McGowan v Chadwick & Anor

Permission to sue a court-appointed receiver should be granted only where the proposed claim is genuine and calls for an answer. Where a draft pleading is provided, the court may test it as if an application for strike-out or summary judgment had been made.

A receiver’s duties do not extend to protecting a partner from losses suffered in the separate capacity of purchaser. A partner who acquires the business may recover the partnership’s loss caused by breach of duty, but cannot recover additional diminution in value or purchase-price losses as a disappointed purchaser. Loss must be assessed by reference to the business as a whole and the position the partners would have occupied absent the breach.

Mr Chadwick and Mr McGowan were partners in a restaurant business. Following a partnership dispute, the High Court appointed Mr Newton Grant as receiver and manager. Mr Chadwick later sought permission to sue the receiver for alleged failure to accept an early purchase offer, mismanagement and resulting losses.

Deputy Master Lloyd refused permission. Burton J allowed permission for several pleaded heads of loss, subject to amendments and conditions. The receiver appealed against that order, and Mr Chadwick cross-appealed concerning a £90,000 element of the purchase price. The central issues were the scope of the receiver’s duties and which losses were arguably recoverable.

1. Permission to sue. The court’s discretion is guided by the need to protect a receiver from vexatious claims while ensuring that justice is done. The applicant must show a genuine claim, meaning allegations calling for an answer. Where a draft pleading is before the court, it may be examined as if proceedings had begun and an application for strike-out or summary judgment had been made.
2. Scope of duty. Applying South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 and Skyepharma v Hyal Pharmaceutical Corporation [2001] BPIR 163, the receiver owed duties to the partners but no duty to Mr Chadwick in his capacity as a disappointed purchaser. As between the partners, Mr Chadwick could claim the entirety of any loss suffered by the partnership, but that was the limit of his claim as a partner.
3. Assessment of loss. Loss had to be evaluated by reference to the partnership business as a whole, not separate assets or liabilities. Had the early offer been accepted, the partners would have been in a nil position. The only arguable business loss, apart from certain costs, was the outstanding pre-receivership liabilities for which the partners remained liable. The £90,000 payment, depreciation, goodwill and other purchase-related losses were purchaser losses and were not recoverable.
4. Costs. Under Berry v British Transport Commission [1962] 1 QB 306, costs considered and withheld by the court could not be recovered as damages in a separate action. Unadjudicated non-litigation costs were, however, arguably incurred on behalf of the partnership and could proceed.
5. Disposition. The receiver’s appeal was allowed in part. Permission was confined to the claim for pre-receivership liabilities and non-litigation legal costs. The cross-appeal was dismissed.

• High Court, Chancery Division: Burton J, on 10 December 2001, allowed part of Mr Chadwick’s appeal from Deputy Master Lloyd and granted permission to proceed with specified heads of loss, subject to conditions.
• Court of Appeal (Civil Division): The appeal was allowed in part. Permission was limited to pre-receivership liabilities and non-litigation legal costs. The cross-appeal was dismissed.