Serene Construction Ltd v Salata and Associates Ltd & Ors

Serene Construction Ltd v Salata and Associates Ltd & Ors [2021] EWHC 2433 (Ch) reports an unsuccessful claim against receivers for failing to get the right price for land they sold.

The facts were much as in most cases of this kind. The receivers were appointed in 2012 as fixed charge receivers over an unbuilt residential development site owned by the claimant company. In 2013 they completed the sale of the site for £175,000. The claimant contended that the sale was in breach of the receivers’ fiduciary duty to take reasonable steps to achieve the best price available.  The receivers’ case was that the price they got was the best realistically available in the circumstances.

HHJ David Cooke reviewed the case law, much of which will be familiar. His inevitable starting point was Cuckmere Brick Co v Mutual Finance, still the classic case on the duty of a mortgagee to a mortgagor when exercising a power of sale, in which the court held that, although the mortgagee is not a trustee of the power obliged to exercise it in the best interests of the mortgagor rather than his own, and so is entitled for instance to sell at a time of his own choosing, he is under a duty to take reasonable steps to obtain “the true market value” or “a proper price” at the time he decides to sell.

He also considered Meah v GE Money Home Finance, in which Mr Alan Steinfeld QC, sitting as a Deputy High Court Judge, observed:

“…the mere fact that a property is sold by a mortgagee at less than a valuer believes was its true market value is not in itself sufficient to give rise to a claim. What the mortgagor has to show is that in failing to achieve that value the mortgagee breached, and as Salmon LJ put it [in Cuckmere Brick] plainly breached, its duty to take reasonable precautions to obtain that value.”

That the same duty is owed by a receiver appointed by the mortgagee was made clear by the Court of Appeal in Silven Properties v Royal Bank of Scotland, in which the duty was described as being “to take care to obtain the best price reasonably obtainable.”

The judge was also taken to to a passage from the judgment of Morgan J in McDonagh v Bank of Scotland Plc:

“When considering whether a mortgagee or a receiver has committed a breach of the equitable duty to take care to obtain the best price reasonably obtainable, the court must recognise that the mortgagee or receiver is involved in an exercise of informed judgment and if he goes about the exercise of his judgment in a reasonable way, he will not be held to be in breach of duty. An error of judgment, without more, is not negligence or a breach of the relevant duty in equity.”

The judge rejected a submission by counsel for the claimant (relying on Mortgage Express v Mardner) that the evidential burden was on the receivers to show what steps they had taken to obtain a proper price, and that these were reasonable:

“[T]hat case, and the Privy Council authority Tse Kwon Lam on which it relied, referred to the onus on a mortgagee who sold the property to a company in which he himself had an interest. No doubt the same would apply if the sale was to a party in which the receivers or their agents had an interest, or perhaps if it were shown that there was some connection, short of an interest, sufficient to imply a real risk of willingness to prefer the buyer’s interests over those of the mortgagee. But that is not the case here…”

As the judge noted, the claimant had not pleaded that there was or adduced evidence of any connection “beyond the prima facie innocuous fact that the developers to whom the site was marketed were known by Connells [the receivers’ agent] through their local experience (including previous sales) to be potentially interested in similar development sites.” In the absence of any connection or interest in the buyer, he held that, as in any claim in negligence or for breach of duty, it was for the claimant to plead and particularise the acts or omissions said to amount to such negligence or breach, and to prove them to the normal civil standard.

The specific allegations against the receivers were:
(1) That they had failed to engage independent expert valuers for the purpose of determining the true market value of the development; and had they done so they would have understood the true value of the development and consequently obtained a better price for it. The valuers were also to act as selling agents. The judge rejected the allegation, holding that the valuers had the necessary experience and had advised within the range contemplated by the expert evidence adduced at trial.

(2) The receivers had only marketed the development to a limited number of potential buyers; had they marketed it to a greater range of potential buyers they would have obtained a better price. Again, the judge rejected the allegation: the marketing approach had not been some kind of shortcut: the first stage, limited marketing, had been just that, and if there had been insufficient interest there would have been a wider targeted marketing and potentially a local advertising campaign.

(3) The receivers had failed to market the development with a guide price, which would have encouraged potential buyers to buy the development for an amount closer to its true market value. Again, the judge found that this had been done for good reason, namely not to put off potential buyers.
Other pleaded allegations were not pursued at trial, nor was what had been a case against the receivers’ company:

“The first defendant is a limited company through which the Receivers conducted their business. Though named as a defendant, no separate case is pleaded against it, and it is now accepted that the Receivers’ appointment was a personal one and the duties relied on were owed by them personally and not by their company. Accordingly [counsel for the claimant] accepted that no claim lies against the first defendant.”

The decision reinforces what we all know: that it is difficult successfully to sue receivers for not getting what is often an optimistic view of what should have been the market price for property: following the judgment of Salmon LJ in Cuckmere, the court will look at the facts broadly in deciding whether the receivers have fallen “plainly on the wrong side of the line.” Where Salmon LJ’s line is to be drawn will depend not just on the broad facts but on the expert evidence, which in this case gave rise to problems for the judge:

“[E]ach party was given leave to rely on the written reports of an expert valuer. There are some difficulties arising from the fact that the instructions given to the respective experts were not consistent with each other, and the opinions they expressed were, not surprisingly, not addressed in all respects to the same matters.”

One is left wondering whether a direction for the appointment of a single joint expert might in this case have avoided what appears to have been a three day trial.


Creditor awarded proportion of costs of appearing at convening hearings

Although in Re Amicus Finance plc [2021] EWHC 2255 (Ch) the company succeeded in persuading Snowden J that the threshold conditions provided for by s 901A Companies Act 2006 had been satisfied so that an order should be made to convene meetings of creditors for the purpose of considering and, if thought fit, approving a restructuring plan under Part 26A Companies Act 2006, the company and its administrators did not have an easy time of it.

The company’s business was the provision of short-term property and development finance. In 2018 it began to experience financial difficulties, and  administrators were appointed in December. The administrators now considered that it was no longer financially viable or in the interests of creditors for the company to continue in administration, mainly because the company’s loan portfolio had turned out to be more difficult and more expensive to service and realise than had been anticipated. They formed the view that a restructuring plan was the only alternative to  liquidation (which was said to be the relevant alternative to the proposed restructuring plan). The purpose of the restructuring plan was to compromise the company’s liabilities with a view to returning it to solvency and providing creditors with more than they would get if the company went into liquidation. That outcome was to be achieved by an injection of funding of £3.1 million, making lump sum payments to creditors and a “waterfall” of payments from the proceeds of  legacy loans to which the company was entitled.

The administrators had proposed to divide creditors into four classes for the purposes of the plan meetings and hold a single meeting in respect of each of them. The proposal for a single class of secured creditors was, however, opposed by a creditor, Crowdstacker Corporate Services Ltd. Snowden J upheld in part their objection to the proposed constitution of the class, holding that differences in existing creditor rights and their treatment under the restructuring plan meant that there was “little or no commonality of commercial interest as regards the holders of those different rights in their capacity as such.” He directed  that Crowdstacker and another creditor should form a single class in respect of their respective secured claims up to the value of Crowdstacker’s senior debt, and that the other creditor should form a separate class in respect of the balance of its claim.

Snowden J also referred to difficulties that had arisen in relation to the explanatory statement. At an earlier hearing Trower J had made observations as a result of which a revised explanatory statement had been prepared. However, even then a number of further points had emerged, some based on submissions made to Snowden J by counsel for the objecting creditor, others that Snowden J himself had identified. Those had necessitated further changes to the explanatory statement and in some cases changes to the terms of the restructuring plan itself.

These matters gave rise to an application for costs by Crowdstacker. Referring to his judgment in Re Virgin Active Holdings Limited, Snowden J summarised the principles as follows:

“i)  In all cases the issue of costs is in the discretion of the court.

  1. ii)  The general rule in relation to costs under CPR 44.2 will ordinarily have no application to an application under Part 8 seeking an order convening scheme meetings or sanctioning a scheme, because the company seeks the approval of the court, not a remedy or relief against another party.

iii)  That is not necessarily the case (and hence the general rule under the CPR may apply) in respect of individual applications made within scheme proceedings.

  1. iv)  In determining the appropriate order to make in relation to costs in scheme proceedings, relevant considerations may include,
  2. a)  that members or creditors should not be deterred from raising genuine issues relating to a scheme in a timely and appropriate manner by concerns over exposure to adverse costs orders;
  3. b)  that ordering the company to pay the reasonable costs of members or creditors who appear may enable matters of proper concern to be fully ventilated before the court, thereby assisting the court in its scrutiny of the proposals; and
  4. c)  that the court should not encourage members or creditors to object in the belief that the costs of objecting will be defrayed by someone else.
  5. v)  The court does not generally make adverse costs orders against objecting members or creditors when their objections (though unsuccessful) are not frivolous and have been of assistance to the court in its scrutiny of the scheme. But the court may make such an adverse costs order if the circumstances justify that order.
  6. vi)  There is no principle or presumption that the court will order the scheme company to pay the costs of an opposing member or creditor whose objections to a scheme have been unsuccessful. It may do so if the objections have not been frivolous and have assisted the court; or it may make no order as to costs. The decision in each case will depend on all the circumstances.”

Having regard to Crowdstacker’s partial  success on the class composition issue and what the judge described as its contribution to the task that the court performed at the convening hearing, he decided to make a partial costs order in favour of Crowdstacker and to make it immediately rather than put the decision off until after sanction, given that for the most part the issues raised and resolved at the convening hearing were discrete and would not be affected by decisions made at the sanction stage.