AVALON MOTORS LIMITED (in Receivership) v BERNARD LEIGH GADSDEN

MOTOR CITY LIMITED (1998) S.J. 26 (S.C.)

SUPREME COURT
NGULUBE, C.J., SAKALA, CHIRWA, MUZYAMBA AND LEWANIKA,JJ.S.
9TH APRIL AND 4TH AUGUST, 1998.
(S.C.Z. JUDGMENT NO. 7 OF 1998)

Flynote

Company Law - Receiver - Legal status of receiver - Whether he can sue or be sued
in his own name

Headnote

The company borrowed money from a bank and upon defaulting, the bank
appointed the first respondent to be the receiver. There were allegations to the
effect that the receivership was being conducted in a deliquent fashion to the
serious disadvantage of the company, the shareholders and all concerned. As a
result a new receiver was appointed. Meanwhile, an action was commenced
against the former receiver who is the first respondent and also against the second
respondent who sold the company's properties and assets allegedly at a grossly
undervalued or give-away price. Such action was commenced in the company's
name and a preliminary objection was taken by the defendants that the director
and shareholder was not entitled to sue in the name of the company; only the new
receiver could do so. The objection was sustained; the action was dismissed
leading to this appeal

Held:
(i) Receivers as well as liquidators occupy a fiduciary relationship and are liable
for their wrongdoing in relation to the mortgaged property
(ii) Whenever a current receiver is the wrongdoer (as where he acts in breach of
his fiduciary duty or with gross negligence) or where the directors wish to litigate
the validity of the security under which the appointment has taken place or in any
other case where the vital interests of the company are at risk from the Receiver
himself or from elsewhere but the Receiver neglects or declines to act, the
directors should be entitled to use the name of the company to litigate.

For the appellant: Mr M.F.Sikatana, Veritas Chambers.

Judgment

NGULUBE,C.J.: delivered the judgment of the court.

When we heard this appeal, we allowed the appeal and reversed the dismissal of
the action upon the objection which was upheld below as to who should have been
the plaintiff. Instead, we allowed an application to substitute the plaintiff so that
the Director and shareholder who had sworn the affidavits in the case became the
plaintiff and the action to proceed accordingly. We said that we would consider
the company's own position by the new receiver in the reserved judgment. We
also ordered that the costs so far occasioned by the shareholder/Director
proceeding in the name of the company would be for the respondents in any event.
We indicated the result of the appeal to facilitate the parties making progress in
the main action. We said our reasons for the decision would be given later and
this we now do.

The facts can be stated very briefly. the company borrowed money from a bank
and upon defaulting, the bank appointed the first respondent to be the receiver.
There were allegations to the effect that the receivership was being conducted in a
deliquent fashion to the serious disadvantage of the company, the shareholders
and all concerned.

We need not here go into detail concerning the nature of wrongdoing which was
alleged save to note that an application was successfully made to the High Court
to remove the first respondent from the receivership, in terms of the relevant
provisions of the Companies Act. We understand that a new receiver was
appointed. Meanwhile, an action was commenced against the former receiver
who is the first respondent and also against the second respondent who was sold
the company's properties and assets allegedly at a grossly undervalued or
give-away price. Such action was commenced in the company's name and a
preliminary objection was taken by the defendants that the director and
shareholder was not entitled to sue in the name of the company; only the new
receiver could do so. The objection was sustained; the action was dismissed
leading to this appeal. It is not necessary for us to make any comments on the
merits of the case which is to be tried below. Indeed, it would be improper for us
to do so. It should also be noted that, contrary to the understanding of the real
complainant (the plaintiff since substituted), the court below did not say anything
which could suggest that a receiver or for that matter a former receiver is immune
from suit for wrongdoing. There is no such blanket exemption or immunity.
Receivers as well as liquidators occupy a fiduciary position. Learned Counsel for
the 1st respondent very fairly and properly outlined the correct legal propositions
in such matters in his extremely helpful and learned heads of arguments. It
was thus common cause that the Receiver's fiduciary relationship with the
company means that he/she owes it duties similar to those owed by a mortgagee.
These include an obligation to exercise the powers conferred by the security in
good faith as well as a duty of care. As the learned authors of Kerr on Receivers
and Administrators (17th Edition) observed at pages 342 - 343:

"Notwithstanding the relationship of principal and agent, however, the

There is a variety of other situations giving rise to duties and liability on the part of
the Receiver for wrongdoing. It is here unnecessary to repeat these since
recourse can be had to texts like Halsbury's Laws of England, 4th Ed; Vol.7 Kerr
on Receivers and other reference works.

What is certain is that companies under receivership are not left without remedies
in the event of wrongdoing by the Receiver. Misfeasance, gross negligence,
anything amounting to fraud and various other breaches or transgressions can
result in a Receiver or former Receiver being sued. The true issue in this case
was "who should sue"; or when can the directors and shareholders of the
company still under receivership be allowed to maintain an action in the name of
the company?

There can be no doubt whatsoever that the shareholders and Directors, as well as
anybody who is properly interested and who has beneficial interests to protect can
sue a wrongdoing Receiver or former Receiver in their own names and in their own
right. In the case of an action against a former Receiver, a current Receiver if so
minded can join the company in the action. However, as far as persons who are
not Receivers suing in the company's name is concerned, we agree with Mr Wood
that the circumstances when this will be permitted should be limited. For
instance, it would be improper for a current Receiver being sued in his own name
by the company as this would amount to suing himself. See Magnum (Zambia)
Limited v Basif Quadri (Receiver/Manager) and another (1981) ZR 141 (which
held, inter alia, that a company under receivership has no locus standi
independent of its Receiver). However, whenever a current receiver is the
wrongdoer (as where he acts in breach of his fiduciary duty or with gross
negligence) or where the directors wish to litigate the validity of the security under
which the appointment has taken place or in any other case where the vital
interests of the company are at risk from the Receiver himself or from elsewhere
but the Receiver neglects or declines to act, the directors should be entitled to use
the name of the company to litigate. There is no need for us to be exhaustive in
our remarks nor to say any more in this case which is on-going in the court below

It was for the foregoing reasons that the appeal was allowed and substitution of
the plaintiff made, in keeping with the spirit of Order 14 of the High Court Rules
relating to joinder, non-joinder and misjoinder of parties.

Appeal allowed