The threat of receivership is one of the most serious any limited company can face.
In this article we’ll explore the legal meaning, the relevant laws, and what your options are available to company directors.
What’s the Definition of Receivership?
The term receivership describes the process in which a ‘receiver’ is appointed by the creditor, typically a bank, to administer and ‘receive’ (i.e. liquidate) the company’s assets so the secured creditors can recoup their money.
If a business acquires a loan by using a current or long-term asset as security, such as equipment, inventory, property or accounts receivable, the lender has the right to seize possession of those assets if the loan is unpaid.
It’s important to note that a company can only enter into receivership if it has a secured debt of £750 or more, on a debenture created before 15th September 2003.
When creditors are threatening to send your company into receivership, you’ll understandably be extremely concerned about what this means for you and your business. Such a process could spell the end of your business, so it’s important you have all the information you need to take the right steps.
Do You Have to Be Officially Insolvent First?
The short answer is no. In Company Law, a lenders right to resort to receivership is governed by the Law of Property Act of 1925 meaning all that has to be demonstrated is default on a loan.
How does Receivership Work?
Where the creditor (debenture holder) has the legal right to exercise ‘power of sale’ the process can start, almost without warning.
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.
Essentially, the receiver has extensive powers to recover the money owed so will commence whatever actions are necessary to get the job done.
What is a Qualifying Floating Charge?
A qualifying floating charge is essentially a security interest over the assets of a company. According to the Insolvency Act 1986, the holder of a floating charge has the power to appoint a receiver without any need for the court’s permission.
What is Administrative Receivership?
Administrative receivership is the more old fashioned terminology for exactly the same process. When a creditor (usually a bank or financial institution) with a qualifying floating charge wishes to recover money owed to them, it does the following.
- The bank will ask for increased security from the directors, usually in the form of personal guarantees.
- It may also ask for the directors to present a new business plan.
- Sometimes the bank will ask the company to consider borrowing against accounts receivable (factoring) to reduce the loan amount.
- If the bank is still not satisfied, it will ask investigating accountants (insolvency practitioners) to investigate the financial health of the business further.
They 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
- Whether the banks should appoint an administrator or receiver
Depending on the insolvency practitioner’s findings, the receivership process can begin quickly, particularly once the bank has the right to exercise ‘power of sale’.
The whole process will be sped up further if the loan agreement contains a provision allowing for the express appointment of a receiver.
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 the Responsibilities of a Receiver?
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.
Best Results for Creditors are the Priority
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, the result of a receivership is 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.
How Long do They Last?
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.
What is the Difference Between a Receiver and a Liquidator?
While liquidators have a primary responsibility to all creditors, receivers act on behalf of a secured creditor, which is often a bank. This means that receivers answer specifically to the secured creditor who has appointed them, with the specific focus of getting them their money back.
Administration vs. Receivership
From the perspective of a company directory, receivership is a more threatening scenario than administration.
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 is the Difference Between a Receiver and an Administrative Receiver?
Administrators are tasked with getting the best return for all the company creditors. Receivers are working on behalf of a single secured creditor so all of their efforts will be to get them their money back.
If the ‘Receivers’ decide to keep the business trading, it is their responsibility to continue paying the employees from any company assets. At the end of the receivership, these wages will be considered an overall expense.
If the ‘Receivers’ decide to sell the business as a going concern, it will be up to the new owner whether jobs are retained although more commonly than not they are, and any new employer would take on responsibility for employee entitlements as well.