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.