The JSBF Report
The Ordeal of a Receiver: The Harshest Remedy
- By Deepanjali Jain
Since time immemorial, civil cases regarding property and division of assets have always been crucial in India. Parties fight for their rights, money, or fulfilment of contractual obligations and such cases tend to last a decade or half on average. Such long legal battles often cause loss to the property or enterprise in the absence of efficient management and strong leadership. That is where the courts appoint a receiver in such cases. The receiver is an extension of the court which ensures that no losses are suffered by the enterprise in the duration of the case.
But this is one of the harshest mechanisms provided by the Code of Civil Procedure 1908 (CPC). This mechanism has many flaws which have the potential to ruin the personal assets of the parties and cause losses due to ill intentions or just a miscalculated step. Additionally, there are no established procedures to follow except a judicial discourse which tends to slow things down and the losses suffered by the parties become irreparable. The article explores different aspects of the appointment of the receiver and their role.
Who is a Receiver?
The Receiver is an independent and impartial person appointed by the court to administer/manage, that is, to protect and preserve a disputed property engaged in an action, according to Order 40 of the CPC.
In a dispute between A and B over immovable property, for example, if the court believes it is in the best interests of both parties to take ownership of the property from B and deliver it to an independent person, the court may appoint a receiver to administer the property until the action is resolved.
Test for the Appointment of Receivers
The test of "Panch Sadachar' was established in the case of T. Krishnaswamy Chetty vs C. Thangavelu Chetty (Chetty case) to determine the circumstances under which a receiver can be appointed. It is a five-step test discussed below.
Firstly, the appointment of a receiver is done by the court and the matter is solely under their discretion. Even if all the essentials mentioned in this test are fulfilled, if a court deems that the appointment of the receiver is not necessary, then it has the full discretion to deny such a request.
Secondly, the appointment of the receiver is dependent on the proof presented by the plaintiff that prima facie they have an excellent chance of succeeding in the suit.
Thirdly, the plaintiff must also present before the court that
There are adverse and conflicting claims to the property in question.
There must be some emergency or danger or loss demanding immediate action and of their right.
They must be reasonably clear and free from doubt.
The purpose of appointing a receiver is to protect the assets of the party from any imminent damage while the court still ponders the rights of the parties involved. Therefore, the instant danger is a crucial consideration that courts look at while appointing a receiver. A Court will not act only when they are convinced that the danger is great and imminent, demanding immediate relief.
Fourthly, if appointing a receiver has the potential to cause any damage for the opposing party, which could lead to irreparable damage, then the court will not interfere. For the court to approve the appointment of a receiver, the party that is approaching the court for the appointment must prove to the court that the opposing party will not suffer any damage due to the appointment of a receiver. The appointment of the receiver must be done in such a manner that does not expose the property to any danger or loss and must be beneficial for both parties.
Fifthly, the party making an application for the appointment of the receiver must come to the courts with clean hands. The court would refuse to interfere if it is found that the party approached them for the appointment of a receiver who was not free from blame.
The mechanism of receivers, according to the author, is not the best method in such cases including property and business enterprise. The author feels that the mechanism has many flaws and can easily be regarded as the harshest way prescribed by the CPC. This method takes the power of managing assets such as property out of the hands of the parties to the case and gives him the absolute power to manage it.
The first issue with this mechanism has to be that in the test laid out, by the Indian judiciary, in the Chetty case, there is no standard rule mentioned to check if the person that is being adopted as the receiver has the capability for such a position. For example, every property, enterprise has its niche, its expertise. It becomes entirely crucial that courts find someone who has the appropriate expertise, who understands the business, and can work in such a manner, which to say the least, does not end up hurting the business in the long run.
Additionally, the test lays down such specific conditions for the appointment of a receiver that, it is clear that receivers are only appointed in cases where the properties or enterprise face great losses. Therefore, the person appointed as receiver must not only understand the needs of the enterprise and its working efficiently but must also be able to steer the sinking ship.
The second issue with the mechanism of receivers is that there is no standard form of supervision laid down to keep the actions of a receiver in check. The highest-ranking officers and departments in this country are under supervision, so it only seems fair that in such cases as well, the courts establish a procedure to supervise their actions. With the constant increase in corruption and bribing practices in this country, supervision becomes more crucial than ever. But such supervision, must not only be done through a judicial lens but also from an ethical and commercial lens as well. Such commercial supervision becomes essential as if the actions of receivers can cause damage to the assets they are managing, the supervising committee would still be able to point the mistakes out.
The third issue might be that there is no prescribed way to efficiently challenge the actions of the receiver and stop them promptly. Most business decisions are extremely time-sensitive and have high stakes. The quality of a sharp businessperson is often judged by such successful high-risk decisions. But sometimes, such decisions can destroy the whole enterprise, it went wrong. It becomes a duty for the receiver to utilize such opportunities for the enterprise and act on them but there could be times when the decision ends up causing losses for the enterprise. To prevent that, there must be a quick non-judicial method to challenge the decisions of the receiver and be able to stop them, if the parties feel that such action could cause severe losses to the enterprise.
The last issue with the mechanism is mentioned in Order 40 in the CPC. It specifies that if due to the actions of the receiver, the parties face any losses, then the receiver will be liable to pay them out of his pocket. This rule does more harm than good, as it discourages smart business people from actually volunteering their services as receivers as the risk of an honest mistake can cost them a fortune.
This article discusses the mechanism followed by the Indian judiciary to ensure that during civil legal battles, no assets are depreciated. Therefore, they appoint a receiver under Order 40 rule 1 of the CPC. The Chetty case provides for a test known as ‘panch sadachar’ which tells us under which circumstances can the courts appoint a receiver.
While the author would still not recommend the mechanism of the receiver to be taken in any case and have in-depth discussed the many flaws in this system, the author would recommend the following changes.
Firstly, the court must lay down a test that determines the eligibility of a person to become a receiver. This test must focus on the capabilities of a person to manage such properties or enterprises.
Secondly, the courts must set up a supervising committee that would ensure ethical practices are being followed by the receiver while performing their duty. This committee does not have to be established temporarily for a particular case but could focus on all the cases where the appointment of a receiver was approved within the jurisdiction of a specific court. Additionally, the members of this committee could be both judicial and non-judicial members to enforce ethical and legal practices while ensuring commercially viable practices. This committee can be given the powers to give feedbacks to the receiver.