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Downsview Nominees v First City

[1993] AC 295

Case summary last updated at 09/01/2020 17:41 by the Oxbridge Notes in-house law team.

Judgement for the case Downsview Nominees v First City

It was held that a mortgagee owes no general duty in negligence to subsequent mortgagees or mortgagors to use reasonable care in the exercise of their powers and in dealing with the assets of the mortgagor. However equity imposed on a mortgagee and a receiver and manager specific duties including the duty to exercise their powers in good faith for the purpose of obtaining repayment. In this case the first debenture holder had instructed receivers to a mortgagor to disrupt the plans of debt repayment by the second debenture holder, so that he was not in good faith. 
 
Lord Templeman: Equity has developed two rules: “first, that powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and secondly that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower. These principles and rules apply also to a receiver and manager appointed by the mortgagee.” He also assert that “first, that powers conferred on a mortgagee must be exercised in good faith for the purpose of obtaining repayment and secondly that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower. These principles and rules apply also to a receiver and manager appointed by the mortgagee.” Negligence must not extend to managers or receivers for the repayment of a debt: the result would be the selling off of assets to pay debts ASAP so as to avoid exposure to liability, though this would not necessarily be in the interests of the company. 

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