UNIVERSITY OF LAGOS

SCHOOL OF POST GRADUATE STUDIES

LLM PROGRAMME

(SEMINAR PAPER IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE GRANT OF LLM DEGREE)

COURSE: SECURED CREDIT TRANSACTION

TOPIC: RECEIVERSHIP: MEANING OF THE CONCEPT,

DUTIES AND POWERS OF A RECEIVER.

MEMBERS

NWABUEZE NGOZI - 020601101

DANIEL AMAECHI ONWE - 059061097

LECTURERS: DR. DAYO AMOKAYE AND DR. TUNDE OTUBU

TABLE OF CONTENT

SECTIONS PAGE

1.1 ABSTRACT.......................................................................................

...1

1.2 INTRODUCTION................................................................................

...2

1.3 HISTORY..........................................................................................

...3

1.4 DEFINITION OF

RECEIVER..................................................................5

1.5 DEFINITION AND DISTINCTION OF CERTAIN TERMS...........................7

1.6 CREATION OF RECEIVERSHIP……………………………………………………..9

1.7 NATURE OF THE AGENCY OF RECEIVERSHIP………………………….......11

1.8 SOURCE OF THE DUTY OF CARE EXERCISABLE IN RECEIVERSHIP...11

1.9 SCOPE OF RECEIVERS OBLIGATION TOWARDS THE MORTGAGOR....12

1.10 CAPACITY ………………………………………………………………………………..16

1.11 WHAT A RECEIVER IS TO DO UPON APPOINTMENT………………………..17

1.12 LEGAL EFFECT OF APPOINTING A RECEIVER. ……………………………..20

1.13 ADVANTAGES OF RECEIVERSHIPS………………………………………………22

1.14 DISADVANTAGES OF A RECEIVERSHIP……………………………………......24

1.15 POWERS OF A RECEIVER………………………………………………………......25

1.16 DUTIES OF RECEIVERS IN RECEIVERSHIP……………………………………28

1.17 RECEIVERSHIP AND THE MORTGAGE AND PROPERTY LAW 2010 OF

LAGOS

STATE......................................................................................32

1.18 PROBLEMS AND SUGGESTED REFORMS OF THE CONCEPT OF

RECEIVERSHIP IN NIGERIA…………………………………………………………34

1.19 CONCLUSION………………………………………………………………………........36

RECIEVERSHIP

1.1 ABSTRACT

The law relating to Receivership covers a wide sphere which includes a historically entrenched

equitable remedy originally invented by the Court of Chancery in England and a more recent

extra judicial remedy usually arising from an agreement between a lender and a borrower in the

form of a debenture both involving the appointment of a receiver.

Receiverships as a means of enforcing a security originated with the appointment of receivers at

the request of mortgagees, to collect income from mortgaged property and apply it towards the

repayment of mortgages. As time went on, the practice developed of the mortgage deed

incorporating a power for the mortgagee to appoint the receiver directly, as agent of the

mortgagor.

The essence of a receivership is that it is a mechanism by which one secured creditor enforces

his security against a debtor by appointing a receiver to sell some assets of the insolvent

company, sell the company as a going concern or in some cases manage the company with a

view to recovering the amount due to the creditor and then handing the company back to its

owners. It is therefore possible for a company which has been in receivership to return to

financial health and avoid liquidation.

1.2 INTRODUCTION

The concept of Receivership is one of the powers exercisable by a mortgagee under a mortgage

instrument. It entails the appointment of a receiver with the aim to safeguard the subject matter

of the security for the benefit of the person entitled to it or to protect same from damage or

jeopardy which threatens it.1 Basically, it ensures the preservation of the ‘res’ in a pending suit

where ordinary legal remedies are inadequate. Usually, a legal mortgagee is protected from the

onerous consequences in equity of taking physical possession, while an equitable mortgagee may

where such equitable mortgage is created by deed or contains an express power to appoint

receiver, overcome his legal disability to enter into possession by appointing a receiver.

1 Atunaya v. Atunaya (1994) 1 NWLR (PT. 322) P. 572

1.3 HISTORY OF THE EVOLUTION OF THE CONCEPT OF RECIEVERSHIP

Before considering some of the specific duties and powers of receivers, it may be helpful to

understand the historical evolution of receivership. While the institution of receivership

continues to be refined and developed by the courts, a great deal can still be explained by its

historical genesis. In particular, the reluctance of the courts to impose any duty on the part of the

receiver to the mortgagor beyond that of good faith has been attributed to the historical origin of

receivership.

Historically, a mortgagee (secured creditor) could directly take possession of mortgaged property

where a mortgagor (borrower) had defaulted under the loan agreement. As entry into possession

by a mortgagee was regarded as a bold assertion of legal rights, the courts of equity constructed

particularly onerous duties for mortgagees in possession so as to ensure that a mortgagee dealt

fairly and equitably with the mortgagor.

Prior to Lord Cranworth Act of 1860 2, a mortgagee had no power to appoint a receiver unless

he had expressly stipulated for it in a mortgage agreement. Appointment of a receiver by a

mortgagee in the absence of any power so to do expressly stipulated in the mortgage agreement

rendered the mortgagee, his Principal, liable to account to the mortgagor on the footing of willful

default3. Not surprisingly, mortgagees sought to avoid the exceptional severity with which they

were liable to be treated by courts of equity for business mismanagement. In consequence,

mortgagees began to insist on a contractual provision requiring the mortgagor to appoint a

2 23 and 24 Vict c 145 enacted in 1860

3 The historical background was outlined in the often quoted judgment of Rigby LJ in Gaskill v Gosling [1896] 1 QB 669 at 691-3 and subsequently approved by the House of Lords at [1897] AC 575. See also LG Doyle Administrative Receivership: Law and Practice (1995), Chapter 1.

receiver at the request of the mortgagee but on the basis that the receiver would be the agent of

the mortgagor. The agency provision vis-à-vis the debtor and the receiver became (and remains)

a standard feature of the contract between the borrower and the debenture holder. This practice

was eventually given statutory recognition which remains the case to the present day.

Receivership originally evolved from the agreement of parties to secured credit arrangements,

but it later became establishes statutorily under the Conveyancing Act, 18814, to the extent that

when a mortgage of real property is made by deed, the mortgagee has a statutory power to

appoint a receiver5.

4 Applicable in Lagos, the Eastern and Northern states of Nigeria), and the Property and Conveyancing Law 1959 (cap 100 LWN 1959 applicable in the Western states of Nigeria.

5 Conveyancing Act, 1881, s. 19; Property and Conveyancing Law 1959 , s. 131

1.4 DEFINITION OF A RECIEVER

A Receiver can be defined as any natural person appointed by a charge or a mortgagee to direct

and manage the affairs of the chargor or mortgagor until the realization of the security. The

Companies and Allied Matters Act (hereinafter known as CAMA)6 does not define who a

Receiver is, although the CAMA mentions that only natural persons can be appointed as

Receivers. The Black’s Law Dictionary7 defines a Receiver as “a person appointed by court for

the purpose of preserving the property of a debtor pending the action against him or applying the

property in satisfaction of a creditor’s claim, whenever there is a danger that, in absence of such

appointment, the property will lost, removed or injured”.

In Viners Abridgement of Law and Equity8, ‘Receiver’ is defined as follows;

“A receiver is an indifferent person between the parties, appointed

by the court to receive the rents, issues or profits of land or other

things in question in this court, pending the suit, where it does not

seem reasonable to the court that either party should do it; and he

is to account for such his receipt when the court shall require him.

And to secure his doing so, he is commonly ordered to enter into a

recognisance with such sureties in such sum as the court directs”.

6 Cap C20, Laws of the Federation of Nigeria, 2004.

7 6th Edition.

8 (1793) Vol. 18 Abridgement of Law and Equity 160

In the old case of Re: Manchester and Milford Railway Company9 Sir George Jessel, MR gave

what is generally considered to be a consummate definition of the terms Receiver and

Receiver/Manager, as follows;

“A ‘Receiver’ is a term which was well known in the Court of

Chancery, as meaning a person who receives rents or other

income paying ascertained outgoing, but who does not, if I may

say so, manage the property in the sense of buying or selling or

anything of that kind. We were most familiar with the distinction

in the case of partnership. If a receiver was appointed of

partnership assets, the trade stopped immediately. He collected

debts, sold the stock-in-trade and other assets, and then under

the order of the court the debts of the concern were liquidated

and the balance divided. If it was desired to continue the trade

at all it was necessary to appoint a manager, or a receiver and

manager as it was generally called. He could buy and sell and

carry on the trade.”

From the foregoing it is clear that there is a distinction between a receiver on the one hand and a

manager or what is now commonly known as receiver/manager on the other. While the former

merely receives income and makes necessary expenses, the latter carries on the trade or business.

9 (1880) 14 CH D 645 at 653

1.5 DEFINITION AND DISTINCTION OF CERTAIN TERMS10.

Receiver And Receiver Manager/Manager.

A Receiver can be appointed as either a ‘Receiver’ or a ‘Receiver Manager’. There is a

significant distinction between the two functions. Where the property mortgaged and charged is a

specific asset or series of assets, a receiver will be appointed in respect of that specific asset or

assets. However, where a debenture creates a charge over the entire undertaking and business of

a company, a debenture holder may appoint a Receiver Manager over the entire undertaking and

business. A Receiver Manager will, in addition to performing his duties as receiver also act as

manager of the business for the duration of the receivership.

Receivers and Liquidators

A Receiver is defined as any natural person appointed by a charge or a mortgagee to direct and

manage the affairs of the chargor or mortgagor until the realization of the security. Liquidation,

on the other hand, is a class action designed to protect the interests of the unsecured creditors

whereas receivership is designed to protect the interest of security holders; liquidation terminates

the trading powers of a company but this is not so in receivership. A liquidator in a compulsory

winding up of a company is an officer of the court but this is not so for a receiver appointed by

court11. Liquidation is the death knell of a company; receivership is not, although in certain

cases, a company that goes into receivership might also afterwards end up being liquidated. The

liquidation of a company is also known as ‘winding up’ a company. The process takes the

10 Receivers And Receiver Managers - ODCE Decision Notice D/2002/1 Information Book 7 - Liquidators,

Receivers & Examiners 26

11 Parsons v. Sovereign Bank of Canada (1913) A.C 160

company out of existence in an orderly way by paying debts from any available assets.

Receivership is used by banks or other lenders to sell a company’s asset that was promised to

them if the company failed to repay its loan as agreed.

Receivers and Examiners 12

A Receiver is defined as any natural person appointed by a charge or a mortgagee to direct and

manage the affairs of the chargor or mortgagor until the realization of the security, whereas an

Examiner is a person, appointed to a company by the Court, who assesses the affairs of a

company which has been placed into ‘Examinership’ and, if possible, prepares a plan for the

rescue of the company, its undertakings or substantial parts thereof. Examinership is a process

that protects a company from its creditors (the people to whom it owes money) while efforts are

being made to keep it running as a going concern. Examiners consider if a company can be saved

and, if it can, they prepare the rescue plan. Examinership is a process whereby a company can be

placed under the ‘protection’ of the Court in certain circumstances. In this context, protection

means protection from the company’s creditors. Where a company is placed in examinership, the

examiner considers whether the company is capable of rescue, and if so, brings forward a

scheme for this purpose (which must be approved by the Court)13.

12 Receivers And Receiver Managers - ODCE Decision Notice D/2002/1 Information Book 7 - Liquidators,

Receivers & Examiners 26

13 It is important to note that this concept does not exist in insolvency laws in Nigeria, hence this is a suggested reform.

1.6 CREATION OF RECIEVERSHIP

Receivership can be created in various ways. Below are the ways by which a receivership is

created:

1. By the agreement between the parties (by debenture agreement).

The power to appoint a receiver could be expressly stated in the mortgage agreement

between the mortgagor and the mortgagee. This is where there is a power in the

debenture for such appointment to be made by the debenture holder14. Also the trustee of

a debenture may also appoint a receiver/manager if satisfied that an event has occurred

which entitles the debenture holder or a class of debenture holders to realise the

security15. In such case, the terms of the agreement would be granted its plain

interpretation when the situation arises. A receiver or manager appointed out of court

may apply to the court for direction in relation to any matter arising in connection with

the performance of his function16.

2. Appointment by court.

A Debenture holder or trustee may apply to court for the appointment of a

receiver/manager in the absence of a power of appointment. The general ground on which

the court will appoint a receiver is the protection or preservation of the property for the

benefit of persons who have interest in it17. Once the appointment is made it is left for the

receiver to decide whether to carry on the business with the objective of a rescue in the

long term or of a beneficial sale as a going concern in the short term or to close the

14Intercontractors Nigeria Ltd. v. UAC Nigeria (1988) 2 NWLR (PT. 76) P. 280

15 CAMA; 2004 s. 209

16 CAMA; 2004 s. 391

17 Halsbury’s Laws of England 3rd ed. Vol. 32 p. 393; Okoya & ors v. Santili & ors. (1990) 2 NWLR (pt.13) p. 172.

business and sell up18. It is not entirely clear whether there may not a duty on the

creditors and receivers in certain circumstance to safeguard the company’s goodwill or

procure the most beneficial realisation by continuing the business, but the circumstances

in which such a duty may exist are likely to be rare.

3. By Statute

Where a receiver is appointed by an instrument shall subject to section 393 of the CAMA

be deemed to be an agent of the person or persons on whose behalf he is appointed and if

appointed manager of the whole or any part of the undertaking of a company19, he shall

be deemed to stand in fiduciary relationship to the company and must exercise utmost

good faith towards it in any transactions with it or on its behalf20.

1.7 NATURE OF THE AGENCY OF RECIEVERSHIP.

18 Gavin Lightman and Gabriel Moss, the Law of Receivers of Companies. (Sweet and Maxwell, London) p.11

19 Onuoha R.A. ‘The Role of Receiver in the preservation , realization and enforcement of Security’, in Secured Credit in a Global Economy- Challenges and Prospects, Editor, I. O Smith. The Department of Private and Property Law, Faculty of Law, University of Lagos, 2003.

20 S. 390 (1) CAMA. Section 131 of the Property and Conveyancing Law Cap 100 LWN 1959, S. 19 Conveyancing

Act 1881.

An Agent as defined by Black’s Law Dictionary21 is ‘a person authorized by another (principal)

to act for or in place of him; one intrusted with another’s business’. Basically it is where a person

appoints another with the requisite authority to act on his behalf. In an Agency relationship, the

principal is bound by the actions or inactions of his Agent and is liable for the consequence of his

omission, negligence or willful default22. The relationship of principal and agent with the

attendant duties and obligations is formed. Such agency is created expressly delimiting the

powers and duties of the agent (receiver)23.

1.8 SOURCE OF THE DUTY OF CARE EXERCISABLE IN RECIEVERSHIP

The concept of duty of care can be traced to equity. It arises as a result of the fiduciary position

occupied by the receiver. Flowing from this duty of care are certain expectations and obligations.

The duty of care concept arose in the early case of Donoghue v. Stevenson24. Also in Home

Office v. Dorset Yacht Co. Ltd25. It is an offshoot of the ‘NEIGHBOUR PRINCIPLE. This duty

is to prevent the receiver from achieving a selfish end26.

1.9 SCOPE OF THE OBLIGATION OF THE RECIEVER TO THE MORTGAGOR.

21 6th Edition

22 Bamgbala v. Deputy Sheriff, Lagos, C.F.A.O (1966) 2 All N.L.R p. 102.

23 Onuoha op. cit p. 129

24 (1932) AC p. 562

25 (1970) 2 All ER p. 294

26 Onuoha op. cit p. 134

The courts have recognized that apart from the debenture holder, other parties will be affected by

the actions and realizations of the receiver, not least of which is the mortgagor but also including

subsequent mortgagees and guarantors of the debt secured by the debenture.

Traditionally the courts have formulated the duty of a mortgagee-in-possession (or a receiver

appointed by a mortgagee) on a narrow footing. So long as the powers conferred by the

debenture were exercised in good faith, that is, absence of fraud, dishonesty or recklessness,

there would be no breach of duty. The decision of the House of Lords in Kennedy v De Trafford27

was most frequently cited as authority for this proposition. Commentators have, however,

questioned whether a fair reading of the judgment in Kennedy v De Trafford can be interpreted as

ruling that the mortgagee’s only duty is to act in good faith. A distinction was, however, drawn

historically between the duties of a mortgagee in possession and those of a receiver appointed by

a mortgagee in relation to the maintenance of mortgaged premises and carrying on the business

of the mortgagor. If the mortgagee personally exercised his power to take possession, he became

liable to account on a strict basis whereas this was not perceived to be the case if the mortgagee

appointed a receiver and manager to displace the mortgagor from control of the mortgaged

property. It has therefore been argued that the whole purpose of a receiver’s appointment would

be stultified if the receiver is held to owe obligations to the mortgagor that go beyond duties of

good faith28. Contemporary developments within the law of receivership have expanded the

duties of receivers as modern courts have not been so willing to confine the duties of a receiver

to simply acting in good faith29. These developments have occurred in a somewhat haphazard

fashion but it may now be possible to distil a more consistent basis to these duties. As

developments have occurred at a different pace in relation to the power of sale as opposed to the

27 [1897] AC 180. 28 This point was unsuccessfully argued before the Court of Appeal in Medforth v Blake [1999] 3 All ER 97, see 102- 105.

29 I. O. Smith, “Agency of the Receiver in Mortgage Agreements”, Modern Practice Journal of Finance and Investment Law (1999) Vol. 4, No. 2, p. 200

power of management, it may be convenient to review these aspects of the receiver’s powers

separately.

In Cuckmere Brick Co Ltd v Mutual Finance Ltd,30 the Court of Appeal held that a mortgagee

exercising his power of sale (and by extension a receiver exercising a power of sale vested in

him) must take reasonable precaution to obtain the true market value of the mortgaged property.

This has also been described as a duty to take reasonable precautions to obtain the best price

reasonably obtainable at the time of sale31. The Cuckmere Brick principle represents a significant

departure from the traditional doctrine which confined the mortgagee and receivers duties to act

only in good faith when exercising the power of sale. It has not been sanctioned by the House of

Lords but it has been approved by the Privy Council in Downsview Nominees (supra) and now

appears to be well established in English law. While each case will turn on its own particular

circumstances, it would mean that receivers should at least ensure sales particulars for the

mortgaged property are full and accurate32; specialist valuation advice is sought where

appropriate in addition to the sale being advertised in the relevant trade publications33; in relation

to a sale by auction, steps are taken to encourage bidders to attend and that the property is

exposed to the market for a proper period of time34.

The Cuckmere Brick principle however does not impose any obligation to sell at any particular

time if at all. It is for the mortgagee or receiver to decide if and when he should exercise his

power of sale35; delay the timing of a sale in the hope of obtaining a better price at a later date36;

30 [1971] 2 All ER 633. 31 Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54 at 60 per Templeman LJ.

32 Cuckmere Brick Co Ltd v Mutual Finance Ltd.

33 American Express International Banking Corp v Hurley [1985] 3 All ER 564.

34 Tse Kwong Lam v Wong Chit Sen (supra).

35 China and South Sea Bank Ltd v Tan [1990] 1 AC 536. 36 Bank of Cyprus (London) Ltd v Gill [1980] 2 Lloyd.s Rep 51.

conduct a fresh marketing program when the property has already been exposed to the market for

a reasonable period of time37.

One attempt to enlarge the duties of a receiver in managing mortgaged premises focused on the

law of negligence. In Knight v Lawrence38, a receiver was held liable in negligence to the

mortgagor for failing to put in motion a rent review process which would have resulted in a

higher rental income from the properties. It is now established that the liability should have been

based on equitable rather than common law principles.

Knight v Lawrence was followed by Downsview Nominees Ltd v First City Corp39 in which the

Privy Council sought to restrict the impact of the Cuckmere Brick case by stating that it was only

authority for the proposition that a mortgagee or receiver must take reasonable care to obtain a

proper price in exercising the power of sale. It was stated that there was no basis for the

imposition of a general duty of care on the part of a receiver and manager appointed by a

debenture holder to use reasonable care in dealing with the assets of the company. This would

suggest that where a receiver decided to carry on the business of the mortgagor he would not be

liable to act in accordance with any duty beyond that of good faith. It has been commented that

there is no convincing reason why receivers should be under a different duty in relation to

exercising a power of sale as opposed to conducting the mortgagor’s business40. The view

espoused in Downsview Nominees41 is clearly not compatible with the contemporary ethos of

corporate rehabilitation. Scott VC remarked in Medforth v. Blake42 that the proposition that, in

managing mortgaged property, the receiver owes the mortgagor no duty other than good faith

37 Campbell v Crabtree & Others, High Court, 6 July 2001 (unreported) at paras 131-133.

38 [1991] BCLC 215. 39 [1993] AC 295.

40 G. McCormack .Receivership and the Rescue Culture in Company Financial & Insolvency Law Review 2 (2000) 229-247.

41 supra

42 supra

offends commercial sense. It was considered necessary to ensure that a receiver, while

discharging his duties to manage the property with a view to repayment of the secured debt,

should take account of the interests of the mortgagor and others interested in the mortgaged

property.

The court in Medforth v. Blake could find no compelling reason to prevent it from holding that a

receiver who carries on a business on mortgaged premises should do so with due diligence. It did

not regard Downsview Nominees as authority to the contrary. Accordingly, the court held that

due diligence does not oblige the receiver to continue to carry on a business on mortgaged

premises previously carried on by the mortgagor. But if the receiver does carry on the

mortgagors business, due diligence requires reasonable steps to be taken in order to try to do so

profitably. It will be clear from the above that the law in relation to the powers and duties of

receivers is in a state of flux. Further judicial guidance is required on the standard and content of

the equitable duty of care and some guidance is starting to emerge. In a recent judgment it was

held that in managing the business formerly conducted by the mortgagor, simply adopting a

change in style where the business was a theme restaurant would not of itself amount to a breach

of the duty. It also seems that there is no duty on the part of the receiver to modernise and invest

in premises where the mortgagor had failed to do so.

1.10 CAPACITY

Section 387 (1) of the CAMA 2004 provides that the following persons cannot be appointed as

receivers:

1. An infant;

2. Any person found by a competent court to be of unsound mind;

3. A body corporate;

4. An undischarged bankrupt unless such a person has been given leave to act as a

receiver or manager by the court by which he was adjudged bankrupt;

5. A director or auditor of the company;

6. Any person convicted of any offence involving fraud, dishonesty, official corruption

or moral turpitude and who is unqualified under section 254 of CAMA 2004.

Where any of the persons mentioned above is appointed as a receiver or manager such

appointment shall be void and if any of the persons named in 3-6 above acts as a receiver or

manager he shall, in addition be guilty of an offence and liable to a fine not exceeding N2, 000.

00 in the case of a body corporate or in the case of an individual, to imprisonment for a term not

exceeding six months or to a fine not exceeding N500. 0043. Also where any of the persons listed

in 1-6 is at the commencement of CAMA acting as a receiver or manager, he may be removed by

the court on application by an interested person44.

1.11 WHAT A RECIEVER IS TO DO UPON APPOINTMENT.

43 S. 387 (2), CAMA, 2004.

44 S. 387 (3), CAMA, 2004.

Once a receiver is appointed he is advised to do the following as a precautionary measure to

further protect himself from liability45.The receiver is to consider46:

1. The validity of the debenture – This is necessary to avoid putting something on nothing. For

example if the debenture is void ab inito then so is the appointment. Section 97 of the

Bankruptcy Act does not make provision for indemnity in case of invalid appointment under a

debenture, but the law may reasonably require the appointor to accept the risk of any invalidity

and to provide a deed of indemnity if the debenture is valid at the date of the appointment but

potentially flawed, for example, maybe by reason of non registration of the mortgage

document47. If the charge under which a receiver is appointed or the appointment itself, is invalid

or defective, both the receiver and his appointor could incur substantial liabilities even where

they have acted in good faith. The proposed receiver will therefore need to be satisfied that not

only is the charge pursuant to which he is being appointed valid, but that the appointment itself is

valid. When a receiver is about to be appointed a search at the Corporate Affairs Commission,

Abuja (hereinafter called “CAC”) should always be carried out in addition to other relevant

investigations including the following;

a. Was the creation of the charge within the powers of the company and its directors? A perusal

of the Memo and Articles of the company should reveal whether there are limitations on the

director’s powers to borrow without a resolution of the general meeting.

b. Was the charge validity executed? This may depend on whether the company’s seal appears to

have been affixed in accordance with the formalities prescribed in the articles and whether the

persons attesting to the sealing held the offices which they were described as holding.

c. Was the charge duly registered as required by law?

d. Is the change void or unenforceable for any reason?45 See generally Tolley’s Insolvency Law July 2000

46 Onuoha op. cit p. 123-127.

47 Burston v. Speirway (1974) 1 WLR 1648 @ 1657

e. Has the holder of the charge become entitled to enforce it? This depends on whether any event

giving rise to the right to appoint a receiver has occurred and whether at least some money

secured by the charge is properly due and has become payable by the terms of the charge

document. It should however be noted that in the absence of bad faith, the appointer is not under

any duty of care to the company48.

6. Does the charge contain a power to appoint a receiver and what significant limitations (if any)

are there as to the assets covered, the amount secured thereby, the powers of the receiver, or the

nature of the charge in relation to each category of assets?

7. Are there any prior or subsequent charges in favour of other parties over the whole or part of

the same assets? Although the existence or any such charges is not in itself a bar to the

appointment of a receiver, their existence could affect the proposed appointor’s commercial

judgment as to whether to make the appointment.

2. The satisfaction of the conditions of debenture for the appointment contained in the

debenture agreement –

The debenture may enable an appointment to be made at any point in the debenture agreement

upon the happening of a specific event or in case of default by the company. The burden of proof

is upon the debenture holder and receiver to show that the power of appointment has become

exercisable. There is no presumption of a right to act, if the power has become exercisable, the

debenture holder owes no duty of care to the company or any guarantor in deciding whether to

exercise it provided he acts in good faith49.

3. If appointed by the court causes a notice of such appointment to be advertised in the

official gazette and two daily newspapers50.

4. Give notice to the CAC-

48 See Re Potter Oils Limited (No.) 1986 WLR 201

49 Shamiji v. Johnson Mathey Bankers Ltd. (CA) (1986) F.T.L.R.

50 CAMA 2004 S. 181

A person appointed out of court or obtains an order for such an appointment by the court is under

a statutory duty to give notice of the fact to the CAC within 14 days, indicating the terms of the

appointment and the remuneration and also every invoice order for goods or business latter

issued by or on behalf of the company or the receiver being a document on or in which the

company’s name appears shall contain a statement that a receiver has been appointed51. This fact

is then entered on the register of charges. The receiver appointed gives notice within 14 days.

Also where the court appoints a receiver over the whole or a substantial part of the property of

the company secured by a floating charge, the receiver is to give notice to the company of his

appointment and the terms of such appointment52.

Upon the receipt of such notice the company is to within 14 days (or any longer period allowed)

submit to the receiver, statement of affairs of the company in the prescribed form53. Within two

months of the receipt of the statement, the receiver must send to:

a. The court a copy of the statement and his comment on it if any;

b. The commission, a copy of the statement and his comment on it if any; and a summary of the

statement and his comment on it if any;

c. The company, a copy of the statement and his comment on it if any; and if he does not comment,

a note to that effect;

d. Any trustees of the debenture and every debenture holder whose address is known, a copy of the

summary of the statement of affairs.

1.12 LEGAL EFFECT OF APPOINTING A RECEIVER 54 .

51 Ibid S. 392 (1)

52Ibid S. 206 (1) (a)

53 Ibid S. 396 (1) (a) (b)54 I. O. Smith, Nigerian Law of Secured Credit, Ecowatch Publications, Lagos, 2001.p. 335- 339

This has been extensively dealt with by Karibi-Whyte JSC in the sister cases of Intercontractors

Nigeria Ltd v. N.P.F.M.B55 and Intercontractors Nigeria Ltd. v. U.A.C56. where he opined that ...

“by the appointment of a Receiver/Manager under his powers in the

debenture deed, the assets formerly available to the company ceases to be

so, and now becomes fixed and is crystallized and remains under the

general control of the receiver manager...the company ceases to have any

right to deal with the assets. Its right thereto is suspended....”

Intercontractors Nigeria Ltd. v. U.A.C.(supra) his Lordship pronounced the law as:

“ ....the effect of the appointment of a receiver/manager is to paralyse the

powers of the owner of goods from dealing with it. A company does not lose

its legal personality neither are the goods vested in the Receiver/Manager on

the appointment.....he is however entitled to possession of the goods, subject

to all specific charges validly created in priority to the floating charge....this

enables him to institute and defend actions in the name of the debenture

holder or the company entitled to the goods under the debenture....”.

The legal consequences are five fold. Firstly, the assets which hitherto were available to the

company ceases to be so and the floating charge having crystallized into a fixed charge the assets

remain under the general control of the receiver/manager. Hence the company can no longer deal

with the assets without the receivers consent.

Secondly, the receiver is the agent of the company for the purpose of dealing with the assets in

the receivership, thus he may employ new servants and carry out existing contracts in the name

of the company for the purpose of it business without incurring any personal liability.

55 (1998) 3 NWLR (pt. 76) p. 280.

56 (1998) 2 NWLR (pt. 26) p. 303.

Thirdly, company does not lose its legal personality neither are the goods vested in the

Receiver/Manager on the appointment.....he is however entitled to possession of the goods while

the legal estate is still vested in the company.

Fourthly, he is however entitled to possession of the goods, subject to al specific charges validly

created in priority to the floating charge and subject to all rights of set off acquired by debtors to

the company in respect of dealings with it.

Finally, the status of a receiver enables him to institute and defend actions in the name of the

debenture holder or the company entitled to the goods under the debenture. The CAMA provides

for this without need to seek the leave or permission of the court.

1.13 ADVANTAGES OF RECEIVERSHIPS 57 .

Receiverships remained in relative obscurity for the better part of the 20th Century; however,

secured lenders are turning to receiverships more often in today’s depressed real estate market

due to their many advantages. In the right situation, a receivership may provide a secured lender

57 Lessons Learned From Jerry Jones: Consider a Receiver for Your First Round Pick 25th Annual Real Estate Law

Conference June 3-4, 2010 South Texas College of Law By Ian T. Peck Erik K. Martin Haynes and Boone, LLP

Fort Worth, Texas.

with a more attractive option of disposing of a distressed real estate asset than foreclosure or

borrower bankruptcy.

Flexibility

One advantage of a receivership is that it provides the lender with flexibility in disposing of the

property. Receiverships, based in the laws of equity, can afford a more flexible remedy than

bankruptcy because there is no statutory counterpart to the Bankruptcy Code. A secured lender is

generally able to carefully craft the receivership order to fit each unique situation (subject to

court approval, of course). Additionally, unlike a foreclosure sale, a receiver has the ability to

move with the speed that the market demands – if market prices are depressed, a receiver may

elect to reposition the property for a later sale to maximize the property’s value. If time is of the

essence, however, a receiver can generally move expeditiously in noticing a sale and disposing

of the asset. A receiver is also authorized to collect rents, profits and revenues, improve

management and otherwise manage a property to maximize its value during the pendency of the

receivership. The use of a receivership may also provide a lender which is a REMIC more

flexibility to reposition and market an asset than a foreclosure and cash sale of the asset.

Cost-Effectiveness

A receivership may provide a secured lender a more efficient and cost-effective method of

managing and disposing of distressed real estate projects than in a bankruptcy. sAs such, a

receivership may involve fewer parties, professionals and administrative requirements, leading to

fewer costs associated with disposing of the asset and a greater recovery to the secured lender.

The lack of “formalities” may also allow a secured lender to dispose of an asset on a much more

expedited basis than would be possible in a bankruptcy setting.

Liability

A receivership may allow a secured lender to avoid or minimize potential liability. The receiver

provides a type of “shield” to the secured lender as the receiver’s actions are considered actions

of the court, and it is the receiver, not the secured lender, that makes final decisions related to

disposing of the property, including selecting the buyer, marketing the property and accepting

the final sales price. Additionally, the receiver shields the secured lender from liabilities

associated with foreclosing and becoming the owner of collateral. A receiver is also generally

allowed to sell property free and clear of existing liens which could maximize the property’s

value and minimize litigation with lower-priority secured creditors.

1.14 DISADVANTAGES OF A RECEIVERSHIP 58 .

As with all judicial mechanisms for disposing of or managing property, a receivership has its

advantages and disadvantages. One major drawback is that, unlike non-judicial foreclosure

proceedings, once a receivership is invoked, the receiver and underlying property are subject to

the appointing court’s jurisdiction until the receivership is wound up and the receiver is

discharged.

Another drawback is that the court is not required to accept the secured creditor’s candidate for

the receivership and may appoint an independent third party not aligned with the interests of the

58 Lessons Learned From Jerry Jones: Consider a Receiver for Your First Round Pick 25th Annual Real Estate Law

Conference June 3-4, 2010 South Texas College of Law By Ian T. Peck Erik K. Martin Haynes and Boone, LLP

Fort Worth, Texas.

secured lender. Though all receivers are officers of the court and must be disinterested in the

proceeding, the appointment of a third party with whom the secured lender has not dealt may

make it more difficult for the lender to achieve its objectives.

A third drawback is that, unlike the automatic stay in bankruptcy, no authority prevents post-

receivership litigation, and numerous lawsuits may arise after the appointment of a receiver,

particularly in the situation where the property is subject to multiple claims and liens.

Furthermore, if the borrower files for bankruptcy protection subsequent to the receivership

action, the receiver could be compelled to turn the property over to the borrower or a bankruptcy

trustee.

1.15 POWERS OF A RECIEVER.

The powers vested in an appointed receiver depends on the nature of the debenture deed.

Irrespective of the means of creation of the receivership, he has the power to settle the debts of

the company and realize the assets of the company. Pursuant to this general power, the receiver

is statutorily empowered to take possession of the assets subject to the mortgage, charge or other

security and to sell those assets , to collect debts owed the company, to enforce claims vested in

the company, to compromise, settle and enter into arrangements in respect of claims by or

against the company, to grant and accept leases of land and licenses in respect of patents,

designs, copyright or trademarks and to recover any installments unpaid on the company’s issued

shares59. It should be noted very importantly that these powers granted by CAMA are in addition

to, and not in substitution for, any other powers conferred on the trustee of the debenture trust

59 s. 209 (3)

deed or on behalf of the debenture holders by the debenture instrument and may be altered or

altogether excluded b the debenture instrument. It is also worthy of note that any person

appointed as receiver ALONE shall not have the power to carry on the business of the company,

except he is appointed as a Manager60. Where a person is appointed as receiver and manager he

has in addition to the foregoing the power to control and carry on the business of the company61.

The powers of the Receiver are listed in Schedule 11 of the CAMA, 2004 Section 393 (3) as

follows:

Powers of receivers of the whole or substantially the whole of the company’s property.

1. Power to take possession of, collect and get in the property of the company and for that

purpose, to take such proceedings as may seem to him expedient;

2. Power to sell or otherwise dispose of the property of the company by public auction or

private contract;

3. Power to raise or borrow money and grant security therefore over the property of the

company;

4. Power to appoint a solicitor or accountant or other professionally qualified person to

assist him in the performance of his functions;

5. Power to bring or defend any action or other legal proceedings in the name and on behalf

of the company;

6. Power to refer to arbitration any question affecting the company;

60 s. 391 (1).

61 (Uwakwe & ors v. Odogwu & ors (1985) 5 NWLR (pt. 123) p. 562 @ 589 para. E.)

7. Power to effect and maintain insurances in respect of the business and property of the

company;

8. Power to use the company’s seal;

9. Power to do all acts and to execute in the name and on behalf of the company any deed,

receipt or other document;

10. Power to draw, accept, make and endorse any bill of exchange or promissory note in the

name and on behalf of the company;

11. Power to appoint any agent to do business which he is unable to do himself or which can

more conveniently be done by an agent and power to employ and dismiss employees;

12. Power to do all things (including the carrying out of works) as may be necessary for the

realization of the property of the company;

13. Power to make any payment which is necessary or incidental to the performance of his

functions;

14. Power to carry on the business of the company;

15. Power to establish subsidiaries of the company;

16. Power to transfer to subsidiaries of the company the whole or part of the business and

property of the company;

17. Power to grant or accept a surrender of a lease or tenancy of any of the property of the

company, and to take a lease or tenancy of any property required or convenient for the

business of the company;

18. To make any arrangement or compromises on behalf of the company;

19. Power to call up any uncalled capital of the company;

20. Power to rank and claim in the bankruptcy, insolvency, sequestration or liquidation of

any person indebted to the company and to receive dividend, and to accede to trust deeds

for the creditors of any such persons;

21. Power to present or defend a petition for the winding up of the company;

22. Power to change the situation of the company’s registered office;

23. Power to do all other things incidental to the exercise of the foregoing powers.

1.16 DUTIES OF RECIVERS IN RECIEVERSHIP 62 .

In Kennedy v. De Trafford, 63 a mortgagee was said to owe a mortgagor a duty of good faith in

the exercise of his power of sale.

In Downsview Nominees Ltd. v. First City Corporation Ltd. (supra), the Privy Council held that

equity imposed on the mortgagee and receiver/manager specific duties including the duty to

exercise their powers in good faith for the purpose of obtaining repayment.

In Cuckmere Brick Co. Ltd. & Anor. V. Mutual Finance, the Court of Appeal in England held

that a mortgagee, when exercising his power of sale, owed a duty to the mortgagor to take

reasonable care to obtain a proper price, thus, where property is sold at the lower price than the

available market price as a result of the mortgagee’s negligence, the latter is liable for losses

incurred. But it must be noted that the duty of care imposed on a receiver/manager is higher than

that on a mortgagee.

62 CAMA s. 393 (3) schedule II to the Act; Smith ibid p. 344-347

63 (1897) AC p. 181

It is a primary duty of the receiver to take possession of and protect the property, receive the

rents and profits, discharge all outgoings therefrom and mange same with a view to the beneficial

realization of the security. A receiver appointed manager of the whole or part of the undertaking

of a company is deemed to stand in a fiduciary relationship to the company and shall observe a

duty of utmost good faith towards it in any transaction with it or on its behalf. He is expected to

act at all times in what he believes to be in the best interest of the company as a whole so as to

preserve its assets, further to its business and promote the purposes for which it was formed and

in such a manner as a faithful, diligent, careful and ordinary skilful manager who would act in

the circumstances.

The CAMA ensures that these obligations are not eroded by providing that nothing in the

Articles of Association or resolution of the company or in any contract shall relieve the

receiver/manager from the duty imposed by the Act or relieve him from any liability incurred as

a result of any breach of such duty64.

To ensure that the receiver is prudent, the CAMA ensures that the receiver is personally liable on

any contract entered into by him and may be indemnified only where he entered into the contract

in the proper performance of his functions statutory or otherwise, or with the express or implied

authority of the appointor subject to the rights of prior encumbrances65.

Preparation and filing of Account.

A receiver appointed under the debenture secured by a floating charge in respect of the whole or

substantially the whole of the property of the company shall send an abstract in the prescribed

form66 showing his receipts and payments to the Corporate Affairs Commission; any trustees for

the debenture holders of the Company on whose behalf he was appointed; the company; and (so

far as he is aware of eth addresses) all debenture holders, within the following period:

64 Section 390 (3).

65 S. 394 (2).

66 See second schedule of the Act.

a. within two months or such longer period as the court may allow after the expiration

of a period of twelve months from the date of his appointment, and or every

subsequent period of twelve months; and

b. within two months or such longer period as the court may allow after he ceases to

act as the receiver or manager of the property67.

The abstract shall cover the period of twelve months from the date of the appointment of the

receiver and any other subsequent period of equal duration. Where he ceases to act before the

expiration of any twelve month period, the abstract shall relate to all receipts and payments from

the end of the last preceding abstract to the date of his so ceasing to act, and the aggregate

amounts of his receipts and of his payments during all preceding period since his appointment. s.

396 (2). Where he is appointed under the powers contained in any instrument, he shall forward

the abstract within one month after the expiration of the six month period from the date of

appointment or of every subsequent period of equal duration. Where he ceases to act before the

expiration of any period of six months, the abstract shall relate to all receipts and payments from

the end of the last preceding abstract to the date of his ceasing to act and the aggregate amount of

his receipts and of his payments during all preceding periods since his appointment68. Any

receiver who fails to file his abstract shall be guilty of an offence and liable to a fine of N25. 00

per day of default.

Realization of debenture holder’s security.

A receiver appointed by debenture instrument may realize the assets of the company by auction

or a private sale but must not be fraudulent or sell at an undervalue. Medforth v. Blake (supra)69,

67 S. 396 (1).

68 CAMA s. 396 (2).

69 s. 393 (3) CAMA.

Where he is appointed by the courts, he shall exercise his power of sale with the directives of the

court70.

Distribution of proceeds.

All moneys realized from a sale of assets, rents or debts shall be distributed by the receiver in

accordance with his instrument of appointment in the case of one appointed out of court. Where

he is appointed by court, an application shall be brought for an order setting out the manner of

distribution amongst various claimants71. Monies in the hands of the receiver may be applied as

follows:

i. The cost of realizing the assets;

ii. Other expenses of the receiver including remuneration and costs;

iii. Costs, exchanges, other outgoings and the expenses of trustees under the debenture

trust deed, if any, including their remuneration;

iv. Cost of debenture holder’s action (if any);

v. Preferential debts out of the property subject to a floating charge in priority to the

claims of the debenture holder72.

vi. The debenture debt with interest accruing thereon up to the date of payment.

Institution of proceedings.

To enable the receiver achieve the desired goals of taking possession of the secured assets,

realizing proceeds therefrom or recovering debts due to the company, the law empowers him to

bring and defend action in the name and on behalf of the company73. Since the legal personality 70 CAMA S. 391.

71 CAMA 2004 s. 391

72 CAMA s. 182.

73 CAMA s. 393 (3); item 5 of schedule 11

of the company remains unaltered despite the appointment of a receiver, the latter cannot bring

an action in his name. But he need not obtain the leave of court to be able to bring or defend such

action neither is the occurrence of the share holders required.

1.17 RECEIVERSHIP AND THE MORTGAGE AND PROPERTY LAW 2010 OF

LAGOS STATE.

The Property and Mortgage Law of Lagos State, 2010 addresses the concept of Receivership in

section 43. In this law, the mortgagee can appoint a receiver after obtaining an order of a High

court when his right to exercise his power of sale has arisen74. The receiver also has the power to

insure the res but only to the extent to which the mortgagor himself could have 75. This law also

precludes any person making any payments to the Receiver from inquiring whether any incident

has happened to authorize the Receiver to act76. The Receiver can also from any money received

retain money for his remuneration, and to also satisfy all costs, charges and expenses incurred by

him, and also allows him to take a commission at such rate not exceeding 5% on the gross

amount of all monies received as specified in his appointment and if no rate is specified, then at

74 Section 43 (1) of the Mortgage and Property Law, 2010.

75 Section 43 (7)

76 Section 43 (4)

the rate of 5% on the gross amount or at such other rate that the court thinks fit to allow on

application made by him for that purpose77. The law allows the receiver to apply money to:

a. Discharge all rents, taxes, rates and outgoings affecting the mortgaged property.

b. In keeping down all annual sums or other payments and the interest on all principal sums,

having priority to the mortgagee in right whereof he is receiver.

c. In payment of his commission and of the premiums and other insurances.

d. In payment of the interest due in respect of any principal money due under the mortgage.

e. Towards the discharge of the principal sum if so directed in writing by the mortgagee and

shall pay the residue if any 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 mortgage property78.

77 Section 43 (6)

78 S. 43 (8)(e)

1.18 PROBLEMS AND SUGGESTED REFORMS OF THE CONCEPT OF

RECIEVERSHIP IN NIGERIA.

Despite the foregoing there is still in the opinion of this writer a dearth of experience on the part

of our practitioners and judicial officers on technical issues relating to receiverships. For

example, a receiver may be appointed over the assets of a company, which assets may be subject

to adverse trust claims, intellectual property right claims or third party claims of set-off, yet not

many courts or legal practitioners in Nigeria have had experience of dealing with issues such as

the effect of the appointment of a receiver on intellectual property rights, trust assets in

receiverships, the rights of set off or deposits as security in cases of insolvency.

Another reason in the view of the this writer for slow pace of the development of the law relating

to insolvency generally and receivership in particular is that the relevant insolvency laws in

Nigeria are merely part of our general company law, they are not separately codified and are

therefore not comprehensive enough to deal with a large number of the technicalities of

receiverships. While the CAMA deals with many issues relevant to insolvency and receivership,

there are many areas left untouched by the law such as the definition, distinction from other

closely related areas like managing, liquidation and examination, for example, qualifications

required of a receiver, set off, reservation of title etc. It is clearly difficult to advance the law

relating to receivership at the pace required without adequate and separately codified legislation.

It is also the writers humble opinion that upon the codification of insolvency laws that the

concept of ‘Receivership’ and ‘Managing’ (and indeed other insolvency concepts) be

institutionalized and professionalized, as we have in the cases of Arbitrators and Chartered

Secretaries and Administrators, for example. This will enable the growth of that area of the law

and ensure that only seasoned practitioners are allowed to practice in this area.

Finally, there should be a concerted effort by those who are knowledgeable in the practice of

insolvency in collaboration with relevant bodies such as the various chambers of commerce to

embark on a public enlightenment drive regarding the need for proper advice on insolvency

issues even when their businesses or industries are thriving because a company may be on course

for a bumper profit at the end of the year but if it cannot pay the bank, the tax authorities or any

other trade creditor it is by law an insolvent company and may be wound up or have a receiver

appointed over its assets. A majority of receivership in Nigeria could have been prevented if the

directors had access to relevant advice early enough for them to recognise the warning signals. It

must be instilled in the Nigerian entrepreneur that if he executes a debenture which enables the

debenture holder to appoint a receiver in the event of default, he must be prepared to cooperate

with the receiver and not automatically view such a receiver as the enemy.

1.19 CONCLUSION

From the foregoing, it is clear that the concept of receivership is borne out of the necessity to

protect real property while safeguarding the institution of mortgage transactions from abuse by

the mortgagee. It is therefore suggested that in the drafting of the debenture deed, all possible

protection should be included and granted to all interested parties, so as to reduce uncertainty and

doubt. The object of the foregoing is essentially to highlight the need for the development of the

practice of insolvency in Nigeria. The public need to know that insolvency law and practice is a

very complex area and made even more complicated by the fact that a business crisis or the

collapse of an industry is an extremely stressful experience for everyone involved. It is hoped

that as knowledge and experience is garnered by insolvency practitioners, legal practitioners,

accountants, the courts, company directors, trade unionists and all the other relevant groups,

strategies would be adopted to make receiverships more efficient and the laws relating to

insolvency more effective.