When a Receiver has been appointed, company directors and other relevant stakeholders must quickly get up to speed on what receivership is and how it will impact them, as the consequences can be dire. For example, in May 2024, plans to convert the former John Lewis store in Liverpool’s historic George Henry Lee building were stalled when the developer was placed into receivership.
What is a Receivership?
Receivership is where a Secured Creditor, usually a bank or other lending institution, appoints a Receiver to liquidate a company's assets so money owing from a secured debt can be paid. This is formally known as an Administrative Receivership, which is different from an LPA Receivership.
Why Would a Company Go into Receivership?
Companies go into receivership because they have borrowed money from a financial institution, used assets or property as security for the loan, and have subsequently defaulted on payment/s. The Creditor will appoint a Receiver to protect the value of those assets or property so it can recoup as much of what it is owed as possible.
It is important to note that a company does not have to be insolvent for a Receiver to be appointed; it only needs to default on its loan payments.
Who Appoints Receivers?
A Receiver can be appointed by the Court or privately by the holder of a floating charge in limited circumstances.
Privately Appointed Receiverships
The following types of creditors can appoint an Administrative Receiver:
- The holder of a floating charge over the whole or most of a company's property created before 15 September 2003. Please note that a floating charge (also referred to as a floating lien) is when a debt is secured against a group of non-constant assets, i.e., assets that may change in value and quantity, e.g. stock, inventory, trade debtors.
- A qualifying floating charge holder, which includes the holder of a floating charge over the whole or most of a company's property, where one of the exceptions under sections 72B to 72GA of the Insolvency Act 1986 applies. The statutory exceptions are where the floating charge is part of any of the following:
- a capital market arrangement;
- a public-private partnership;
- a utility project;
- an urban regeneration project;
- a project financing;
- a financial markets arrangement;
- an arrangement with a registered social landlord; or
- an arrangement with a protected railway or certain other special companies.
If one of the above exceptions does not apply, a Receiver cannot be appointed. Instead, they can put the company into administration.
Receivers appointed privately owe a duty to the entity that appointed them, not the company's creditors as a whole. This is why private appointments are only permitted in limited circumstances.
Court-Appointed Receiverships
The Court may appoint a Receiver if it agrees to wind up a company after obtaining a Winding Up petition from a creditor.
Section 37(1) Senior Courts Act 1981 provides:
"The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so."
The Court Order appointing the Receiver will set out their powers. Unlike a privately appointed Receiver, they are first and foremost officers of the Court and, therefore, must be fair and impartial and act to benefit all creditors.
How Do Receiverships Work?
A Receiver must be a licensed Insolvency Practitioner. They will assess the company and talk with directors to decide on taking one of the following three actions:
- Continue to trade
- Sell the company as a whole
- Sell some or all of the company's assets
What happens with the company is entirely in the Receiver's hands. If they are privately appointed, they need to get the best results for the Creditor who appointed them. They have the power to:
- Repossess property
- Dismiss directors and employees
- Collect rents
- Sell a property
- Grant or terminate leases
The Receiver must also look at the conduct of the company's directors and deliver a report to the Government.
What are the Benefits and Disadvantages of Receivership?
Receivership holds few advantages for the company as it is unlikely to be rescued in its current form. However, for the Secured Creditors, the solution can result in them quickly recouping some of their money. And provided they are not found guilty of misconduct; directors can walk away from a problematic situation relatively unscathed.
How Does a Receiver Work in Individual Bankruptcy Situations?
The Court can appoint a Receiver when a Bankruptcy Order is made. The Receiver will take control of the Bankrupt's property and determine whether the Bankrupt party can make financial contributions towards any outstanding debts. One way this can be achieved is by selling property and assets.
What is the Difference Between Administration and Receivership?
One of the crucial differences between administration and receivership is that the former creates a statutory moratorium, meaning creditors are stopped from pursuing insolvency measures, including legal action against the company. This protects the company from its creditors. If a business is in receivership, other creditors can apply for a Winding Up Petition and take other legal action to recover debts. Rather than protect the company from its creditors, receivership is designed to protect the value of the organisation's assets.
Unlike administration, directors cannot put their company into receivership.
What Should Company Directors Do if their Organisation is in Financial Distress?
Directors have strict duties under the Company Act 2006 and the Insolvency Act 1986 that must be complied with if they know, or ought to know, that their business is at risk of insolvency. Primarily, they must take actions that are in the best interests of the company’s creditors.
Directors should get legal advice immediately to protect the company's and its creditors' interests. As mentioned above, receivership is not ideal for a company – an Insolvency Law Solicitor will swiftly advise you whether it is best to appoint an Administrator voluntarily.
How We Can Help
As experts in insolvency law, Witan Solicitors can provide expert advice and representation on all insolvency matters. Contact us on 0330 173 6983 or send us an email for more information.
