Sections 268 to 272 of the Companies Act 1997 set out what a receiver owes, and to whom.
Section 268 — the general duties
(1) A receiver shall exercise his powers in good faith.
(2) A receiver shall exercise his powers in a manner he believes on reasonable grounds to be in the best interests of the person in whose interests he was appointed.
(3) To the extent consistent with subsections (1) and (2), a receiver shall exercise his powers with reasonable regard to the interests of —
(a) the company; and
(b) persons claiming, through the company, interests in the property in receivership; and
(c) unsecured creditors of the company; and
(d) sureties who may be called upon to fulfil obligations of the company.
The primary duty in subsection (2) is owed to the appointor. The interests in subsection (3) are subordinated by the opening words — “to the extent consistent with subsections (1) and (2)”.
So a receiver is not an impartial officer holding the ring between competing interests. That is a liquidator’s role: under section 303, a liquidator’s principal duty is to take possession of, realise and distribute the assets to the creditors and any surplus to the shareholders.
But the subordination is not a licence. Where two courses of action serve the appointor equally well, the receiver must take the one that better serves the interests in subsection (3) — and subsection (1), good faith, is not subordinated to anything.
Where a receiver appointed under a deed or agreement acts, or refrains from acting, in accordance with directions given by the person in whose interests he was appointed, the receiver —
(a) is not in breach of the duty in subsection (2); but
(b) is still liable for any breach of the duty in subsection (1) (good faith) and the duty in subsection (3) (reasonable regard for others).
And subsection (5) adds: nothing in this section limits or affects section 269.
“The bank told me to” is a complete answer to a complaint that the receiver failed to act in the appointor’s best interests — which is unsurprising, since the appointor is the person that duty protects.
It is not an answer to a complaint of bad faith, of disregard for the company, unsecured creditors or sureties, or of selling at an undervalue. A receiver who dumps the assets at a low price because the appointor wants a quick exit, leaving nothing for anyone else, is exposed under subsections (1) and (3) and under section 269, whatever instructions were given.
Section 269 — the duty on a sale
A receiver who exercises a power of sale of property in receivership owes a duty to — (a) the company; (b) persons claiming, through the company, interests in the property in receivership; (c) unsecured creditors; and (d) sureties — to obtain the best price reasonably obtainable as at the time of sale.
Notwithstanding any law or anything contained in the deed or agreement by or under which a receiver is appointed —
(a) it is not a defence to proceedings for breach of the section 269 duty that the receiver was acting as the company’s agent or under a power of attorney from the company; and
(b) a receiver is not entitled to compensation or indemnity from the property in receivership or from the company in respect of any liability arising from a breach of that duty.
Paragraph (a) closes the obvious escape. A receiver is, under section 257(3), the agent of the company — so without section 270 a receiver might argue that a sale at an undervalue was the company’s own act, and that an agent owes no duty to its principal’s creditors.
Paragraph (b) removes the receiver’s usual protection. Section 281(9) entitles a receiver to an indemnity out of the property in receivership for personal liability — but not for liability arising from breach of section 269. Damages for selling at an undervalue come out of the receiver’s own pocket.
“Best price reasonably obtainable as at the time of sale” is not a guarantee of the highest conceivable price. It is a standard of reasonable conduct measured at the moment of sale — proper marketing, independent valuation, a competitive process where practicable. Hindsight about later market movements is not the test.
| Duty | Owed to | Can it be excluded? |
|---|---|---|
| Good faith — s 268(1) | Generally | No — and directions from the appointor are no defence |
| Best interests — s 268(2) | The appointor | Effectively, by the appointor’s own directions — s 268(4)(a) |
| Reasonable regard — s 268(3) | Company, those claiming through it, unsecured creditors, sureties | No — s 268(4)(b) |
| Best price — s 269 | The same four | No — s 270, notwithstanding any law or agreement |
Section 271 — keeping the money separate
A receiver shall keep money relating to the property in receivership separate from other money received in the course of, but not relating to, the receivership and from other money held by or under the control of the receiver.
Three pools must be kept apart: money of this receivership; money received in the course of the receivership that does not relate to the property in receivership; and the receiver’s own or other clients’ money. Mixing them makes the section 279 priority rules impossible to apply and exposes the receiver on the taking of accounts.
Section 272 — accounting records
(1) A receiver shall at all times keep accounting records that correctly record and explain the receipts, expenditure, and other transactions relating to the property in receivership.
(2) The records shall be retained for not less than seven years after the receivership ends.
This mirrors the company’s own obligation under section 188, and it feeds the reports required by sections 273 and 274 — which must set out all amounts received and paid during the period covered.
How the duties are enforced
- An order to comply under section 286, sought by the Registrar, the company, a creditor, a guarantor, a liquidator, or a person with an interest in the property — after seven days’ notice of the failure.
- Removal under section 286(5), or a prohibition order of up to five years under section 286(6) for persistent or serious failures.
- Review of remuneration under section 283(2), including an order to refund an unreasonable amount retained.
- An ordinary claim for damages for breach of section 269, against which section 270 removes both the agency defence and the indemnity.
- Court directions under section 283(1) — a receiver who acts in accordance with a direction has a defence under section 283(6), unless the Court orders otherwise under section 283(7) because of the circumstances in which the direction was obtained.
Sources
- Companies Act 1997 — ss 188, 257, 268–272, 273, 274, 279, 281, 283, 286, 303
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.