Validation of appointments of Receivers – Advice from a Receivers’ Solicitor

This article looks at the Validation of Appointments of Receivers and the case of The Merrow Limited v Bank of Scotland Plc and David O’Connor.  It looks at the case from the perspective of a Solicitor acting regularly for Banks and Receivers.

The recent case of The Merrow Limited v Bank of Scotland Plc and David O’Connor (High Court Record No: 2012/695/COS) has once again highlighted the importance of strict compliance with the terms of a mortgage when appointing or accepting an appointment as a receiver.  Solicitors acting for Banks and Receivers should take note.  In this case Mr. Justice Gilligan, when setting aside the appointment by Bank of Scotland Plc of David O’Connor as receiver over certain property of The Belohn Limited (the “Company”), being a wholly owned subsidiary of The Merrow Limited, quoted approvingly from Lynch-Fannon’s Corporate Insolvency and Rescue in which they noted that “the penalty for non-compliance with the formalities for the appointment of the receiver is that such appointment is void”.

The Company operated the licenced premises known as Foley’s Bar and O’Reilly’s Bar situated at 1 Merrion Road, Dublin 2 and 17 Merrion Street, Dublin 2.  The Company had extensive loan facilities with Bank of Scotland Plc which amounted to approximately €4,000,000 in October of 2012.  These borrowings were secured by a mortgage debenture dated the 7^th of August 1981 granted by the Company to the Industrial Credit Company Limited (the “Debenture”) over Foley’s Bar and by a mortgage dated the 3^rd of April 2008 granted by the Company in favour of Bank of Scotland (Ireland) Limited (the “Mortgage”) over O’Reilly’s Bar.  ICC subsequently changed its name to Bank of Scotland (Ireland) Limited whose business was, in 2010, vested in Bank of Scotland Plc.

Bank of Scotland Plc. appointed Mr O’Connor as receiver and manager to Foley’s Bar and O’Reilly’s Bar by Deed of Appointment dated the 10^th of October 2012.  The Company challenged the appointment of Mr. O’Connor on a number of grounds including the formalities surrounding his appointment under the Debenture.

The Debenture provided as follows:

“A lender may at any time after the mortgage debt shall have become payable appoint by writing under its seal a receiver of the mortgage (sic) property or any part thereof and remove any receiver so appointed and appoint another receiver in his stead and the following provisions shall have affect…..”

 The Debenture expressly excluded subsection (1) of Section 24 of the Conveyancing and Law Reform Act, 1881 which gives a statutory power to a mortgagee to appoint a receiver under the hand of the mortgagee.  The receiver was appointed under a Deed of Appointment by an authorised officer of Bank of Scotland Plc however the Deed of Appointment was not executed under Bank of Scotland Plc’s seal.

Bank of Scotland Plc argued that its Memorandum and Articles of Association did not require it to have a seal and therefore it was not possible for the bank to have executed the Deed of Appointment under seal.  This argument was not accepted by the learned Judge and he ultimately found that the appointment of the receiver pursuant to the terms of the Debenture was void and he made an Order pursuant to Section 316(1) of the Companies Act 1963 declaring that Mr. O’Connor did not stand validly appointed, the appointment being invalid, void and of no effect.  He also found that as the business of both licensed premises were inextricably linked Mr. O’Connor’s appointment under the Mortgage was also void.

While this judgment turned on a net point; being the failure by Bank of Scotland Plc to comply strictly with the formalities of its own debenture, the judgment re-emphasises the importance of ensuring that a Deed of Appointment is drafted and executed strictly in accordance with the terms of the relevant mortgage or debenture.  In addition the Deed of Appointment should grant in favour of the receiver only those powers which are contained in the mortgage or incorporated from statute.

Regarding the former, we have come across the following defects in Deeds of Appointment when validating appointments as Solicitors for Banks and Receivers:

1. The debenture provided for the appointment by a receiver under seal or under the hand of a director however the draft Deed of Appointment provided for the Deed to be executed by an authorised signatory.
2. The Deed of Appointment provided for the appointment of joint receivers whereas the debenture referred to the appointment of a receiver only rather than a “receiver or receivers”.
3. The description of the secured property and/or the date of the mortgage was inaccurately recited in the Deed of Appointment.

In relation to the latter the following are some of the common defects we have encountered in practice when acting as Solicitors for Banks and Receivers:

1. The Deed of Appointment purported to appoint the receiver as a receiver and manager while the debenture did not make any reference to a manager.
2. The Deed of Appointment purported to grant to the receiver a power of sale where no such contractual power was contained in the mortgage.
3. The Deed of Appointment purported to grant to the receiver a power to take possession of the mortgaged premises where no such contractual power was contained in the mortgage.

It should be noted that both banks and insolvency practitioners may be liable in damages where an Appointment is deemed to be void and in the case of a receiver appointed under an invalid Deed he/she may be deemed a trespasser on the secured asset.  It is therefore vital that each Deed of Appointment is vetted and validated in advance of any appointment being offered and/or accepted.  Banks and Receivers should therefore obtain legal advice when executing a Deed of Appointment.

Keith Hogan

Partner

Hogan Dowling McNamara

28^th May 2013

Hogan Dowling McNamara Solicitors are conveniently located at Castletroy House, Dublin Road, Limerick with plenty of off street parking.