INSOLVENCY LAW

LECTURE NOTES NO. 11

PREPARED BY MUHAMUD SEWAYA

REVISED AUGUST 2019

CORPORATE AND INDIVIDUAL RECEIVERSHIP

Receiver Defined

Both Section 2 Insolvency Act and Section 2 of Mortgage Act 2009 have similar
definition of a “receiver”:
.Means a receiver or a manager and include a receiver and manager or
administrative receiver in respect of any property and any person appointed as
receiver –
(a) by or under any debenture, or
(b) by the court in the exercise of a power to make such an appointment
given by any Act or any rule of court or in the exercise of its inherent
jurisdiction,
whether or not the person appointed is empowered to sell any of the property in
receivership.

A grantor is defined under section 2 Insolvency Act: Means a person in respect of whose
property a receiver is or may be appointed.

A receiver is a person who is appointed to receive, control and safeguard property, real or
personal. He is appointed by court pending the outcome of litigation by agreement of the
previous claiming to be entitled to the property; or by one person who has previously
been granted the right to appoint by any instrument (like a debenture, mortgage or
charge).

A receiver’s duties include not only the preservation of property, but also the collection
and application of the income there from. A receiver does not, by virtue of being a
receiver, have any power of sale. Some times he is given this and a general power to
manage property particularly an active business and in that case he is’ called a “ receiver
and manager”

The court has power, if it thinks proper to appoint a receiver or a receiver and manager,
and the appointee becomes an officer of the court. His powers and duties depend upon
the terms of the court order. The court is cautious and will not appoint unless there is a
danger to the property or threat of loss or other special factors necessitating appointment.
A receiver/manager is appointed by or on behalf of the holders of any debenture of the
company which as created was a floating charge or by such a charger and a one or more
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other securities, or a person who would be such a receiver /or manager of part only of the
company property.

It has been held that a receiver appointed over the whole or substantially the whole of the
property of unregistered company is an administrative receiver - Re International Bank
Commodities (1993) Ch 77.

Sec 20(b) Mortgage Act (MA) 2009 provides for the remedies of a mortgagee to
appoint a receiver. Most security documents provide for the appointment of a receiver on
the happening of a certain specified event of default.

Section 22(1) of Mortgage Act. provides that it is an implied condition in every

mortgage that the mortgage has the power to appoint a receiver of the income of the
mortgaged land.

However, the security document must provide specific powers to appoint a receiver or to
enter into possession where the mortgaged property is other than land.

Read Sec 22(1) – (4).MA

Receivers and Managers are usually appointed under charges (Instruments or deeds)
executed between creditors and debtors for purposes of securing debts. These may take
the form of floating charges for examples debentures, or fixed changes for example
mortgage. In the case of fixed charges on land, the mortgages are governed by the
Mortgages Act, 2009 and the Registration of Titles Act . Cap 230 while the Chattels
Securities Act 2015 governs movable properties. The powers to appoint receivers and
managers are contained in those instruments.

Commencement of receivership

Section 176 provides that where the appointment of a receiver is made by court, the
receivership shall commence and the appointment shall take effect as specified in the
court order. In other cases, the receivership commences and the appointment takes effect
when the receiver accepts the appointment in writing.

Circumstance in which receivers are appointed

Receivers may be appointed in the following circumstances and for the following
purposes:

(a) To preserve the assets of a trust estate.

(b) To safeguard the position between debtor and creditor. - It is exceptionally
possible for a creditor to apply for a receiver to be appointed to take control
of the property of his debtor, if the creditor shows that assets of a particular
fund out of which he is to receive payment are being dissipated.
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(c) To protect an infant. A receiver to safeguard an infant’s estate where there is

no guardian, or where the infant’s father is of bad character or untrustworthy
and there is danger of loss.
(d) To safeguard the position between mortgagor and mortgagee -
The deed of mortgage or charge usually empowers the mortgagee to appoint
a receiver if the mortgagor should prejudice the security on which the money
is advanced. Even if the mortgage deed does not so provide, the mortgagee
may ask the court to appoint a receiver if the security is
“ in jeopardy”.
(e) To safeguard the estate of a mentally incompetent person.
(f) To protect partnership property.
(g) To safeguard the position between vendor and purchaser.
(h) Pending a grant of probate or letters of administration. If litigation is pending
to decide whether a grant of probate or letters of administration is to be made
to a particular person it may be necessary to appoint a receiver to protect the
deceased’s assets pending the result..
(i) In company matters – Mortgagee and debenture holders of companies may
apply to the court for the appointment of a receiver but this will not be
necessary. If, as is usual, the security instrument gives a power to appoint a
receiver or manager directly.

Appointment

The receiver’s appointment, unless it is by court order is normally made under a deed of
appointment which is signed by the debenture holder eg, a bank or the trustees for the
debenture holders. The deed of appointment is the receiver’s authority to act and he can
produce it together with the debenture or trust deed, as evidence of his authority should
this be required.

The appointment of a receiver or manager is normally permissible upon the happening of

any of a number of events specified in the charge. One of these events is usually the
failure to meet a demand for repayment.

Read:
 Sec 22 Mortgage Act – Appointment of a receiver.

 Sec 22(6) Mortgage Act – Position of the Receiver – agent of mortgager.

 Section 38(e) Of the Civil Procedure Act and Order 41 of the Civil
Procedure Rules (check the amended version) the court is empowered to
execute a judgment by appointing receiver if it appears that doing so is just.

A receiver or manager must be appointed in accordance with the terms of the debenture
which usually requires the appointment to be made in writing.
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In Cryne v Barclays Bank (1987) BCLC 548, CA Kerr and May LJJ held that in the
absence of an express term which entitled the bank to appoint a receiver where they, on
reasonable grounds considered that their security was in jeopardy such a term could not
be implied into the debenture.

The appointment has to be in writing as provided in sec 22(3) MA.

The appointment of a person as a receiver is of no effect unless the proposed receiver

accepts it before the end of the business day following that on which the instrument of
appointment is received by him or on his behalf. If it is accepted then the appointment is
deemed to be made at the time at which the instrument of appointment is received by the
receiver.

Liability for invalid appointment

Sec 177
Where the appointment of a person as receiver other than by court order is found to be
invalid, the court may on an application of an aggrieved person order thee person by
whom or on whose behalf the appointment was made to indemnify the person appointed
against any liability which arises as a result of the invalidity of the appointment.
However, invalid appointment does not affect the bonafide transaction.

Read theses cases on appointment:

 Morris & Co Ltd v Kenya Commercial Bank Ltd & Others ( 2003) 2 EA 605
 Clovergem Fish & Foods Ltd v International al Finance Corp & 7 Others
( UCLR 2002 – 2004)
 Nyali Beach Hotel Ltd v Kenya Commercial Bank Ltd & Anor ( 2006) 1 EA
304
 Spares & Industries Ltd v Fina Bank ltd (2000) KLR 19
 Mrao Ltd v First American Bank of Kenya Ltd & 2 Others (2003) KLR 125

The Companies Act 2012 provides for registration of the charges under section 105 and
notification to the Registrar of appointment and cessation of acting of the receiver and
manager.

Notice of Appointment
Sec 178
- Receiver to give written notice of the appointment to the grantor
- Not later than 14 days give public notice about details of his/her appointment
- Where the grantor is a body corporate, the receiver shall not later than 14 days
after commencement deliver to the registrar and the official receiver a copy of
the notice
- Failure to comply does not affect the validity of the document.
- Failure to comply commits an offence – fine or 24 CP
- Defence for non compliance – sec 178(7).
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The receiver or manager of the property of a company is required to notify his/her

appointment on all the company documents like invoices, order for goods business letters
issued by receiver on the company’s behalf.

The appointment of a receiver out of court is advantageous from the perspective of the
debenture holder as a body. This is so because “the procedure in a debenture holders’
action is expensive, since the receiver as an officer of the court will have to work under
its closest supervision and constant application will have to be made in chambers
throughout the duration of the receivership, which may last years if a complicated
realization is involved consequently, in view of provisions for an out-of – court appointed
receiver to seek the court’s directions an application to court for appointment of a
receiver may be unnecessary and unduly expensive.

A receiver function is to take possession of the assets charged, collect rent and profits,
exercise the debenture holders’ powers of realization and pay the net proceeds to the
holders in reduction of their charges. He has no authority to carry on the business of the
company.

Who can be appointed a receiver?

- Section 203(1) (a) IA
- Section 204IA
- Section 207IA

Fundamental duty of a Receiver

Section 179

The receiver’s duty is to exercise hid/her powers in a manner which he or she believes on
reasonable grounds to be the best interest of all persons in whose interests the receiver is
appointed. A receiver shall have power over the property in receivership with reasonable
regard to the interests of the grantor; a person claiming through the grantor; un secured
creditor of the grantor, any surety.

Under section 189 IA, a receiver is expected within forty working days after
appointment prepare and send to person mentioned in section 191(2) IA, a preliminary
report on the state of affairs of property in receivership. Another report is needed under
section 189 IA. Other general details of the report to be prepared in accordance with
section 191 IA.

Notice of Default

Before proceeding for the appointment there is a need to observe 19 MA and section 4
IA in regards to compliance with the statutory demand notice.
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Effect of appointment of receiver

Read: Section 180 IA

In general terms, the appointment of a receiver paralyses the powers of the company and
its administration in favour of the receiver. As was said in the House of Lords in Moss
Steamships v Whinney (1912) AC 254: Receiver entirely supersedes the company in
the conduct of its business, deprives it of all powers to enter into contracts to sell, pledge
or otherwise dispose of the property put into possession of or under the control of the
receiver and manager.

a) Directors

The directors are not dismissed by the appointment of the receiver but their powers to
deal with the company’s property are suspended during the receivership as held in
Newhart Development case (1977)ALL ER.

However, the receiver is not obliged to pay directors remuneration, which is voted by the
members either before or after the receiver’s appointment, nor are the directors entitled to
any fees granted to them by the articles.

The effect of the appointment of a receiver on the directors is that, they remain in office
but their powers to deal with the assets comprised in the charge cease since the charge
will usually extend to all assets in the company. They are effectively powerless to run the
business.

In Gomba Holdings UK Ltd v Homan (1986) 3 ALLER 94, it was suggested that
directors have a contriving duty to exposit the company’s assets during receivership but
Holfmann J rejected any such and said at page 98 -99.

In my judgment, the board has during the currency of the receivership no powers
over assets in the possession or control of the receiver.

However, it is important to remember that the receiver is appointed only over the assets
to which the charge relates and that his function is to realize the assets to satisfy that
creditor. It may be therefore that the directors are able to exercise their residual powers in
certain circumstances.

An issue which has arisen is whether the directors are able to bring or initiate proceedings
in the company’s name. In Tudor Grange Holding P/C v Citibank NA (1992) Ch 53
(1991) 4 ALL ER 1, the court, while reluctantly accepting that there was some
authority to the effect that they could, found that that they had no power to do so where
the receiver’s position would be prejudiced by their decision to bring proceedings, for
example, by an order for costs against the assets comprised in the charge. The court also
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indicated that in this type of situation an application to other court for directions is
probably appropriate.

Read:

Githungo v Fidelity Shield Insurance Co Ltd and Others (2004) 1 EA 45

In Watts v Midland Bank P/C (1986) BC LC 15, the court held that directors can
initiate an action by the company against the receiver for the improper discharge of his
duties.

When a receiver is appointed, he becomes the agent of the company with the result that
the company’s directors to administer the affairs of the company is restricted by the
terms of the mortgage/ debenture and the power of the receivers.

The relationship between the company and the receiver is not the relationship of an
ordinary principal and agent because the receiver also owes duties to the debenture
holder. This relationship was considering by the courts in Gomba Holdings UK Ltd v
Miniories Finance Ltd, LA 1986, (1989) 1 ALL ER 261 Fox LJ Said:-

The agency of a receiver is not an ordinary agency. It is primarily a

device to protect the mortgagee or debenture holder. Thus, the receiver
acts as agent for the mortgagor in that he has power to affect the
mortgagor’s positions by acts which, though done for the benefit of the
debenture holder are treated as if they were the acts of the mortgagor the
relationship set up by the debentures and the appointment of the receiver,
however, is not simply between the mortgagor and the receiver.

In Re B. Johnson & Co (Builders) (1955) 2 All ER 775, it was held that a receiver
appointed by a bank was not an officer of the company for the purpose s of misfeasance
proceedings and it said that one who is appointed receiver and manager out of court is
one who is appointed receiver, not with any duties to carry on the business of the
company, but in order to realize for the debenture holders a mortgagee the security which
they have got and only for that limited purposes is to given power to manage.

Employees

Section 186 IA

When a receiver is appointed out of court contracts of employment will continue

provided the terms of the appointment make the receiver an agent of the company. If the
receiver offers employee new contract while he is running the company there is no breach
in the continuity of their employment as held in Re Mack Trucks (1967) 1 All ER
977.
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However, if he sells the whole business as a going concern the sale operates as a
dismissal of all staff. If the continuation of the contract of service of a particular
employee is inconsistent with the position of a receiver and manager, his appointment
will be terminated.

In the event that the receiver seeks to secure the services of employee; it may be
appropriate for the receiver to offer employment to those employee it wishes to retain
such employee would then need to terminate their employment, thereby giving rise to the
employee’s entitlement.

However, in engaging employee, the mortgagee will take upon itself the personal liability
arising under employment contract.

In Nicoll v Cutts (1985) BCLC 32 CA, it was held that while a receiver who merely
continued a managing director’s contract of employment on behalf of the company could
pay salary at an expense of a receivership in priority to the claims of the secured
creditors, he incurred no personal liability to do so and, if he elected not to, the MD, in
respect of services rendered post- receivership, merely had the status of secured creditor.

In Re Foster Clark’s Indenture Trusts (1966) 1 ALL ER 43, employee were entitled to
benefit under a pension fund if the company terminated their employment before,
retirement age. A receiver was appointed under a debenture which provided that such
receiver was the company’s agent. On the day after his appointment the receiver sold the
business as a going concern to a wholly owned subsidiary and he purported to transfer the
employee into the employment of the wholly owned subsidiary. It was held that the
employees were entitled to benefit under the schemes because the transfer of the business
from one company to another, terminated the receiver’s agency and operated as a
demand.

OTHER CONTRACTS
Section 186

The appointment of a receiver does not determine contracts entered into by the company
before the appointment. Griffiths v Secretary of State for Social Service (1973) 3 All
ER 1184. But the receiver need not cause the company to fulfill the contract. However,
if a contract is specifically enforceable, the receiver can not resist a claim for specific
performance.

In Gosling v Gaskill (1897) AC 575, it was held that a receiver is personally liable on
any contract entered into by him, and on any contract of employment adapted by him in
the performance of his functions.

Old Contract

Contracts which were binding on the company when the receiver was appointed continue
to bind the company; though any enforcement as by selling the company’s assets is
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subject to the prior rights of the debenture holders over the assets. The receiver may in
his discretion fulfill old contracts. However, although he has discretion he should not
disregard contracts if to do so would damage the company’s goodwill or affect the
realization of its assets, especially if it seems likely that the company will continue to
trade.

Thus in Re Newdigate Colliery (1912) I Ch 468, where the receiver and manager of a
mining company could have made a greater profit by disregarding contracts for the
formal sale / of coal, he was not allowed to drop the contract because of the damage to
the company’s goodwill.

Otherwise, he can not only ignore old contracts, but may even take steps to frustrate their
performance. In Airline Airspares Ltd v Handley Page Ltd (1970) 1 All ER 29, the
defendant company had agreed to pay commission to the plaintiff company on sales of
aircraft. On the defendant’s company going into receivership, the receiver “haved
Down”, (Is a convenient means of preserving the viable parts of a business for sale as a
going concern while leaving the debts and other liabilities with the parent company).

With the transfer of the business to the subsidiary ,there would be no sales and therefore
no commission available to the plaintiff. The court refused the plaintiff’s application for
an injunction to prevent the receiver proceeding in this way. In the opinion of Graham J,
almost any unsecured creditor would be able to improve his position and prevent the
receiver from carrying out, or at any rate carrying out as sensibly and as equitable as
possible.

In George Barker ( Transport) Ltd v Eynom (1974) 1 All ER 900, it was held that
where a pre-receivership contract created a lien over company property, the lien was
bending on the company in receivership even though the events causing the lien to arise
only occurred after the receivership began.

Position of Supplier of Goods

It is common for suppliers of goods to a company to do so under a reservation of title

clause in the contract which essentially, and at its most basic prevents title to the
suppliers goods passing to the company until the company has paid for them –
Aluminum Industries Vaassen Bv v Romalpa Aluminium Ltd (1976) 2 All ER
552.

This is designed to prevent the goods falling within the company’s assets to be realized to
pay the debts due to the debenture holder while leaving the unpaid supplier to claim.

The receiver may therefore offer undertaking to the suppliers that in the event that the
reservation of title claim is proved, the receiver will return the goods to them or, if they
have disposed of them will account for the value of the goods.
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In Leyland DAF Ltd v Automatic Products PLC (1994) I BCLC 245, Leyland owed
ƒ 750,000 to Automotive Products (AP) when receivers, were appointed to Leyland AP
refused to continue supplies unless its outstanding bill was met in full and without its
supplies there was likelihood that Leyland would cease to carry on business. The receiver
sought an order that AP continue to supply the goods even if the outstanding
indebtedness was not satisfied. COA held that in the absence of a contractual provision,
there is no legal obligation on one person to continue to trade with another. The court
noted that the person who stands to benefit from receivership is the debenture holder and
the court thought there was no obvious reason why a supplier of goods should be
expected to bear for the benefit of the debenture holder.

New Contract

A receiver is free to enter into new contracts in the course of carrying on the company’s
business of the other party will accept it he may contract on terms that he should incur no
liability. This is achieved, if acceptable, by overprinting a stamping all correspondence,
orders and other documents which the receiver issues with the words. “The contracts
only as agent for the company, and without personal liability” But if this is not
acceptable he will contract as an agent for the company but he will be personally liable
on contract, with a right of indemnity against the company’s assets, or if he thinks the
assets may not be easily realizable, he may have taken an indemnity from debenture
holders.

In Moss Steamship Co Ltd. v Whinney (1912) AC 254, HL, it was held that receivers
appointed by the court are personally liable on contracts entered into in the course of
carrying on the company’s business because, as independent officers of the court, they
are not agents of either the company or the debenture holder but contract as principals.

Where at any time a receiver vacates office, his remuneration and any expenses properly
incurred by him and any indemnity to which he is entitled out of the company’s assets
are a charge on and must be paid out of any property if the company which is in his
custody or under his control at that time in priority to any security held by the person by
whom or behalf he was appointed.

It should be not that a receiver appointed by the court is not the agent of the company or
of the debenture holder. Thus his contracts do not bind them. He incurs personal liability
and may be entitled to an indemnity. Not only is the company not liable on the receivers
contracts, it “ becomes incapable of making contract on its own behalf or exercising any
control over any part of its property or assets.

As pointed out by Hoffmann, LJ in Lipe Ltd v Leyland DAF Ltd (1993) BCC 385, 387
in continuing to supply, suppliers do not primarily rely upon the receiver having the
personal resources to meet their claims, but rather upon the receiver, having enough
common sense not to incur liabilities which will attract an indemnity in excess of the
company’s assets.
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Section 182 IA

Effects on a Charge

The appointment of a receiver crystallizes a floating charge, if this has not already
crystallized. Refer to Order 24 r 7(1) (2) (8) (check the amended version)

Effect of receivership on competing family interests.

Read these cases:

 Mwakalinde v NBC Holding Corporation (2001) 1 EA 148

 Kitale v Kitale (2001) 1EA 90

 Muthembwa v Muthembwa (2002) 1 EA 186

 Chakupewa v Mpenzi and Anor (1999) 1 EA 32

SM
August 2019