Medforth v Blake

A receiver who manages mortgaged property owes equitable duties to the mortgagor and those interested in the equity of redemption. Those duties are not confined to good faith. Their extent depends on the circumstances, but the receiver's primary duty remains to secure payment of interest and repayment of the secured debt.

Subject to that purpose, a receiver must manage with due diligence. A receiver need not continue the mortgagor's business. If the receiver chooses to continue it, however, reasonable steps must be taken to seek to operate it profitably. Good faith remains distinct from negligence and requires dishonesty, an improper motive, or other bad faith.

The respondent operated a large pig-farming business subject to agricultural charges in favour of Midland Bank plc. The bank appointed the appellants as receivers and managers, who continued the business.

The respondent alleged that the receivers failed to seek readily available bulk discounts on pig feed. The parties agreed that the trial should be postponed while a preliminary issue was determined: whether receivers managing a mortgaged business owed only a duty of good faith, or also a duty of care.

A Deputy High Court Judge held that the receivers owed an equitable duty of care, measured by the standard of a reasonably competent receiver, when managing as well as selling. The receivers appealed.

1. Appeal dismissed. The Vice-Chancellor, with whom Swinton Thomas and Tuckey LJJ agreed, upheld the conclusion that the receivers owed the mortgagor an equitable duty of care when managing the business.

2. A receiver's main function is to assist the mortgagee to obtain payment of the secured debt. The receiver may therefore decide not to continue the mortgagor's business and may prefer the mortgagee's interests when making that decision. But a receiver who elects to manage or carry on the business owes duties to the mortgagor and others interested in the equity of redemption.

3. Those equitable duties include good faith but are not confined to it. Their precise extent depends on the circumstances. Subject to the primary duty of obtaining payment of interest and discharge of the debt, the receiver must manage with due diligence. If carrying on a business, that requires reasonable steps to try to conduct it profitably.

4. The duty is equitable in origin, rather than a general tortious duty arising from negligence. The court relied on the specific equitable duties recognised on a sale, including the requirement stated in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 to take reasonable care to obtain a proper price, as supporting comparable duties in management.

5. The judge below was wrong to regard management as merely ancillary to a power of sale. A receiver may manage independently in order to generate profits from which the secured debt can be paid.

6. Good faith should not be diluted into negligence. Its breach requires dishonesty, an improper motive, or equivalent bad faith. On the pleaded facts, a failure to seek freely available feed discounts would, if proved and unanswered, breach the receivers' equitable duty of due diligence.

• Court of Appeal (Civil Division): dismissed the receivers' appeal in [2000] Ch 86, affirming that they owed an equitable duty of care when managing the mortgaged business.

• High Court, Queen's Bench Division: His Honour Judge McGonigal, sitting as a Deputy High Court Judge, determined the preliminary issue on 20 November 1998. He held that the receivers owed an equitable duty of care, measured by the standard of a reasonably competent receiver, in managing as well as selling.