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Do Law of Property Act (LPA) receivers owe any duties to a mortgagor who is subsequently adjudged bankrupt? Matthew Weaver, a barrister at St Philips Chambers, reviews the decision of the Court of Appeal in Purewal v Countrywide Residential Lettings.
Purewal v Countrywide Residential Lettings Ltd and others  EWCA Civ 1122,  All ER (D) 60 (Nov)
The Court of Appeal, Civil Division, dismissed the claimant's appeal against the dismissal of his claim for damages for breach of duty against the second and third defendant receivers. The judge had been right to dismiss the claim on the basis that any duties owed by the receivers in relation to an insurance claim had been owed exclusively to the claimant's trustee in bankruptcy, and the claimant had not produced the evidence necessary to establish his case on causation.
The appellant, Mr Purewal, was the freehold owner of a buy-to-let property. The property was subject to a mortgage and, in circumstances where Mr Purewal fell into arrears under the mortgage, the mortgagee appointed LPA receivers over the property. The receivers informed Mr Purewal of their appointment and told him to cancel any policies of insurance he held over the property as the property would be subject to a policy of insurance taken out by the receivers during their appointment.
A leak occurred in the property which caused water damage throughout the property. The leak was reported to the receivers but they failed to notify their insurer and, as such, no successful insurance claim was submitted in respect of the damage. The property was therefore left by the receivers in a damaged state.
Mr Purewal was made bankrupt around the same time as the leak at the property. The official receiver (OR) was not appointed as trustee in bankruptcy until the leak had been reported to the receivers, but the breach of duty (ie the failure to notify the insurers) took place after vesting of the bankruptcy estate, including the property, in the OR.
The property was transferred back to Mr Purewal by the OR after Mr Purewal’s discharge from bankruptcy. Mr Purewal issued proceedings against the receivers for breach of duty. The claim was dismissed at first instance but permission to appeal was granted by the first instance judge.
The one fundamental issue to be determined by the Court of Appeal was whether the receivers owed a continuing duty to Mr Purewal after the property—and the equity of redemption—vested in the OR.
Mr Purewal sought to argue that a continuing duty in equity ought to subsist in his favour notwithstanding his bankruptcy given that he remained interested in the property for the period of his bankruptcy. Mr Purewal’s position was said to be similar—albeit not analogous—to the position of a guarantor of a mortgagor, to whom LPA receivers owe duties. While bankruptcy releases a bankrupt from the mortgage debt, the bankrupt remains as the mortgagor while undischarged and the mortgagee remains able to realise its security post discharge from bankruptcy and, as here, after a property has been re-transferred back to the discharged bankrupt.
The receivers argued, simply, that any duties owed to Mr Purewal followed the property and, as such, became vested in the OR. If Mr Purewal ceased to hold the equity of redemption in the property, no duties could subsist.
It was common ground that the equity of redemption vested in the OR upon his appointment as trustee in bankruptcy. For that reason, the receivers undoubtedly owed duties to the OR. However, despite the fact that it remained perfectly possible for a bankrupt to retake the equity of redemption in a property after discharge from bankruptcy (whether automatically after three years in the case of a home, in circumstances where the bankruptcy produces a surplus, or if the property has no equity capable of being realised for the benefit of creditors) the Court of Appeal determined that a bankrupt is not owed duties by LPA receivers.
The Court of Appeal concluded that the dicta in Medforth v Blake  3 All ER 97 was to be construed in a narrow way and, as such, duties were owed only to the mortgagor and those with an interest in the equity of redemption. Despite the Court of Appeal in Medforth v Blake not facing this question in respect of bankruptcy, the Court of Appeal’s conclusions in that case were to apply to bankrupts and—therefore—exclude them from the class of persons to whom duties are owed. The position of guarantors, in respect of whom duties are owed, was not analogous.
This was, prior to this decision, an issue which the courts had not previously considered. The law on the duties and liabilities of LPA receivers has been developed over the years by a relatively small number of authorities, and the question of a mortgagor and this issue was not one which had ever been addressed by the courts.
The particular circumstances which existed in this case are unlikely to be common place. However, given the recent history of the property market and the fact that property owners have been made bankrupt after the appointment of LPA receivers over their property(ies), it is by no means impossible for similar circumstances to exist whereby LPA receivers breach their duties of care while a property is vested in a trustee in bankruptcy and the property is then re-transferred to the discharged bankrupt. In those circumstances, no duty would be owed to the bankrupt and no direct claim against the LPA receivers would be possible. This is something which lawyers acting for bankrupts reclaiming properties from a trustee in bankruptcy may need to explore before the properties are re-transferred so that the bankrupt knows the precise nature of the asset that he is acquiring.
An observation by the Court of Appeal in respect of mortgage debt and bankruptcy is also worth bearing in mind from the point of view of a mortgagee. The Court of Appeal confirmed that mortgage debts are extinguished by discharge from bankruptcy (while the right to enforce security in respect of such a debt remains). As such, when (as is not uncommon) properties are re-transferred to bankrupts (or re-vest in them automatically) the bankrupt cannot be pursued for any shortfall in the mortgage whether that be immediately or in the future. The mortgagee’s only remedy under the mortgage is to enforce the security.
Matthew Weaver has developed an impressive chancery/commercial practice with a particular specialisation in insolvency. He regularly appears in the specialist courts in both Birmingham and London. While Matthew’s commercial practice is founded on significant insolvency and company law expertise, he also specialises in the areas of banking and finance law, commercial fraud and professional liability.
Interviewed by Stephen Leslie.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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Effect of appointment of LPA receiver on property
Powers, duties and liabilities of the LPA receiver
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Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.
Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.
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