THE OSTENSIBLE AUTHORITY OF RECEIVERS, APPLYING THE PRIVY COUNCIL DECISION IN PT SATRIA V EAST ASIA COMPANY LTD

Michael Todd QC and Philip Gillyon consider the High Court’s decision in Business Mortgage Finance 6 Plc v Roundstone Technologies Ltd

In Business Mortgage Finance 6 Plc v Roundstone Technologies Ltd [2019] EWHC 2917 (Ch), the High Court considered whether a receiver who had not been validly appointed nevertheless had ostensible authority to bind the company.

Facts

This case follows on from Business Mortgage Finance 6 Plc v Greencoat Investments Limited and Others [2019] EWHC 2128 (Ch) heard by Zacaroli J who handed down judgment in July 2019. In that case, the claimant, Business Mortgage Finance 6 Plc (BMF6) obtained declaratory and other relief in relation to arrangements which had the effect of allowing the defendants to obtain control of a securitisation structure. The last declaration sought by BMF6 related to the validity of certain transactions, one of which was the sale of certain charged assets ostensibly by a receiver, appointed over BMF6’s assets, to Roundstone Technologies Ltd (Roundstone). As Roundstone was not a party to the case before Zacaroli J, BMF6 brought this second action against Roundstone before Nugee J by way of a Part 8 claim.

The facts of the case are complex but, in summary and with relevance to this second case, are as follows:

  • BMF6 was an issuer of six classes of notes under a securitisation structure (Notes) over which BNY Mellon Corporate Trustee Services Limited (BNY) was appointed trustee.
  • Another company, Greencoat Investments Limited (GIL) claimed to have acquired a number of the Notes and purported to appoint two other companies, Greencoat Holdings Limited (GHL) and Portfolio Logistics Limited (PLL), as separate and/or co-trustees of the Notes in June 2019.
  • Shortly after, GHL and PLL purported to appoint a Mr Oyekoya as receiver over BMF6’s portfolio of loans. Mr Oyekoya, acting as purported receiver of BMF6, then executed an agreement for the sale and purchase (SPA) of various BMF6 assets to Roundstone.
  • Nugee J agreed with the judgment of Zacaroli J that GIL’s attempt to appoint GHL and PLL as additional trustees had failed, and concluded that, therefore, Zacaroli J was justified in giving declarations that the acts of GHL and PLL in their purported capacity as trustees, including the appointment of Mr Oyekoya as receiver, and the acts of Mr Oyekoya as such purported receiver, were invalid and of no effect.

 

The remaining issue before Nugee J in this second case was whether, notwithstanding his conclusions as to the invalidity of the appointment of GHL and PLL as trustees and consequently of Mr Oyekoya as receiver, a declaration of invalidity should be made in relation to the SPA with Roundhouse. Roundstone’s defence was that it was a bona fide purchaser for value of the legal estate without notice of any irregularity. For that defence to work, it required Mr Oyekoya to have had authority to enter into the SPA.

In the absence of that authority Roundstone would not have been a purchaser at all. It was not disputed that Mr Oyekoya had no actual authority to enter into the SPA.

The answer to the issue, therefore, rested on whether or not Mr Oyekoya had ostensible authority to enter into a binding contract on behalf of BMF6.

Ostensible authority and the rule in Turquand’s case

Nugee J found that Roundstone could not rely on the ostensible authority of Mr Oyekoya to bind BMF6 to the SPA, and that Roundstone, therefore, was not able to rely on the defence of being a bona fide purchaser for value without notice.

In reaching that conclusion, Nugee J followed East Asia Company Limited v PT Satria Tirtamata Energindo [2019] UKPC 30 (see FC Feature 25 September 2019) and the legal principles relating to the rule in Turquand’s case, or the so called ‘indoor management rule’, set out in Bowstead and Reynolds on Agency (21st edition , 2018). Under this rule, a third party dealing, in good faith, with an agent who has apparent authority is entitled to assume that the company’s internal procedural requirements have been complied with in order to delegate authority to that agent (see Authority of an Agent, Q&A here). For this rule to apply, there must be a traceable representation or holding out by the company (ie one of the company’s authorised officers) that the agent had such authority.

Of course, the onus of proving authority was on Roundstone. Because it could not trace any representation by BMF6 (the issuer) or holding out by BNY (the trustee) that Mr Oyekoya had authority to act as receiver, Roundstone could not establish ostensible authority. Accordingly, the SPA was not binding on BMF6, and Roundstone was not a purchaser to whom the defence of being a bona fide purchaser for value without notice of a legal estate was available.

While not necessary in the scheme of his judgment, Nugee J found that, because of the unusual circumstances surrounding the transactions, Roundstone had been on notice as to potential irregularities, but had failed to make reasonable enquiries, and so it could not rely on the doctrine of ostensible authority anyway.

What to take away

The case is a conventional application of the principles considered in East Asia Company Limited v PT Satria Tirtamata Energindo but is a useful reminder of the requirements for establishing ostensible authority, and the rule in Turquand’s case.

First, a key element in the establishment of ostensible authority and the invocation of the rule in Turquand’s case is that a third party can trace back some holding out or representation from the principal itself that the agent was validly appointed or authorised by the principal. A holding out by the purported agent himself, or by some other person who is not authorised by the principal to represent that the purported agent is authorised by the principal, is ineffective to establish ostensible authority.

Secondly, the rule in Turquand’s case is designed to protect against procedural failures of “internal management”, which might otherwise defeat a transaction or allow a contracting party to evade its contractual obligations:

  • The rule cannot be invoked to create ostensible authority where none would otherwise exist (eg where there is no holding out of the purported agent by the principal).
  • Further the rule does not dispense with the need for a contracting counterparty to deal with appropriately authorised persons acting on behalf of the principal.
  • The rule in Turquand’s case is designed to protect those who could not know of procedural defects in the delegation of power to an agent – not to absolve those who are on notice of any irregularity.

 

This case feature was first published in FromCounsel‘s Corporate Briefing on 14 January 2020.

Barristers
Michael Todd QC
Philip Gillyon