Does a debenture holder owe a duty of care to unsecured creditors?

In this case1, the High Court considered the nature of the duty of care, if any, owed by debenture holders to unsecured creditors.

After a company defaulted on its loan obligations, the lender appointed joint receivers over the assets of the company under a first ranking debenture. The assets of the company were insufficient for the receivers to satisfy debts owed to unsecured creditors.

Prior to the completion of the receivership, two of the company's unsecured creditors, owed a combined value of $85,000 in debts, assigned their debts to a debt collection company for $1 each. The debt collectors then issued a proceeding against both the receivers and the lender. The claim alleged a breach of a duty, both to it as assignee and to the unsecured creditors, and sought recovery of the full amount of the debt.

The debt collectors claimed that the lender owed a duty to:

• act in good faith and/or care when making a decision to appoint receivers; and
  
  
• take reasonable steps to protect the interests of the unsecured creditors and their assignees upon learning of actions by the receivers that, as it was alleged here, constituted abuse of powers and bad faith.

The High Court rejected these claims and added that if any such duty existed it was owed to the company or its liquidator, not to unsecured creditors or its assignees.

 

1 Impact Collections Ltd v Bank of New Zealand (2004) 9 NZCLC 263,497

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