Conflicts of Interest

Using three scenarios, Falcon Chambers barristers Julia Petrenko and Stephanie Tozer KC, explored where a conflict of interest might occur for the fixed charge receiver.

 

What is a conflict of Interest?

 
“Conflict of Interest” shall be interpreted to mean the definition as attributed to it by the Members own professional (regulatory) body.
 
NARA - reminder of Nara professional statement:
 
1.3 An appointment to act as Receiver should not be accepted unless the Member has first satisfied himself that no relevant conflict of interest (as defined by the Member’s own professional (regulatory) body) would arise from the acceptance of the appointment. 
 
RICS
RICS definition of Conflicts of Interest (March 2017):
Further document of use: RICS decision tree
 
Insolvency Practitioners Association – IPA definition: 
 
311.2 A1 Examples of circumstances that might create a conflict of interest include where a significant relationship has existed with the entity or someone connected with the entity, or where an insolvency practitioner:
• has to deal with conflicting or competing interests between entitles over whom they, or another insolvency practitioner in their firm, is appointed.
• or another insolvency practitioner in their firm has previously acted as an insolvency office holder to a company with a common director, or common directors. Where the insolvency practitioner has been appointed officeholder to a number of insolvent companies with the same director or directors, there will be an increased risk of a conflict of interest arising.
• has, or others in their firm have, previously carried out one or more assignments for an entity and / or its wider group and they are appointed as an insolvency office holder to the entity or its connected entities.
• has, or others in their firm have, previously carried out one or more assignments for an entity’s charge holders or stakeholders and the insolvency practitioner is appointed as an insolvency office holder to the entity or its connected entities.  
 
Two key types of conflict: 

• Party conflict: when interests of 2 clients conflict
• Own interest conflict: where own interests, or those of firm, conflict with duty to client

 
Who is the receiver’s client?

• BOTH lender and borrower

 
Duties owed by receivers to borrowers
 
Medforth v Blake [2000] Ch 86, Sir Richard Scott VC ([103B]):
“(1) A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption (2) The duties include, but are not necessarily confined to, a duty of good faith”
 
Devon Commercial Property Ltd v Barnett [2019] EWHC 700 ([188]):
“Breach of the duty of good faith owed by a receiver to a mortgagor must involve intentional conduct amounting to more than mere negligence, and encompassing either an improper motive or an element of bad faith, but it need not amount to dishonesty” 
 
Silven Properties Ltd v Royal Bank of Scotland Plc [2004] 1 WLR 997 ([22]): 
“There is binding authority for the proposition that (again in default of agreement to the contrary) in the exercise of the power of sale receivers owe the same equitable duty to the mortgagor and others interested in the equity of redemption as is owned by the mortgagee: they are obliged to take care to obtain the best price reasonably obtainable...”
 
Inherent conflict between Mortgagee and Mortgagor

• No rule which forbids receiver from placing themselves in a position where interests of borrower and lender may conflict.  They have both agreed to this, in the mortgage. 
• Receiver is entitled in exercising their power for the proper purpose of securing repayment of the debt to prefer the interest of the lender: Downsview Nominees v First City Corporation [1993] AC 295.  This rule tells you how to resolve the inherent conflict. 

 
 
Scenario 1 

• Susan Meyer is the freehold owner of 1 Wisteria Lane, which is charged to Fairview Bank.
• Susan engages Solis Consultants (a firm of commercial and real estate agents) to advise her as to renting out the Property, but the Property does not rent.
• Susan is unable to meet her mortgage payments. 
• Fairview decide to appoint Edie Britt as a receiver.
• Edie is employed by Solis Consultants. She was not actively involved in trying to let 1 Wisteria Lane, but she shares an office with Carlos who was the estate agent who acted for Susan.
• Can Edie accept the appointment? 

Relevant case law:
 
Balaratnam v Santander UK Plc [2019] EWHC 227 (QB) at [71]
"I add that I do not accept that the mere fact that Begbies had previously acted for the borrowers automatically gives rise to a conflict of interest. On the contrary, if Begbies had already gained knowledge of the secured properties then appointing them as receivers could well be the most economical and effective choice.”
 
Jennings v Quinn [2019] NICA 39 at [22]
“The engagement of LHS by Mr Quinn was to facilitate the sale or rental of the Ormeau Road premises. The engagement of LHS by the Bank was for precisely the same purposes. Mr Quinn was unable to demonstrate how any information about the loan to asset values of the properties subject to the charge could be used against him. There is nothing to suggest that information relating to the loan to asset values of the properties subject to the charges in any way influenced the fixed charge receivers in their decision making. The information specifically referred to by Mr Quinn would quite independently have been readily apparent to the receivers once appointed in any event. On the facts of this case, there was no actual conflict of interest in relation to Ormeau Road premises and in relation to the lands which are the subject of this appeal.”
 
Answer to scenario 1: 

• The estate agent was engaged to try to rent out and monetise the property to get money in for Susan
• The receiver would rent or sell the property to get money in to pay the bank.
• As their objectives are the similar, there is no real risk of conflict. There’s not likely to be any information that Solis Consultants know from having been engaged to rent Susan’s property out, which they ought not to know as a receiver.
• In an ordinary case, the fact that you’ve had some involvement in this property before won’t give rise to a conflict when you try to let or sell it.  But, you should consider whether your firm holds any confidential information as a result of a prior retainer which give rise to a conflict.  

 
Scenario 2

• Logan is the freehold owner of a shop which he uses to runs a newsagents
• A local high street bank has a benefit of charge over the shop, and assigns the charge to Logan’s business rival, Kendall
• Logan fails to make payments and Kendall appoints Siobhan as a receiver. Siobhan decides to sell the property.
• Waystar Ltd, a firm wholly owned by Kendall, makes a bid for the property
• Can Siobhan sell the property to Waystar? 

Relevant case law:
 
Devon Commercial Property v Barnett [2019] EWHC 700 at [194]
"Where the mortgagee appoints a receiver, and the receiver exercises the power of sale to sell to the mortgagee's associate, then, as I have said, there is no self-dealing, and the receiver does not have the same interest as the mortgagee in minimising the price. He or she does not benefit directly from any lower price. The receiver's interest lies instead in performing the role properly so as to earn fees. Those fees are earned whether the price is high or low, so long as reasonable care is taken that it is a proper one. The receiver may be tempted to gratify the mortgagee's desire for the associate to purchase cheaply for other, improper reasons, for example to continue to earn fees from the current appointment or to secure further appointments in the future, but that is quite different. Thus, in my judgement, the receiver in a case where the sale is to an associate of the appointor does not have a conflict of duty and interest as such.”
 
Answer to Scenario 2

• You are under an obligation to get the best reasonably possible price for the property.
• There’s no conflict of interest, per se, where a receiver sells to an entity connected to the lender
• Of the position where a mortgagee seeks to sell directly to a connected entity: here, the mortgagee would bear the burden of proving that it paid a proper price (“the self-dealing rule”).
• However, as usual, it is necessary to show that you have exercised your powers for a proper purpose.   
• Here, there is no prior connection between the receiver and the lender and no suggestion of improper purpose, so Siobhan can sell to Waystar. 

 
Scenario 3a

• Logan is the freehold owner of a shop which he uses to runs a newsagents
• A local high street bank has a benefit of charge over the shop, and assigns the charge to Logan’s business rival, Kendall
• Logan fails to make payments, and Kendall seeks to appoint Siobhan as a receiver
• Siobhan is already aware of the property as she is a shareholder in her brother Roman’s newsagent business and Roman has expressed an interest in acquiring the shop
• Can Siobhan accept the appointment? 

 
Answer to Scenario 3

• “Own Interest Conflict” between Siobhan’s interest as shareholder and her duty to Kendall and Logan
• Should not accept the appointment without Informed Consent of both Kendall and Logan
• If Logan's consent not sought: 
  • Lender probably cannot consent: Balaratnam suggests lender has a duty to take reasonable care not to appoint a conflicted person
  • Logan could likely prevent her from acting.  Supporting case law:

Relevant case law: 
 
Jennings v Quinn [2019] NICA 39 at [23]
“Because the Court has so readily disposed of the conflict of interest argument raised by Mr Quinn on the facts of this case, it is unnecessary for the Court to determine whether in law a conflict of interest is a ground for disqualifying a fixed charge receiver. It is clear that both the Association of Property and Fixed Charge Receivers and the Royal Institution of Chartered Surveyors place great emphasis on the necessity of avoiding engaging in relevant professional activities where a conflict of interest could arise. The Court assumes without deciding the point that a mortgagee could be prevented from appointing a fixed charge receiver where a conflict of interest existed and insofar as the decision of the lower Court could be interpreted as supporting the proposition that a conflict of interest is not a ground for disqualification of a fixed charge receiver, subject to further argument on this point, this Court would not be inclined to favour or support that interpretation.” 
 
Scenario 3b

• Assume Siobhan does not know of Roman’s interest when she accepts the appointment (and can prove this)
• Can Siobhan sell to Roman? 

 
Answer to 3b:
 
Yes, but Siobhan must prove that she took reasonable care to get best price reasonably obtainable if challenged by Logan.
 
Relevant case-law:

• Medforth v Blake [2000] Ch 86 at [99d]: in the event of sale by a receiver to a company in which the receiver is interested, receiver must prove took reasonable care to obtain best price reasonably obtainable

 
Consequences of a conflict 

• Regulatory  
• Might place the lender in breach of duty (so reputational impact  on receiver)
• Devon Commercial  suggests receiver also owes duty to the borrower not to act where there is a conflict, so the borrower could sue the receiver for any loss arising, or remove the receiver.