Finance house reserves right to increase fee paid to receiver – CCJ Rules
The Caribbean Court of Justice (CCJ) ruled that a finance house (business that loans money) has the legal right to increase the fees paid to its receiver (somebody appointed to run a business).
All nine CCJ judges who heard the following case came to the same conclusion.
The company, Guyana Furniture Manufacturing Limited, had asked the CCJ to rule that the Inter-American Investment Corporation had no power to increase the fees of receiver, Robert Ramcharan, without first consulting with it.
The case was brought following the furniture company’s failure to repay loans borrowed from the Inter-American Investment Corporation (“Inter”) and from the National Bank of Industry and Commerce in Guyana. Inter appointed Mr. Ramcharan acted as receiver in accordance with a mortgage debenture the company had executed.
By way of explanation, debentures are legal instruments large companies give to lenders as security for loans made to the companies. A debenture is used to certify a loan, and serves as evidence that a company must repay the lender a set amount of money with interest.
In a debenture there are usually provisions for the company to grant the lender a charge over property owned by the company and a power to appoint a receiver in the event of the loan not being duly repaid. Once appointed, the receiver will manage the company’s business as a going concern if possible but, if need be, the receiver can sell the charged property to enable the lender to be repaid. The receiver is paid a commission which comes out of the income and assets of the company.
This case called on the CCJ to examine whether a receiver’s commission could be increased by the lender without first consulting the company. The claimant in the case, Guyana Furniture Manufacturing Ltd., executed two debentures. The first debenture was executed in March 1993 with Inter. Under this debenture, Inter loaned US$500,000 to the company with a charge on the company’s property and equipment.
In October 1998, the company executed a second debenture in favour of the Bank, charging the same property and equipment. The two debentures ranked equally.
Each one allowed for the appointment of a receiver in the event the company failed to repay the loans. The Bank’s debenture specified that for any receiver appointed under it the receiver would be paid a rate of commission to be agreed as long as the rate did not exceed 10% of the gross amount of monies received by the receiver.
The company defaulted on its payments to both lenders, and in March 2001, the Bank appointed Mr. Robert Ramcharan as receiver of the company’s property. The Bank and Mr. Ramcharan agreed on a commission of one per cent of all funds received by him.
In April 2002, however, the Bank and Mr Ramcharan agreed to increase Mr. Ramcharan’s commission to three per cent to compensate him for assuming additional responsibility for management of the Company in order to improve its profitability.
Mr. Ramcharan operated as Receiver from October 2001 until February 2004, when the receivership came to an end. In the mean time, Inter appointed its own receiver, Mr. Maurice Solomon, who operated as Inter’s receiver from January 2003 to February 2004.
The company brought a claim to the High Court, contending that the increase in Mr. Ramcharan’s commission was illegal because the company did not consent to it and that therefore Mr Ramcharan was wrongly overpaid $11,100,888; and the company was owed US $21,592, which it claimed was illegally paid by Mr Ramcharan to Mr. Solomon as part of the latter’s commission.
The company stated that Mr Solomon’s fees had already been paid by Inter. The High Court dismissed the company’s claims, but ruled that the sum of $19,459 – an overpayment to Mr. Ramcharan according to the Court’s calculations – was to be returned to the company.
The Court ruled that the company’s consent was not required in order for the Bank to increase the receiver’s commission, and that there was no evidence of any payment by Inter to its receiver. The company appealed the decision, and its appeal was rejected by the Court of Appeal. The company subsequently brought a further appeal to the Caribbean Court of Justice (CCJ).
The CCJ found that the standard position under debentures is that the obligations and remuneration of a receiver appointed by the lender are necessarily agreed upon only by those parties. Simply put, there is no contractual relationship between a receiver and a debtor, and the receiver therefore has no obligation to the debtor.
The Court stated, “Nothing in the debenture required the Company to be involved in either fixing or increasing the commission. The outer limit of the commission was fixed at 10 per cent thereby permitting an increase to any rate below that percentage on terms mutually agreed upon between the bank and Mr Ramcharran”.
The Court also agreed with the courts in Guyana that Mr Ramcharan did nothing wrong in paying Mr Solomon’s commission out of the company’s funds since there was no evidence suggesting that Inter had itself paid its receiver.
The Court therefore ruled that the payment of US $21,592 to Mr. Solomon by Mr. Ramcharan was in keeping with the Inter debenture agreement as it was paid out of the funds collected on the company’s behalf. Finally, the Court ordered that the company pay the legal costs of both Mr. Ramcharan and the Bank. In this case, interestingly, all nine judges who heard the case came to the same conclusions.