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Although not as common these days, applying for receivership is an insolvency option in which a bank or lender with a floating charge employs a receiver, such as a licensed insolvency practitioner (IP), to take control of the company to recover their debt.
What is administrative receivership?
The term administrative receivership refers to a formal insolvency process whereby an organisation, such as a bank that holds a floating charge, employs the services of a receiver with the objective of recovering the debt owed, by selling company assets that are subject to the floating charge.
If necessary, this may include the sale of the company itself. A lender may appoint an administrative receiver if the loan is in default or in breach of the covenants in the loan agreement which usually includes the commencement of any insolvency procedures. It is not uncommon for this procedure to be confused with administration. The principle difference between the two is that with receivership, a receiver is not working with the purpose of saving the company, but enabling it to continue operating, which is the primary purpose of an administrator.
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 agreed terms. The typical route from lending capital for the company to enter 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.
What does an administrative receiver do?
A receiver takes control of the company’s assets that are covered by the floating charge. By doing so, they aim to recoup money owed to the creditor that appointed them. As soon as a receiver is appointed, they take complete control of the assets and are not there to consider the directors’ or shareholders’ needs. Their main purpose is to repay ‘preferential creditors’, the charge holders and cover the cost of the receivership.
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 company based on its current situation. They will then be able to decide whether to sell business assets, the business itself or to keep the business trading.
- Deciding on the best way forward for the company, without having to consult with directors.
- Removing the directors and employees, if it’s deemed to be necessary.
- If the administrative receiver decides on a deal with the directors, the business and assets must first be advertised for sale.
- Pay the debts belonging to preferential creditors (such as employees) first from the floating charge collection
- Following the rules which govern receiverships, investigate director conduct and file any necessary reports.
Can an administrative receiver dissolve a company?
Depending on the condition of the floating charge, the receiver can break the company up, sell the assets and even the company itself as a going concern. Their decision will be wholly dependent upon what will maximise the return to the lender. The company can either be sold partially or in its entirety. Alternatively, the receiver may determine that the best action to take is to keep on trading while putting the company into a Company Voluntary Arrangement (CVA) or another insolvency procedure.
The receiver has the right to dismiss either all or some of the company’s employees and directors.
Administrative receivership is a procedure that creditors can instigate when a company breaches the terms of their contract, from a creditor who has a floating charge against what is borrowed. This gives creditors the ability to hire an insolvency practitioner, acting as an administrative receiver, to collect the money owed. This procedure may involve selling assets (which may include the company itself), and heavy restructuring, with saving the company being an afterthought. Due to a change in insolvency law, only lenders who had a floating charge before 15th September 2003 can still put that company into administrative receivership.
How we can help
If you are an old established company and have had a floating charge since before 2003 and need to talk through administrative receivership, then we can help talk you through the different options available. If your company has charges after the law change, then we can still help your company in its current circumstances. We offer free, impartial advice with no obligation on company insolvency options.