Option Two: Receivership

When a borrower company has defaulted on a loan a receiver is a person appointed to collect or protect property for the benefit either of the persons ultimately held to be entitled to that property i.e. a mortgage or charge holder (usually a financial institution). The charge holder is seeking to recover the outstanding borrowings.

What will a Receiver do?

• Secure the assets of the company
• Realise the assets
• Manage the affairs of the company with a view to maximising the return of the charge holder.

A receiver is appointed by a debenture to secure/ take possession of the assets subject to the debenture holders charge, allowing the receiver to realise their assets and sell to pay off the debenture holder. The receiver may decide that they wish to manage the affairs of the company with a view to maximizing the return for the charge holder.

When is a receivership appropriate?

• Where a company is being placed in liquidation by its officers or where the company is under threat of liquidation or the subject of a winding-up order.
• When a company is seeking to restructure its finances or make arrangements with its creditors but has not sought the protection of the court by means of seeking the appointment of an Examiner.
• The principal under a debenture is in arrears.
• The interest under a debenture is in arrears.
• If a company ceases to trade or carry on business.
• When the mortgagee has failed to engage the bank to discuss arrears or cash flow problems.
• If, as a result of some other occurrence the security of the debenture has become threatened.

Appointment & Important legal advice

A Receiver is usually appointed when the denture or charge holder believes there to be a situation where the terms under which the debenture or charge was granted have been breached and that the most effective way to safeguard the charge holder’s position is to appoint a Receiver.

The debenture or charge holder’s legal advisors shall then prepare a Deed of Appointment. The deed sets out the security under which the receiver is appointed and grants the receiver authority to take possession and secure the assets as specified.

Prior to this, however, the solicitor advising the proposed Receiver will usually:

• Examine the company’s memorandum and articles of association to ensure the company possessed the ability to create the debenture and
• Check that the debenture was duly sealed in accordance with the Company’s Articles of Association
• Check that the debenture was properly created and registered within the 21 day time limit
• Check that the debenture could not be deemed as a fraudulent preference having been registered within 12months of the company entering into liquidation or at a point when the company was insolvent
• Check that the property covering the charge is identifiable and the extent of this property.

Different types of Interests

A charge on a company’s assets may be categorized as fixed e.g. a mortgage on a freehold property or as a “floating” charge e.g. on stock. A debenture holder waiting on a floating charge may only receive money after the receiver’s fees have been paid and preferential creditors have been discharged. In many cases, a floating charge has little value to a debenture holder given the extent of preferential claims.

• Assets subject to a fixed and floating charge
  The most common form of appointment is where the assets/security are subject to a fixed and floating charge. Generally the receiver takes control of all of the company’s assets and is then in a position to decide on the best course of action to take.

• Assets subject to a fixed charge
  In this situation the receiver takes possession of, or responsibility for, specific assets such as property, machinery etc. This usually results in the demise of the company.

•  Assets subject to a floating charge
  Where the receiver is appointed over assets subject to a floating charge it is usual for the receiver to take steps to identify and discharge all of the preferential creditors who take priority over the floating charge holder prior to discharging the amounts owed to the floating charge holders.

• Assets where no charge is in place (equitable execution)
  In this situation where a judgement against a corporate body has been obtained and where assets have been identified that have not yet come into the possession of the corporate body the High Court appoints a receiver owner this future entitlement and the receiver seeks to take possession of or realise this future asset.