The age old question of exactly what is the effect of a loss of a receiver’s agency

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We all know that if an individual borrower is made bankrupt, dies or if a corporate borrower goes into liquidation or becomes dissolved, any receiver appointed (before or after the event) loses the agency relationship he or she would have previously had. Whilst this termination does not prevent the receiver continuing from being appointed (if not already) or continuing in office, it can effect the way in which s/he deals with property they are appointed over.

One of the best examples to use is if a lease is to be granted over the property and agency has been lost.

Under the terms of most legal charges, a receiver will be given the power to enter into leases. The agency relationship usually afforded to the receiver enables the receiver to enter such lease in the borrower’s name excluding any personal liability.

However, where the agency status is lost, a receiver loses the ability to enter into such lease in the name of the borrower (the rationale being that the receiver can do what the borrower can do and once the borrower dies, or enters and insolvency process, s/he can no longer deal with their property in that way).

It is often believed the provisions of section 4 of the Power of Attorney Act 1971 permit a receiver to continue to act in the borrowers’ name. It may not.

As noted above, the power of attorney provides that authority survives liquidation if the power is given ‘by way of security’. Something can only be given ‘by way of security’ if the person it is given to is owed something by the person giving it.

So, in the usual cases receivers deal with, a borrower grants a power of attorney in the relevant legal charge ‘as security’ to the lender by virtue of the fact the borrower owes the lender a debt. The power of attorney granted to any receiver in that same document cannot be given by security as the borrower does not owe the receiver anything. Therefore, upon termination of the agency agreement, only the bank can enter into a document listing the power of attorney the borrower granted. Practically, this simply requires the bank to sign the necessary paperwork as power of attorney in the borrower’s name. So, the follow-on question must then be what happens if the receiver does sign a document in the borrower’s name either purporting to be his agent or purporting to use the power of attorney?

Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that a contact for the sale or other disposition of an interest in land can only be made in writing. A written contract cannot be unilaterally entered into. As we have seen, a receiver entering into a document as detailed above has no authority to do so on behalf of the borrower and therefore the document could be declared void. However, although currently no case law on the point, given the court’s aim in equity is put the parties into the position they ought to have been, it is more likely that a court would find that a clause seeking to exclude a receiver’s personal liability is ineffective and find the document was made by the receiver in his/her own right.