Purewal v Countrywide Residential Lettings Ltd & Anor

The claimant, Mr Purewal, appeals with the leave of the judge against the dismissal by HH Judge Worster of his claim for damages for breach of duty against the second and third defendants. On 16 March 2009 they were appointed by the Bank of Scotland plc (“the Bank”) as LPA receivers (“the Receivers”) over a residential property at 184 School Road, Yardley Wood, Birmingham (“the Property”) which Mr Purewal had acquired on a buy-to-let basis. The Property was originally purchased in 2001 and was then re-mortgaged to the Bank. The loan from the Bank was secured by a first legal charge registered in its favour on 16 June 2004.

In 2009 the claimant fell into arrears in respect of his mortgage payments and the Bank appointed the Receivers. On 17 March 2009 the Receivers informed the claimant that they had taken out their own buildings insurance over the Property and that he should therefore cancel his own policy, which he did.

On 18 September 2009 the claimant visited the Property and discovered that water was leaking from a cistern and had caused a considerable amount of damage. By then the Property was vacant. He informed the Receivers about the leak on the same day but they appear to have done nothing to remedy the situation. The Receivers’ file contains nothing to suggest that any action was taken before February 2010 when Mr Purewal contacted them again to find out what was being done.

Although the Receivers were unable to produce a copy of the buildings insurance which they took out on the Property, it was accepted at the trial that the policy would have included a condition requiring that any claims made under the policy should be made promptly. The Receivers therefore appear to have taken the position in 2010 that they could no longer pursue an insurance claim in respect of the damage which (subject to any excess) would, the judge found, have been likely to be covered by the policy.

The Receivers’ appointment was terminated by the Bank on 29 April 2010. Again, the judge had no real evidence as to why this occurred at that time and one can only assume that the mortgage arrears were either repaid or some other arrangement satisfactory to the Bank was put in place.

The matter is made more obscure by the fact that on 9 September 2009 a bankruptcy order was made against the claimant. He was not discharged from bankruptcy until 28 April 2011. His evidence was that he carried out repairs to the Property at his own expense which were completed in May 2011 after which the Property was let to a new tenant. On 22 August 2011 the Official Receiver, who was the claimant’s trustee-in-bankruptcy, transferred the Property back to him for the nominal sum of £1.

In January 2013 Mr Purewal issued his claim against the Receivers seeking damages for breach of duty in the amount expended by him on the repair of the Property. Although the claim was pleaded in the sum of £28,584, the cost of repairs were agreed for the purposes of the trial at £16,000. The claimant also sought damages of £14,250 for loss of rent attributable to the period between 2009 and 2011 when the Property remained in a state of disrepair and was unlettable. But that claim was not pursued once the defendants became aware and pleaded that the Property during that period of time was vested in the trustee-in-bankruptcy subject to the mortgage and that any rent would either have been payable to the Bank in reduction of the claimant’s indebtedness or have been payable to the trustee for the benefit of the claimant’s unsecured creditors. The claim was, however, pursued in respect of the cost of the repairs carried out in May 2011. The first defendant, Countrywide Residential Lettings Limited, which employed the Receivers at the relevant time, was alleged to be vicariously liable for their breaches of duty.

The breach complained of was the failure by the Receivers to submit a timely claim on the insurance policy for the damage caused by the water leak. It is said that the Receivers would either have been obliged or would have been authorised by the Bank to use the money received to repair the Property thereby avoiding the necessity for Mr Purewal to have carried out the repairs at his own expense. The Receivers’ position at trial was that they accepted that they owed a duty in equity to the mortgagor and anyone else interested in the equity of redemption to manage the property with a view to securing repayment of the secured debt but in a way which took account of the interests of the mortgagor. As Sir Richard Scott VC explained in his judgment in Medforth v Blake [2000] Ch 86, the scope of these duties will depend upon the facts of each particular case but Judge Worster accepted that if the equitable duty was owed to the claimant then it would have been a breach of that duty not to have made an effective claim on the buildings insurance for the water damage. He, however, rejected the claim on two grounds. First, because in his view any such duty ceased to be owed to the claimant (as opposed to his trustee-in-bankruptcy) following the making of the bankruptcy order in April 2009. The claimant therefore had no cause of action. His second ground for dismissing the claim was that the repairs were carried out by the claimant before the Property had been transferred back to him by the trustee and were done as a volunteer without the agreement of the trustee. It would not therefore be equitable or fair to saddle the Receivers with liability for the cost of repairs which were carried out when the Property did not belong to the claimant and which he was not asked to undertake. He also accepted the submission by Mr Halliwell on behalf of the Receivers that even had they made a timely claim for the insurance monies and received a payment equivalent to the cost of the repairs, there would have been no obligation on them to use the monies for the repair of the water damage. The effect of ss. 108(3) and 109(8) LPA 1925 is said to be that the insurance monies would almost certainly have been paid to the Bank in reduction of the mortgage loan and any outstanding interest.

There is no doubt that on the making of the bankruptcy order title to the Property vested in the trustee pursuant to s.306(1) of the Insolvency Act 1986 (“IA 1986”) which provides:

“The bankrupt’s estate shall vest in the trustee immediately on his appointment taking effect or, in the case of the official receiver, on his becoming trustee.”

Section 283(1) states:

“Subject as follows, a bankrupt’s estate … comprises—

(a)

all property belonging to or vested in the bankrupt at the commencement of the bankruptcy…”

“Property” is defined by s.436(1) IA 1986 as follows:

““property” includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property;”

Assuming, as the judge did, that any breach of duty by the Receivers cannot have occurred much later than 18 September 2009 when the water damage was reported by the claimant, the claimant can only establish a cause of action if the automatic vesting of title to the Property in the trustee on 9 September 2009 did not remove from the claimant any interest in the Property sufficient to create a continuing duty to him under the principles explained in Medforth v Blake. Although it might have been possible for the trustee to have assigned to Mr Purewal any subsisting cause of action which he may have had against the Receivers based on their breach of duty, this was not done nor does the claimant rely upon the transfer back to the claimant of the Property on 22 August 2011 as including any such cause of action. The claimant’s case is, and always has been, that he continued to be owed a directly enforceable duty by the Receivers.

The claimant challenges both the judge’s reasons for dismissing the claim. In summary, his grounds of appeal are that the vesting of title to the Property in the trustee-in-bankruptcy did not deprive him of his legal status as mortgagor. He remained liable under the mortgage during the period of his bankruptcy and, although the mortgage debt and interest were provable in the bankruptcy, they continued as liabilities until his discharge. He therefore continued to have an interest in the value of the security at the time when the Receivers’ breach of duty occurred. As to causation, the claimant submits that the judge’s reliance on his being a volunteer was misplaced. His claim is not one against the trustee to recover the sums he expended in the improvement of the Property. It is a claim for damages for breach of duty against the Receivers. As against them, his loss is represented by the diminution in value caused by the Receivers’ failure to make an insurance claim and to expend the money received in the repair of the Property. The diminution in value is conventionally measured by the cost of the repairs. But for the Receivers’ failure to carry out the repairs, the claimant would have received the Property back from the trustee-in-bankruptcy in repair.

I turn first to the question of whether the Receivers continued to owe a duty to the claimant following the making of the bankruptcy order. Mr Weaver’s primary submission on behalf of the claimant is that the advent of bankruptcy, commencing with the making of the bankruptcy order, does not terminate the mortgagor’s liabilities under the charge. Although title to the mortgaged property becomes vested in the trustee under s. 306(1) IA 1986, neither that nor the making of the bankruptcy order removes the mortgagor’s legal liability for the mortgage debt and any interest thereon. Those liabilities are, of course, provable in the bankruptcy and cease to be enforceable by legal action against the mortgagor: see s. 285(3). On discharge the bankrupt is released from his mortgage liabilities and the mortgagee’s ability to recover the mortgage debt is limited to his right to enforce the mortgage security which is expressly preserved by s. 281(2). His only remedy for any shortfall is to prove in the bankruptcy: see s. 281(1).

The argument that a bankrupt mortgagor continues to be owed an equitable duty of care by LPA receivers therefore depends upon an incident of timing based on the fact that the mortgagor’s liability for the mortgage debt is not extinguished until his discharge from bankruptcy. Mr Weaver says that the judge was wrong to conclude that the Receivers did not owe duties both to the trustee and to the claimant. The formulation of the duty in Medforth v Blake confirms that the duty continued to be owed both to the mortgagor and to anyone else with an interest in the mortgaged property.

Medforth v Blake was not a case involving bankruptcy. It concerned a claim against receivers appointed over the plaintiff’s pig farming business that they had mismanaged that business by failing to obtain proper discounts on the purchase of animal feed. The court was therefore concerned with a case in which the mortgagor retained title to the property (subject to the mortgage) and therefore retained the equity of redemption. Sir Richard Scott VC, giving the leading judgment in the Court of Appeal, said (at page 101G):

“The equity of redemption was a Chancery invention, introduced in order to ensure that a conveyance by way of mortgage remained a security for the repayment of money whether or not the date fixed for repayment and re-conveyance had passed. The duties imposed on a mortgagee in possession, and on a mortgagee exercising his powers whether or not in possession, were introduced in order to ensure that a mortgagee dealt fairly and equitably with the mortgagor. The duties of a receiver towards the mortgagor have the same origin. They are duties in equity imposed in order to ensure that a receiver, while discharging his duties to manage the property with a view to repayment of the secured debt, nonetheless in doing so takes account of the interests of the mortgagor and others interested in the mortgaged property. These duties are not inflexible. What a mortgagee or a receiver must do to discharge them depends upon the particular facts of the particular case.”

Read in context, it is clear that the duty identified by the Court of Appeal is one that is owed to the mortgagor by virtue of his continued interest in the equity of redemption. The duty to take account of his interests stems from the fact that he retains the right either to receive the property back free from the charge upon payment of what is due to the mortgagee or to any surplus proceeds of sale in the event that the security is realised. He therefore retains a direct interest in the management of the property by the receivers. This is confirmed by the subsequent decision of this Court in Silven Properties Ltd. & Anor v Royal Bank of Scotland Plc & Ors [2004] 1 WLR 997 at [27] where the Court discusses the significance of the fact that LPA receivers, although appointed by the mortgagee, act as agents of the mortgagor:

“The peculiar incidents of the agency are significant. In particular: (1) the agency is one where the principal, the mortgagor, has no say in the appointment or identity of the receiver and is not entitled to give any instructions to the receiver or to dismiss the receiver. In the words of Rigby LJ in Gaskell v Gosling [1896] 1 QB 669, 692: “For valuable consideration he has committed the management of his property to an attorney whose appointment he cannot interfere with”; (2) there is no contractual relationship or duty owed in tort by the receiver to the mortgagor: the relationship and duties owed by the receiver are equitable only: see Medforth v Blake [2000] Ch 86 and Raja v Austin Gray [2003] 1 EGLR 91; (3) the equitable duty is owed to the mortgagee as well as the mortgagor. The relationship created by the mortgage is tripartite involving the mortgagor, the mortgagee and the receiver; (4) the duty owed by the receiver (like the duty owed by a mortgagee) to the mortgagor is not owed to him individually but to him as one of the persons interested in the equity of redemption. The class character of the right is reflected in the class character of the relief to be granted in case of a breach of this duty. That relief is an order that the receiver account to the persons interested in the equity of redemption for what he would have held as receiver but for his default; (5) not merely does the receiver owe a duty of care to the mortgagee as well as the mortgagor, but his primary duty in exercising his powers of management is to try and bring about a situation in which the secured debt is repaid: see the Medforth case at p 86; and (6) the receiver is not managing the mortgagor's property for the benefit of the mortgagor, but the security, the property of the mortgagee, for the benefit of the mortgagee: see In re B Johnson & Co (Builders) Ltd [1955] Ch 634, 661, per Jenkins LJ cited with approval by Lord Templeman in Downsview Nominees Ltd v First City Corpn Ltd [1993] AC 295, 313 b, and [1955] Ch 634, 646, per Evershed MR cited with approval by Sir Richard Scott V-C in the Medforth case [2000] Ch 86, 95 h–96 a. His powers of management are really ancillary to that duty: Gomba Holdings UK Ltd v Homan [1986] 1 WLR 1301, 1305, per Hoffmann J.”

All this serves to emphasise that the duty is owed to the mortgagor if and to the extent that he retains an interest in the equity of redemption. In the case of the bankruptcy of the mortgagor, that ceases to be the case. The equity of redemption becomes vested in the trustee. Although the mortgagor retains a legal liability under the charge, that is limited and finite in nature. Upon discharge it is automatically extinguished. The mortgagor walks free from the mortgage and the benefit of the equity of redemption remains vested in the trustee for the benefit of the general creditors. It is, of course, true that in the event of a surplus in the bankruptcy, the trustee is under an obligation to return that surplus to the bankrupt: see s. 330(5) IA 1986. But the bankrupt has no right to the mortgaged property as such and his interest in any possible surplus can be and is protected by the duties which the receivers and the mortgagee will owe to the trustee-in-bankruptcy in relation to their management of the property and its realisation. It is as much in the interests of the creditors as it is in the interests of the bankrupt mortgagor that the property should be managed and disposed of for the best price reasonably obtainable but no one suggests that they are owed any duty by the Receivers. There is no authority which supports the receiver’s duty being owed to a bankrupt mortgagor nor is there any justification for imposing such a duty. The mortgagor has ceased to have any interest in the equity of redemption and his ultimate entitlement under s. 330(5) to any surplus in the bankruptcy does not require the imposition of a duty to anyone beyond the trustee.

Mr Weaver’s response to this is to draw an analogy between the position of the bankrupt mortgagor and a guarantor of his liabilities. The guarantor of a mortgage remains liable for the mortgage debt notwithstanding the realisation of the security and is owed a duty of care by the mortgagee and any receivers in relation to the sale of the security: see Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410 per Lord Denning M.R. at page 1415H:

“So far as the receiver is concerned, the law is well stated by Rigby L.J. in Gaskell v. Gosling [1896] 1 Q.B. 669, a dissenting judgment which was approved by the House of Lords [1897] A.C. 575. The receiver is the agent of the company, not of the debenture holder, the bank. He owes a duty to use reasonable care to obtain the best possible price which the circumstances of the case permit. He owes this duty not only to the company, of which he is the agent, to clear off as much of its indebtedness to the bank as possible, but he also owes a duty to the guarantor, because the guarantor is liable only to the same extent as the company. The more the overdraft is reduced, the better for the guarantor. It may be that the receiver can choose the time of sale within a considerable margin, but he should, I think, exercise a reasonable degree of care about it. The debenture holder, the bank, is not responsible for what the receiver does except in so far as it gives him directions or interferes with his conduct of the realisation. If it does so, then it too is under a duty to use reasonable care towards the company and the guarantor.”

The short answer to this point is that the bankrupt mortgagor is not in the same position as the guarantor for the reasons stated earlier. Unlike the guarantor, his liability cannot extend beyond his discharge from bankruptcy and to the extent that it continues to exist until then it is more theoretical than real. He cannot be sued for the mortgage debt and will have no personal liability for any shortfall in the security. Moreover, any surplus on a sale of the security will go to satisfy the claims of the unsecured creditors.

I should add that in this case we know very little about the state of the bankruptcy and, in particular, as to the circumstances in which the mortgaged property came to be re-vested in the claimant. Nor is there any evidence about the state of account between the claimant and the Bank and the reasons why the Bank apparently agreed to re-instate the mortgage and to discharge the Receivers. What is suggested is that the Bank decided not to realise its security because the indebtedness exceeded the value of the Property. It therefore took a commercial decision to allow the mortgage to continue. For the same reason, the equity of redemption was of no value and this perhaps explains why the trustee ultimately decided to re-transfer the Property subject to the mortgage to the claimant for a nominal consideration. We are not therefore dealing with a case where the Property was returned because the claims of the unsecured creditors were otherwise provided for.

I therefore consider that the judge was right to dismiss the claim on the basis that any duties owed by the Receivers in relation to the insurance claim were owed exclusively to the trustee-in-bankruptcy. In these circumstances, I propose to say very little about the issue of causation. For the claim to succeed it would be necessary for the claimant to establish that, but for the breach of duty, the Property would have been repaired. This pre-supposes that the Receivers would have been obliged to spend the insurance monies on making good the water damage.

The obligations of the Receivers in this regard are set out in a combination of ss. 108(3) and 109(8) LPA 1925 as follows:

“(3)

All money received on an insurance of mortgaged property against loss or damage by fire or otherwise effected under this Act, or any enactment replaced by this Act, or on an insurance for the maintenance of which the mortgagor is liable under the mortgage deed, shall, if the mortgagee so requires, be applied by the mortgagor in making good the loss or damage in respect of which the money is received.

…..

(8)

Subject to the provisions of this Act as to the application of insurance money, the receiver shall apply all money received by him as follows, namely:

(i)

In discharge of all rents, taxes, rates, and outgoings whatever affecting the mortgaged property; and

(ii)

In keeping down all annual sums or other payments, and the interest on all principal sums, having priority to the mortgage in right where of he is receiver; and

(iii)

In payment of his commission, and of the premiums on fire, life, or other insurances, if any, properly payable under the mortgage deed or under this Act, and the cost of executing necessary or proper repairs directed in writing by the mortgagee; and

(iv)

In payment of the interest accruing due in respect of any principal money due under the mortgage; and

(v)

In or towards discharge of the principal money if so directed in writing by the mortgagee;

and shall pay the residue, if any, of the money received by him to the person who, but for the possession of the receiver, would have been entitled to receive the income of which he is appointed receiver, or who is otherwise entitled to the mortgaged property.”

There is no evidence to show that the Bank would necessarily have directed the Receivers to expend the money on repairs as opposed to the reduction of the mortgage liabilities and subsequent events strongly suggest that the Bank would have sought to reduce its exposure. In my view, the claimant has not produced the evidence necessary to establish his case on causation.

For those reasons, I would dismiss the appeal.

I agree.