When a company is unable to meet its financial obligations, it enters a period of financial distress. This can trigger several legal processes designed to address the company’s debts, including administration, liquidation, and receivership. Each process serves a different purpose and is initiated under specific circumstances, offering distinct paths for the company and its creditors.
What is Receivership?
Receivership is a formal insolvency procedure available to secured creditors when a company defaults on its loan payments. It is a process initiated by a creditor who holds a security interest over some or all of the company’s assets. This security is a form of collateral, like a mortgage over property or a charge over business equipment, that was agreed upon when the loan was provided.
The process begins when the secured creditor appoints a “receiver,” who is a licensed insolvency practitioner. A receiver can be appointed privately by the secured creditor under the terms of a security agreement, which is more common, or by a court order. The receiver’s central task is to take control of the specific assets that are subject to the creditor’s security interest.
The primary objective of receivership is not to rescue the company as a whole, but to sell the secured assets to generate funds. These funds are then used to repay the debt owed to the secured creditor who made the appointment. This focus on a specific creditor distinguishes receivership from procedures that consider the interests of all creditors.
The Role and Purpose of a Receiver
The receiver is a neutral third party, often an experienced attorney or insolvency professional, appointed to take control of a company’s assets. This individual or firm must be a licensed insolvency practitioner. While a court can appoint a receiver, a secured creditor more typically initiates the appointment to recover an outstanding debt. The receiver’s appointment displaces the company’s directors from controlling the assets under receivership.
The receiver’s primary duty is to the secured creditor who appointed them. Their main purpose is to manage and sell the assets covered by the security agreement to recover the money owed. A receiver has extensive powers, which can include operating the business for a time if selling it as a “going concern” will result in a better price for the assets. They are obligated to act with reasonable care to obtain the best price reasonably obtainable for the assets.
The receiver’s goal is not to save the company or act in the interest of all creditors. Their responsibility is focused on realizing the value of the specific assets to satisfy the debt of their appointer. Any actions taken, such as continuing to trade, are strategies to maximize the sale value of the secured assets for the benefit of the secured creditor.
What Happens During Receivership?
The appointment of a receiver alters the control and operation of the company. The company’s directors remain in office, but their powers over the assets managed by the receiver are restricted. They are legally required to cooperate with the receiver, providing access to company records and any information needed. Directors may retain control over any part of the business not covered by the security agreement.
For employees, the onset of receivership brings considerable uncertainty. The receiver assesses the company’s situation to determine the best way to realize the value of the assets. This could involve continuing to trade the business, in which case employees may be kept on. However, the receiver may also decide that terminating employment contracts is necessary to prepare the assets for sale. In some circumstances, outstanding employee wages may be paid from the proceeds of asset sales before the secured creditor is repaid.
Shareholders are positioned at the bottom of the priority list during a receivership. The funds from the sale of assets are first used to pay the receiver’s fees and then the debt owed to the secured creditor. It is unlikely that there will be any money left over to distribute to shareholders. Their interests are secondary to all creditors, and they only receive a return if the company is solvent and all debts have been fully paid.
Receivership Compared to Other Insolvency Procedures
Understanding the distinctions between receivership and other insolvency processes is important for grasping its function. The most common points of confusion are with liquidation and administration, each of which has a different objective.
Liquidation, sometimes called winding up, marks the end of a company’s existence. A liquidator is appointed to take control of all company assets, sell them, and distribute the proceeds to all creditors according to a legally defined priority. Unlike receivership, which is for a single secured creditor, liquidation is a collective process for all creditors. Liquidation almost always results in the company being permanently closed down.
Administration, on the other hand, is primarily a rescue procedure. An administrator is appointed to take full control of the entire business. Their main duty is to act in the interests of all creditors and to try to save the company as a going concern if possible. If rescue isn’t feasible, the administrator will aim for a better result for creditors than would be likely if the company were immediately wound up.
Potential Outcomes of Receivership
The most common outcome of a receivership is the sale of the assets that were under the receiver’s control. The process concludes once the receiver has sold enough assets to repay the debt owed to the secured creditor, along with their own fees. At this point, the receiver’s job is done, and they will resign.
What happens to the company itself depends on its overall financial health and the extent of the receivership. If there are any surplus funds or assets left after the secured creditor has been paid, they are returned to the company’s directors. The company may be able to continue trading, particularly if the receivership only involved a small portion of its assets.
However, in many cases, a company in receivership is facing broader financial difficulties. It is common for a company to be in receivership and another insolvency process, like liquidation or administration, at the same time. If the company cannot pay its other debts after the secured assets have been sold, it may proceed into liquidation to be formally wound up. Surviving receivership is possible, but it does not guarantee the company’s long-term survival.