Receivership

If your secured lender is threatening to appoint a receiver, it is understandable to feel concerned. Receivership is a formal process in which a secured creditor takes control of certain assets to recover debts.

Understanding how receivership works is crucial for making informed decisions about your company’s future.

This article clarifies the role of the receiver, outlines directors’ responsibilities, explores potential outcomes, and discusses possible alternatives.

Gaining insight into these areas can help you better navigate the complexities of receivership and consider all available options for your business.

What is Receivership?

Receivership is a legal process in the UK where a receiver is appointed to manage a company’s assets on behalf of a secured creditor. This usually happens when a company defaults on its loan obligations. The main aim of receivership is to recover the debt owed by taking control of and selling the company’s assets. The legal framework for receivership in the UK is governed by the Insolvency Act 1986 and, for property-related cases, the Law of Property Act 1925. ^[1]Trusted Source – GOV.UK – Insolvency Act 1986

A secured lender, such as a bank, can initiate receivership if they hold a charge over the company’s assets. There are different types of receivership, including administrative receivership and fixed-charge receivership (often referred to as LPA receivership). Administrative receivership involves managing the entire company, while fixed-charge receivership focuses on specific assets.

Unlike administration or liquidation, receivership does not primarily aim to rescue the company or distribute assets among all creditors. Instead, it focuses on satisfying the secured creditor’s debt. In administration, an administrator seeks to rescue the company or achieve a better outcome for all creditors. Liquidation involves winding up the company entirely. Understanding these differences is crucial for directors facing potential receivership threats.

Types of Receivership (Administrative vs Fixed Charge)

Understanding the distinctions between administrative and fixed charge receivership is crucial for directors facing potential receivership.

Administrative receivership involves appointing a receiver over the whole or substantially the whole of a company’s assets. This can only be initiated by holders of floating charges created before 15 September 2003, as per the Insolvency Act 1986 and Enterprise Act 2002. ^[2]Trusted Source – GOV.UK – Enterprise Act 2002

In contrast, fixed charge receivership, often under the Law of Property Act 1925, pertains to specific assets like land and is initiated by secured creditors with a fixed charge over those assets.

Key Differences:

• Scope of Assets:
  • Administrative Receiver: Whole or substantially whole of the company’s property.
  • Fixed-Charge Receiver: Specific charged assets (typically land/property).
• Appointing Creditor:
  • Administrative Receiver: Appointed by floating charge holders (pre-2003 charges).
  • Fixed-Charge Receiver: Appointed by secured creditors with a fixed charge.
• Primary Duty:
  • Administrative Receiver: Duty to the appointing floating charge holder.
  • Fixed-Charge Receiver: Acts as the borrower’s agent, focusing on managing or realising the charged asset.

Each type carries distinct obligations for directors. Administrative receivership may lead to broader business control loss, while fixed charge receivership focuses on specific asset management. Understanding these nuances helps prepare for potential outcomes and align with legal obligations.

When and Why Receivers Are Appointed

Secured lenders may appoint a receiver when a company defaults on its loan obligations, such as failing to make payments or breaching loan covenants. This action is primarily taken to recover the debt owed without necessarily liquidating the entire company. The lender’s goal is often to take control of specific assets or the business itself to manage and sell them, thereby recouping the outstanding loan amount.

Common triggers for appointing a receiver include:

• Non-payment of a secured loan: Missing scheduled payments can prompt lenders to enforce their security rights.  
• Breach of loan covenants: The lender sets these conditions, which, if violated, can lead to the appointment of a receiver. 
• Deterioration in financial health: If a company’s financial situation worsens significantly, lenders might act to protect their interests.

Unlike administration or liquidation, receivership focuses on satisfying the secured creditor’s claims rather than addressing the collective interests of all creditors. This distinction makes receivership a targeted enforcement tool, allowing lenders to act swiftly in protecting their investments.

The Receiver’s Powers and Duties

Once appointed, a receiver has significant authority to manage and control a company’s assets. This role primarily focuses on ensuring that the secured lender’s interests are prioritised and debts are repaid. Here is a breakdown of the key powers and duties of a receiver:

• Control of Assets: The receiver takes charge of the company’s assets and may sell them to repay the secured lender.
• Debt Collection: They are authorised to collect any outstanding debts owed to the company and direct these funds towards settling the secured creditor’s claims.
• Business Operations: In some cases, the receiver may continue to operate parts of the business if it benefits the repayment process.

The receiver’s duties centre on acting in the best interests of the appointing creditor. This involves prioritising funds to ensure that the secured lender is paid first.

While fulfilling these duties, receivers must also adhere to certain reporting obligations, such as keeping detailed accounts and providing updates to creditors. However, they are not required to pursue company rescue or consider unsecured creditors unless funds remain after satisfying secured debts.

Director Responsibilities and Control

When a receiver is appointed, your day-to-day authority as a director is significantly altered, but not entirely removed. The receiver takes over control of the company’s assets and operations relating to the secured creditor’s interests.

However, you still retain important responsibilities, particularly in cooperating with the receiver. This includes providing access to company records, financial statements, and any other necessary information to facilitate the receivership process.

Cooperation with the Receiver

It is crucial to work collaboratively with the receiver. This cooperation ensures that the process runs smoothly and can help protect your position as a director. You should promptly provide any requested documents and information, as this transparency can prevent misunderstandings and delays.

Avoiding Obstruction

Be aware that obstructing the receiver’s duties can lead to serious consequences, including personal liability issues. If you attempt to interfere with the receiver’s work or fail to comply with their requests, you could be held personally accountable for any resulting losses or damages.

Therefore, maintaining open communication and fulfilling your remaining obligations is essential for safeguarding your interests during this challenging time.

Potential Outcomes and Consequences

Once a receiver is appointed, several potential outcomes may unfold, each impacting the company’s future differently. Primarily, the receiver may sell company assets to repay the secured debt. This could involve selling individual assets or the entire business as a going concern, depending on what maximises returns for the creditor.

In some situations, if it benefits the creditor, the company might continue trading under the receiver’s supervision. This approach can preserve business value and potentially lead to a more favourable sale. However, this is not guaranteed and depends on the company’s viability and market conditions.

If asset sales do not fully cover the secured debt, further insolvency procedures might be necessary. These could include administration or liquidation if debts remain unpaid. These processes aim to address outstanding liabilities but often result in less control for directors and the potential closure of the business.

Understanding these scenarios is crucial to preparing for changes in business operations and financial obligations. Engaging with professional advice early can help navigate these complexities and explore alternatives that might better suit your company’s needs.

Alternatives and Next Steps

If receivership is threatened or seems imminent, taking proactive steps can significantly impact your company’s future. Begin by negotiating with your lender. Open communication can sometimes lead to revised terms or temporary relief, which might prevent the need for a receiver altogether.

Next, explore other rescue options such as a Company Voluntary Arrangement (CVA) or administration. A CVA allows you to agree on a plan to pay creditors over time, while administration can offer protection from creditors as you reorganise. Both options focus on business recovery rather than closure.

Seeking immediate professional advice is crucial. Licensed Insolvency Practitioners (IPs) can provide tailored guidance and help you understand your options and obligations. Their expertise can mitigate personal and business risks, ensuring you make informed decisions.

Consider these steps in sequence:

• Negotiate with Lenders: Aim for revised terms or temporary relief.
• Explore Rescue Options: Look into CVAs or administration for recovery.
• Seek Professional Advice: Engage insolvency specialists for expert guidance.

Proactive engagement with professionals helps navigate complex legal landscapes and protects your interests and those of your company.

Need help?

Please call us on 0800 074 6757 or email: info@companydebt.com to discuss your circumstances with our expert team of turnaround advisors.

Receivership FAQs

References

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.

1. Trusted Source – GOV.UK – Insolvency Act 1986
2. Trusted Source – GOV.UK – Enterprise Act 2002