Receivership is the process in which a ‘receiver’ is appointed by a creditor to manage and administer specific assets over which secured creditors hold a charge.
The primary role of the receiver is to recover the money owed to the secured creditors, which may involve liquidating the assets. However, receivership can also be a tool for attempting to save the company. The appointed receiver acts as a financial troubleshooter, assessing the company’s situation, identifying areas for improvement, and developing a plan to get it back on track.
In the UK, receivership falls into several types[1]Trusted Source – GOV.UK – Types of Receivers:
LPA Receivership: This focuses on a single secured asset, such as property, and uses the Law of Property Act 1925 as its legal framework. The receiver manages or sells the specific asset to recover the secured debt.
Fixed Charge Receivership: The receiver is appointed to manage or sell a specific secured asset, typically when a borrower defaults on a loan secured by that asset. The primary goal is to repay the secured creditor.
Administrative Receivership: Although less common now due to legislative changes after 2003, this type of receivership allowed the receiver to take control over most or all of a company’s assets. It was primarily used to recover debts for secured creditors holding a floating charge.
Court-appointed Receivership: In specific legal situations, the court can appoint a receiver to take control of assets. This type of receivership highlights the need for court involvement in some cases.
How Receiverships Work
The decision to appoint a receiver is often taken when the creditor determines that other measures, such as seeking additional security, have failed. At this point, the creditor engages insolvency practitioners to assess the business’s financial health. If the assessment concludes that receivership is the best course of action, the creditor moves forward with petitioning the court for an appointment.
For LPA Receivership, the process does not require a court petition and the creditor can directly appoint a receiver themselves under the Law of Property Act 1925.
Once a receiver is appointed, the company’s directors quickly find themselves displaced from managing their business as the receiver takes control of the specified assets.
The receiver will ascertain:
Whether the business is still viable
Whether the bank’s exposure is sufficiently covered by the company’s assets if it cannot repay the loan
The value of the business’ assets as a going concern and their value if the business were to close
Once a receiver is appointed, their rights and powers will be guided by Section 109 of the Law of Property Act, as well as any fixed charge provisions written into the debenture itself.
What Does it Mean When a Receiver is Appointed?
Once a receiver has been appointed, they will act in the best interests of the creditor (the bank) to claw back the money it is owed.
If more than one creditor holds a charge against the company, repayment priority will be dictated by the level of the securities.
What are a Receivers Responsibilities and Duties?
The first job for the receiver is to determine the prospects of the business, and whether the sale of some or all of the assets or the business as a going concern, is in the best interests of the creditor. Fixed charge provisions may be added to the terms of a loan by the creditor, and the receiver can collect company income to help repay the debt.
It may be that the receiver believes the best result for the creditors will be achieved by allowing the business to continue to trade, or by facilitating the sale of the business to recover the full debt owed. Ultimately, it is the receiver who will decide the fate of the business, and advice from the company directors may not be sought.
The receiver must also investigate the conduct of the company directors to ensure they have acted within the regulations governing receivership, before reporting their findings to the Department for Business, Enterprise and Regulatory Reform (DBERR).
What Rights Does the Receiver Have?
This depends in part on whether the lender has added any supplementary powers into their contract. If they haven’t the receivers rights are documented in the Law of Property Act and may include:
The ability to collect any rental income from a property
the ability to keep the property insured
Power to take possession of a property
The power to put a property up for sale
The power to grant or surrender leases
Can you Stop Receivership?
In the majority of cases, receivership results in the complete closure of the business to repay its secured debts.
It is possible that the value of the company’s assets is sufficient to cover the level of debts owed, and the business can continue to operate after the receivership. However, this is the exception rather than the rule.
Be aware it is often the case the lender involved may strip out assets to secure their debts and leave the empty shell of the company, including employee redundancies, for you, the director, to resolve.
Using Administration to Avoid Receivership
If you find yourself on the slippery slope to receivership, the best thing you can do is to act as soon as the threat arises.
You might be able to force the company into a business rescue process known as administration, during which time all further actions against your company will be postponed for up to eight weeks.
During this time, we can consider a pre-pack administration sale or try to negotiate a company voluntary arrangement (CVA) with your creditors which allow you to keep trading.
Whereas administration offers a breathing space during which an experienced insolvency practitioner can assess the company situation with a view to weighing up the options and opportunities available, receivers have a dedicated focus to recover money for a secured creditor. With the power to sell assets, this can mean that companies, more often than not, end up in liquidation once the receiver has finished.
What’s the Timeframe for a Receivership?
There’s no set time frame for receiverships: they may be over in a few short months or continue on for several years. Receiverhips usually end when the property is sold although there are exceptions to this.
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References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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