.M. issued a first debenture (“the Westpac debenture”) which eventually secured the principal sum of $230,000 in priority to a second debenture (“the F.C.C. debenture”). That second debenture dated 18 September 1986 was made in favour of the first plaintiff, First City Corporation Ltd. Each debenture created a fixed charge over certain assets of the company and a floating charge over the remainder. Each debenture contained power for the debenture holder to appoint a receiver and manager, who was to be deemed to be the agent of the company and was authorised to perform any acts which the company could perform.

For the six months' period to 30 September 1986 G.E.M. traded at a loss. On 10 March 1987, the moneys secured by the second debenture having...

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