Downsview Nominees Ltd v First City Corporation Ltd (No. 1)  AC 295
Charge holder acted in bad faith and liable in damages vis-à-vis subsequent charge holder
The plaintiff appointed receivers and managers of a company over which it held a debenture. A separate debenture in relation to the company was held by the defendants. The defendants appointed receivers and managers of the company for the purpose of disrupting the receivership instigated by the first plaintiff. Under the defendants’ receivership, the company continued to trade and substantial losses were incurred. The defendants’ receivership was ultimately assigned to the first plaintiff.
Damages were awarded at first instance against the defendants in favour of the plaintiffs for breach of duty in negligence. The Court of Appeal of New Zealand partially allowed an appeal by the defendants. There was a further appeal to the Judicial Committee of the Privy Council.
The appeal was dismissed and the plaintiffs’ cross-appeal was allowed. The Privy Council held that equity imposed a specific duty on a mortgagee (i.e. the first defendant), and a receiver appointed by them, to exercise their powers in good faith for the purpose of obtaining repayment of the charge. The equitable duty was owned to the borrower and to any subsequent charge or debenture holder (i.e. the first plaintiff). The receivership by the defendants had been instigated for improper purposes and had been conducted in bad faith. The first defendant had acted in bad faith by failing to transfer its debenture to the first plaintiff when first requested to do so. Accordingly, the defendants were liable in damages to the same extent as would have been applicable had they been liable in negligence.