Farrar v Farrars Ltd (1888) 40 ChD 395
Mortgagee power of sale; whether he can sell to a company of which he is a shareholder.
Facts
Mortgagees exercised their power of sale over real property. They advertised the land and it appeared there were no reasonable prospects of finding a purchaser. They set up a company specifically for the purpose of buying the property themselves, and purchased it. The mortgagee was a shareholder in the company. The mortgagors applied to the court for an order to have the sale set aside.
Issues
The mortgagors argued the sale was fraudulent and the property had been undervalued. They claimed the mortgagee had breached his fiduciary duty towards them, and created a conflict of interest because he was a shareholder in the company purchasing the land. They claimed a mortgagee could not sell property to himself or to a company in which he had an interest. Further, they claimed such transactions were against public policy and ought to be set aside. The mortgagee argued he had not sold the property to himself but to a limited company. He maintained he had taken all reasonable steps to obtain a good price for the property, the transaction had not been at an undervalue, and the sale was bona fides.
Decision/Outcome
The sale was upheld. A sale by a person to a limited company of which he is a shareholder is not a sale to himself. A corporate body has a distinct legal identity to those of the persons holding shares in it. The mortgagees had taken all reasonable steps to obtain a reasonable price and the price paid at the time of the transaction was adequate.
Updated 21 March 2026
This article accurately summarises the decision in Farrar v Farrars Ltd (1888) 40 ChD 395. The core principles remain good law. The distinction between a sale to oneself (which a mortgagee cannot validly make) and a sale to a separate corporate entity in which the mortgagee holds shares continues to reflect the law on mortgagee powers of sale. The separate legal personality of a company, affirmed in Salomon v Salomon & Co Ltd [1897] AC 22, underpins this reasoning and remains foundational.
Readers should note that the broader law governing a mortgagee’s duties when exercising a power of sale has developed significantly since 1888. The modern duty to take reasonable care to obtain the true market value (rather than merely a reasonable price at the time) was established in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 and affirmed in subsequent cases. Additionally, equity may still intervene where there is evidence of fraud, bad faith, or a seriously inadequate price, even where a sale is technically to a separate legal entity. The article does not address these later developments, so students should treat it as authority on the specific point of corporate identity rather than as a complete statement of a mortgagee’s duties on sale.
