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Limited scope of a receiver’s duty of care recognized by Cyprus Courts

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For financial institutions in Cyprus, the floating charge has always been considered as one of the most important types of security in their attempt to minimize exposure to the risk of non-repayment. Once the floating charge became commonplace, the number of receivers appointed under such debentures has been ever increasing and so has the amount of cases brought before the Cyprus Courts by or against such receivers.

The receiver and manager appointed out of court has been described as a ‘‘protean character, changing his colour, shape and function according to circumstances’’. The receiver is appointed by the lender, however he’s the debtor’s agent and under these circumstances, an unusual tripartite relationship emerges between the receiver, the debenture holder and the company in receivership. The receiver will often need to reconcile the competing (and often conflicting) interests of the two, as well as the interests of third parties, such as the company’s shareholders, secured and unsecured creditors and employees. This uncomfortable position could be untangled by considering what duties are owed by receivers and to whom such duties are owed to.

The Cyprus Courts recently examined for the first time in detail the scope of a receiver’s duties and liabilities in the context of two actions filed before the Nicosia District Court. Shareholders, directors and employees of a company that had already been liquidated brought the actions against the debenture holder and the two former receivers of the company. The plaintiffs claimed that, as a consequence of the receivers’ negligent and/or fraudulent actions during the receivership, actions which constituted alleged breaches of their duties owed to them, they incurred losses and damages of different nature and had been wrongfully deprived of the value of their shares in the company and of their continued employment by the company.

The receivers, who had been successfully represented by our firm, raised a preliminary objection in their statement of defense, arguing that a receiver appointed under a floating charge, does not owe a duty of good faith to directors, shareholders and employees of the company and thus, the claims made against them ought to be rejected.

The Nicosia District Court, considering the matter at a preliminary stage, decided that the duties owed by receivers are equitable in nature and not based on common law principles. Accordingly, the proposition that the receivers owed a duty of good faith to all those directly affected in any way by the exercise of the rights and powers conferred to them by the debenture, based on the neighbour principle originally established in the landmark decision of Donoghue v. Stevenson [1932] UKHL 100 was rejected. The Court, applying principles established by relevant English case law, determined that a receiver’s primary duty is owed to the debenture holder, a secondary duty is owed to the company (whose right to enforce such a duty remains vested in the directors) and to any third parties who can show they are interested in the equity of redemption. Consequently, no duty is owed to directors, shareholders and employees of the company, nor to unsecured creditors, as none of these persons has a direct interest in the charged assets. In applying the above principles to the cases in question, the Court decided that the plaintiffs did not have an actionable right and were not entitled to initiate an action against the receivers and therefore rejected the actions as far as the receivers were concerned.

The legal status of receivers continues to give rise to disputes, as a result of the various capacities under which they may act. The aforementioned decisions however, although issued by a court of first instance, do provide some much needed clarity and guidance for both the practicing receivers and financial institutions, as well as the debtor companies, their representatives and other interested third parties.