Receivership and non-consensual sale by the mortgagor (key points for receivers following Maymask)
The recently published judgment in Ghai, Ghai and Somal v Maymask (228) Ltd  UKUT 293 (LC) of the Upper Tribunal (Lands Chamber) confirms that, where receivers are appointed, a sale of the charged property by the registered owner should be registered, even though the purchaser knew of the appointment of the receivers, and the receivers had not given authority to the registered owner to sell.
Although the risks to receivers of unauthorised sale by the mortgagor are relatively small, they may be material. Receivers should be aware of the steps which they can take to reduce their exposure in appropriate cases.
A summary of the relevant facts:
- The property was a large Grade II listed building in central Newcastle. It was purchased in 2015 by Bolbec Hall Ltd (BHL) for £850k with a loan from Auction Finance Ltd (Lender). The sole director and shareholder of BHL was Mr Chahal (Mr C).
- In 2017 the Lender appointed receivers. They marketed the property but, having received offers of £1m+, ceased marketing on a promise by BHL of payment to reduce its debt to the Lender.
- BHL did reduce its debt to the Lender, funded by Dr Ghai, Dr Ghai and Dr Somal (the Investors) who in return collectively became 50% shareholders of BHL.
- Mr C and the Investors fell out. Mr C wanted BHL to sell the property. The Investors agreed, although there was no clarity on whether the sale would be by BHL (acting through Mr C) or the receivers.
- Mr C agreed a sale to Maymask (228) Ltd (Maymask) for £650k. Maymask knew of the appointment of the receivers at the time.
- On the day of completion, the receivers resigned their appointment, the Lender's charge was redeemed and its charge discharged, Mr C (on behalf of BHL) signed the sale contract and transfer deed.
- Following the sale, Mr C appeared to appropriate the net sale proceeds. The Investors subsequently wanted to prevent the registration of the sale by BHL to Maymask.
The Investors claimed that the sale by BHL to Maymask was void and of no effect because, at the time of the sale, the receivers were still appointed over the property and, as such, the board of BHL had no authority to deal with the property. Because Maymask knew that receivers were appointed, it was on notice that Mr C (acting as a director of BHL) had no authority to dispose of the property unless authorised to do so by the receivers. No such authority had been given.
Maymask claimed that the sale was effective because BHL was the registered legal proprietor of the property and so could dispose of it. The transfer took effect in law when the application to register the transfer was made. That application was made 3 days after completion, by which time it was indisputable that the receivers had resigned and so Mr C had authority to dispose of the property at the relevant time.
Unusually, the Judge agreed with neither party's analysis. On Maymask's case, his view was that the disposition was made when the transfer was signed (i.e. the date of completion), not when it was applied to be registered. He did, therefore, have to consider Mr C's authority to dispose of the property on the day of completion (for the purpose of the Judge's analysis, the parties agreed that the receivers were still in office when the transfer was signed by Mr C).
On the Investors' case, relying on ss 24 and 26 of the Land Registration Act 2002, the Judge said that there was no basis on which Maymask needed to go 'behind' the transfer and consider whether Mr C had authority to bind BHL. He made no ruling on that point. Instead, he found that:
- At all times BHL was the registered proprietor of the property and so could exercise owner's powers, including the disposal of the property.
- ss 26 protects disponees (in this case the purchaser, Maymask) by entitling them to assume that the disponer (BHL, acting through Mr C) has the power to make the disposition, unless there is something on the register limiting the disponer's powers.
- There was no doubt that, but for the receivership, Mr C's signature on the transfer would be effective to make a transfer.
- There was no entry on the register limiting Mr C's powers, so Maymask could assume that Mr C had the power to affect the transfer, even though it knew that receivers had been appointed.
- Therefore, the sale by BHL to Maymask was effective and should be registered.
Usually the risk to receivers that a mortgagor might sell the property without their consent is very low, and there should be no adverse consequences for them. A purchaser will ordinarily only purchase with certainty that the charge under which the receivers are appointed is removed from the register, and that charge will only be redeemed if the entire secured sum (including the receivers' costs) is paid in full. Further, in practical terms, the sale will not happen without the mortgagee's consent (but of course the mortgagee must not place a clog on the equity of redemption and so cannot block the sale without good cause).
However, there are circumstances in which receivers should be cautious. In particular, the risk is heightened where:
- The appointing mortgagee is relatively inexperienced in receivership, and so might mistakenly fail to account for the receivers' full costs when providing a redemption figure to the mortgagor.
- There is not a well-established or mutually trusting relationship between receivers and the appointing mortgagee.
Receivers can mitigate for this risk by:
- Ensuring that the terms and conditions covering the appointment provide that the mortgagee is liable to pay the receivers' fees and expenses regardless of whether the mortgagee recovers those sums in full from the mortgagor.
- Engaging in regular effective communication with the mortgagee, so that any proposal by the mortgagor to sell the property is known by all.
- Registering the receivers' address in the proprietorship register for the property.
- The risk of the mortgagor selling the property without the receivers' consent could effectively be eliminated by the receivers registering a Form N restriction against the proprietorship register for the property. This would prevent the registration of a transfer of the property by the mortgagor to a third party without the receivers' written consent. The receivers' power to register such a restriction will be subject to the terms of the charge under which they are appointed, but in many cases such a power will exist. The registration process is relatively simple, and this could be an important check on the mortgagor's power to deal with the property.