An administrative receivership, or receivership, occurs when a company breaches their terms of borrowing from a creditor who has a floating charge against it. When this happens the creditor may appoint an insolvency practitioner (IP) acting as administrative receiver to recover the money they are owed.
A floating charge is usually required by lenders such as banks and factoring companies to provide them with security for the money they have lent the company. This sort of security is very important for these lenders to protect them should a company fall into financial difficulties before paying back the full cost of the loan.
Although an administrative receivership is rare, due to a change in insolvency law in 2003 which tighten up the laws around receiverships, they can still happen. Only lenders which had a floating charge over company assets in place prior to 15th September 2003 can place that company into an administrative receivership.
Why would a company be placed into administrative receivership?
Companies are placed into administrative receivership when they breach the terms of their lending or the company does not conform to the terms agreed. The typical route from lending capital for the business into receivership will go something like this:
- A company will require finance for business growth and development or to help them manage their cash flow more effectively. They will approach their bank or a secured lender, such as a factoring company, to obtain this borrowing.
- The bank or lender will require security for the loan and they will ask the company to sign a debenture with either a fixed or floating charge. This provides the bank with security over the assets of the company.
- If the lending terms are breached for whatever reason, the charge holder (lender) can:
- Appoint an investigating accountant to determine how secure the lender’s debt is and find the best route forward for the lender and borrower.
- Demand a repayment of the loan without prior notice.
- Appoint an administrative receiver to look after the company including its assets.
- The administrative receiver should only collect the charge holder’s debt and they will not be concerned with any other unsecured creditors of the company or the shareholders.
The administrative receiver’s duties will be complete when he has collected the bank’s debt to pay the charge holder or once assets have been sold and proceeds have been distributed to the relevant creditors. He will then send a summary of final receipts and payments to the company, registrar of companies and the creditors committee (if there is one). He will then resign his position leaving the company directors to get on with running their business again.
The powers of the administrative receiver
The administrative receiver has certain powers and duties they can or must carry out once they have been put in place by the charge holder. These include:
- Determining the prospects for the business based on its current situation. They will then be able to decide whether to sell business assets, the business itself or continue to trade the business.
- Deciding on the way forward for the business solely without consulting with the directors.
- Removing the directors and employees of the business if they deem this to be necessary.
- If the administrative receiver decides on a deal with the directors, the business and assets must first be advertised as for sale.
- Pay the debts belonging to preferential creditors (such as employees) first from the floating charge collection.
- Follow rules which govern receiverships, investigate director conduct and file any necessary reports.
What to keep in mind when considering an administrative receivership
There are many issues that a creditor with a floating charge will consider when they are thinking about appointing an administrative receiver due to breach of contract. As a result, an administrative receivership will usually be a last resort for a lender.
Some of the positives of an administrative receivership:
- The bank or lender owed money will be able to take control of the business.
- The bank or lender ensures their exposure to risk is not increased and they will hopefully recover all monies owed.
- Any preferential creditors will see their debts repaid making this situation beneficial for them financially.
- The administrative receiver will have the power to save the business if it thinks it can do this.
- For company directors, an administrative receivership reduces the risk of wrongfully trading and it may also crystallise the company’s difficult position so it can move on.
Some of the negative aspects of an administrative receivership include:
- The company is very rarely saved in its existing form after an administrative receivership.
- The directors of the company will typically lose their employment with the company and their conduct will be investigated. They will usually also lose any money they are due from the company such as wages and holiday pay.
- Unsecured creditors are not likely to receive the money they are owed back and they are also likely to lose a valuable customer of their business.
- The cost of receivership is very high and the bank or lender will have to underwrite the receiver’s costs so the charge holder will have to weigh up the cost and benefits of bringing an administrative receivership against a company.
If you’d like to find out more about administrative receivership or you are struggling to pay your debts and you are worried about action from your creditors, get in contact with us on 0800 901 2475. Our friendly, professional advisers will be able to inform you of your options and answer any questions or queries you may have.