Receivership update

This note provides a summary of some of the more recent developments in relation to receivership in Ireland. The insight will cover:

1. The formalities to be observed in appointing receivers
2. Lis pendens registered over receivership property

The formalities for the appointment of Receivers

The key thing to remember in appointing a Receiver is to ensure that the Deed of Appointment reflects the language contained in the Debenture providing for the appointment. Unfortunately, a significant amount of time and money was spent by charge holders in mending their hand after it transpired that borrowers were able to unseat a receiver due to errors in the Deed of Appointment. The Courts have tended to side with the borrower in circumstances where the debenture holder was generally in a stronger position than the borrower.

In a recent case of the High Court[1] Mr Justice McDonald gave a judgment in respect of an interlocutory injunction taken by the Plaintiff/receiver where he upheld the settled case-law that the formal obligations outlined in the charge debenture were to be strictly adhered to in respect of the appointment of receivers under that debenture. There was nothing new in this and reflected previous judgments. Mr Justice McDonald refused to grant the mandatory injunction sought by the receiver (who sought delivery up of possession of lands) on the basis of the strict Maha Lingham test for obtaining a mandatory injunction, which is a higher bar than the test for an injunction to prevent something from happening.

During the course of the judgment, the Judge appeared to accept the argument that the receiver may not have been validly appointed where the debenture provided for the appointment of a “receiver and manager” but the deed of appointment referred to the appointment of a “Receiver” only. As the Deed of Appointment appointed Mr McCarthy as a 'receiver' not as a 'receiver and manager', the Judge was of the view that Mr McCarthy would “face an uphill struggle in persuading a court at the trial that he had been validly appointed.”

There was concern that the judgment could be interpreted more broadly than perhaps it was intended and that it may have applied the obligation to strictly adhere to the provisions of the debenture too stringently.

Fortunately, the High Court had an opportunity to clarify the position in a recent judgment. Mr Justice Allen clarified the position in a subsequent High Court case[2] in finding that the test is to look at what power is conferred in the terms of the debenture. It was held that the context of the appointment is very important and the documents must be looked at as a whole rather than focusing on the omission of a word or words. In that case, the debenture also referred to the power to appoint a “receiver and manager” but the Deed of Appointment only referred to the appointment of a “Receiver”. The Judge held that “if the appointee is invested with all the powers conferred by the deed of charge, he has power to manage as well as to receive income so he is a receiver and manager’.

Justice Allen concluded that although in the deeds of appointment the term ‘Receiver’ is used, he believed Mr. McCarthy was appointed by the valid exercise of power to appoint a receiver and manager stating: “[t]he crucial question is not how he is described, but what he was”. Therefore, the omission of the words ‘and manager’ was not fatal. The Judge distinguished this case from the Moroney case on the basis that that decision was made at an interlocutory stage and not at a full trial of the matter. It was noted that Mr Justice McDonald did not dismiss the Plaintiff’s arguments in that matter, but merely said he did not have a sufficiently strong and clear case to warrant the granting of an interlocutory injunction.

Although noting that there remains a clear distinction in law between a receiver and a manager and that the power to appoint a receiver-manager cannot be used to appoint merely a receiver and vice versa, Justice Allen held that that the context of the appointment powers provided by the debenture must also be taken in into account in determining whether a receiver and manager is being appointed or a receiver simpliciter.

The Judge went on to note that the description ‘receiver’ or ‘receiver-manager’ is not just terminology or a drafting technique as the difference is substantial. It is therefore critically important that the terms of the debenture governing the steps to be taken in the appointment of a receiver or a receiver and manager must continue to be strictly followed when drafting the instrument of appointment such as how the deed is to be executed.

This reasoning was also adopted in a recent Supreme Court decision[3] where Justice Clarke said it is important to have regard to the fact that the mortgage deeds themselves defined the person who were to be appointed as receivers and managers as ‘receivers’.

The importance of ensuring that the formalities are observed is clear from the facts outlined in the recent judgment of Ms Justice Pilkington[4]. This involved a long running dispute involving the borrower, the receiver and the appointing bank (KBC Bank) whereby the borrower and members of his family had prevented the receiver taking possession of the receivership properties in Wexford, resulting in granting of various orders for attachment and committal, allegations of threatening behaviour against the receiver’s agents and an allegation of assault against an employee of the receiver’s firm. An order for possession was obtained on an interlocutory basis in August 2014 but possession was not secured until January 2017. The Defendant’s Defence and Counterclaim in the plenary proceedings challenged the validity of the appointment of the receiver on the basis that the proper formalities were not complied with.

In order to prove the validity, the following oral evidence was required:

• evidence that the signatories were duly appointed by the Board of Directors of the Bank;
• evidence of the resolution of the Board appointing the signatories;
• compliance with the strict terms of the mortgage for the appointment of the receiver; and details on the acceptance of the appointment by the receiver. If there have been loan sales evidence of each of the sales will also need to be provided.

In this case, the Defendant also took issue with the fact that the deed of appointment referred to the appointment of a “receiver” (lower case “r”) rather than “Receiver” or “receiver and manager” and the failure to include full stops in the abbreviation of public limited company in accordance with the Companies Acts. The various documentation referred to KBC Bank plc rather than p.l.c.

While these arguments were ultimately rejected, this demonstrates the lengths some borrowers will go to try to challenge appointments and reinforces the importance of carefully reviewing the powers and terms of the mortgage debenture when drafting the deed of appointment and of observing the formalities of appointment. This case also demonstrates the challenges faced by receivers in getting possession of properties post appointment. There are countless examples over the past 10 years where borrowers have made life as difficult as possible for lenders notwithstanding that the loans, in the main commercial, have been unpaid for years and no effort was made to come to some arrangements with the lender. This reinforces the need to ensure that as much work is done as possible before the appointment to ensure that one can to the extent that it is possible, successfully defend these applications.

Registration of lis pendens

We have recently encountered a number of cases where lis pendens have been registered over receivership properties inhibiting the ability of the receiver to sell the property and realise the asset.

While it is relatively straight forward to register a lis pendens, it can prove difficult and costly to remove. Two options available to remove lis pendens are: (1) invoke the principle of overreaching; and (2) make an application under section 123 of the Land and Conveyancing Law Reform Act 2009 (the “LCLR Act”). In particular section 123(b)(ii) of the LCLR Act provide that a court can remove a lis pendens “where the court is satisfied that there has been an unreasonable delay in prosecuting the action or the action is not being prosecuted bona fide.”

Recently, the High Court has lifted a lis pendens for a delay of two years in prosecuting the case[5]. A lis pendens had been registered by a nephew of the owner of the lands the receiver wished to sell. The nephew claimed he had an interest in the lands. The High Court set aside the lis pendens on the basis of delay where the defendant had not given any reasonable explanation for his failure to progress the proceedings after instituting them in May 2017, stating:

“[i]t behoves a litigant who asserts a beneficial interest in or over encumbered property and who institutes proceedings in relation to same to prosecute such a claim with reasonable expedition, particularly in circumstances where the registered legal owners of the property are substantially indebted and where the rights and interests of third parties including a charge holder who has validly appointed a receiver stand to be adversely impacted by delays in litigation.”

Conclusion

While the main retail banks have agreed to defer issuing proceedings for three months there has been no express statement as to whether they will continue to enforce loans by the appointment of receivers in the event of a legitimate event of default under the loan documentation.

There is also no express bar to the appointment of receivers in circumstances where the event of default occurred before the introduction of measures in response to the Covid-19 restrictions imposed by the Government. Likewise, the receivers continue to have duties to proceed with the receivership.

When the measures do eventually come to an end it will be clear that banks and lenders will need to carefully analyse their loan book to determine the appropriate enforcement action to take on loans which continue to be non-performing and show no hope of improvement. Lenders will need to be cognisant of the issues and challenges referred to above.

[1] McCarthy v Moroney, [2018] IEHC 379