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Office holders’ liability for conversion

Print publication

09/12/2013

Conversion
‘Conversion’ consists of an act of deliberately dealing with goods in a manner inconsistent with the owner’s rights to use the goods, thereby depriving the owner of those rights. It is not necessary for the offence to have been committed deliberately, only for the act of dealing with those goods to have been deliberate.

Officeholders, including receivers, may be required to dispose of, or deal with, properties, plant and machinery, stock, and fixtures and fittings. All of these are capable of giving rise to a liability in conversion.

Facts of the case
In Euromex Ventures Ltd v BNP Paribas Real Estate Advisory and Property Management UK Ltd [1] the defendants were appointed as administrators of HDS Studios Limited (HDS). HDS later went into compulsory liquidation and the defendants became its liquidators. HDS was the tenant of a property owned by a subsidiary company, also in administration. The defendants caused HDS to enter into a sale agreement to sell various assets situated at the property on the basis that they would remain there until sold on by the buyer. The defendants were party to that sale agreement.

The claimants alleged that the assets belonged to them and claimed that the defendants were liable in conversion.

Defendants’ submissions
The defendants submitted that the assets did not belong to the claimants. They also argued that the claimants had not sought to assert ownership at the time of the sale and were therefore stopped from doing so now.

The defendants further maintained that they were protected by section 234 of the Insolvency Act 1986. This states that an office holder who transfers possession of a third party’s asset who has reasonable grounds for believing that he is entitled to seize or dispose of the asset will not be liable for any loss or damage resulting from such seizure or disposal (unless caused negligently).

Judgment
The court found that section 234 applied. The defendants did have a reasonable belief that the assets belonged to HDS at the time of the sale, and there had been no negligence on their part. Further, the evidence as to ownership adduced by the claimants in support of their claim was of dubious authenticity.

The risks for receivers
The decision is a welcome reminder of the availability of the section 234 defence to a conversion claim – provided, importantly, there is no negligence. The decision applied to administrators but could equally apply to fixed charge receivers. There are a number of points regarding conversion that receivers need to bear in mind:

  • when appointed by the holder of a fixed charge a receiver is usually stated to be acting as agent of the debtor; accordingly, the receiver would not be personally liable. However, an agency relationship is not a defence to a claim in tort (such as conversion)
  • if a receiver is found to be liable in conversion a court has the power to order delivery up of the goods and/or award damages to the value of the goods and for any consequential loss. Exemplary damages may be awarded

What steps can receivers take to minimise the risk of liability in conversion?

  • liability may arise where the appointment is invalid and the receiver disposes of goods or property. The validity of the appointment must be checked
  • the statutory powers of a receiver are limited to the recovery of income so the receiver needs to be certain that the mortgage under which he is appointed extends these powers so they are free to sell, grant leases, carry out repairs, etc. If a receiver acts beyond their authority there is a risk they could be liable in conversion
  • the goods over which the receiver is appointed may be limited to the property only. It is important that the mortgage deed is reviewed to see what else, if anything, is charged
  • where the receiver is dealing with stock or plant and machinery, caution must be taken to investigate whether any other party retains an interest in those goods, such as a hire purchase agreement, or a retention of title clause in a supply contract.

[1] [2013] EWHC 3007 (Ch)