This article looks at explaining receivership and advice on preventing your business from falling into administrative receivership.
The definition of 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 enabling it to continue operating which is the primary purpose of an Administrator.
Since the introduction of the Enterprise Act 2002, receivership is now less widely used compared to administration. This is primarily due to the fact that the Enterprise Act 2002 made changes preventing the floating charge holders to appoint receivers for any debts secured post September 15, 2003. Now it is common for creditors from appointing an administrator as, in the majority of cases, debentures that are defaulted are less than ten years old.
What is considered when a debenture holder chooses to appoint a receiver?
When a debtor company begins to show the initial signs of financial collapse, such as problems related to cash flow, excessive borrowing, overdrafts that have breached their limits or delinquent payments, the bank or other lender make an investigation. This will help determine what is likely to be the best procedure for recouping the debt owed. Prior to the appointment of the receiver, several primary efforts can be implemented, including:
- The lender is able to make requests to the company for regular reports or a detailed report showing how the company plans on repaying the debt in light of their obvious financial difficulties. Such detailed plans will almost always need to include detailed cash flow forecasts. It is not uncommon for companies to get assistance from their accountant to ensure they comply with the banks requests.
- The lender might ask for extra security to be made, typically by personal guarantees from the company directors. In the case of any loans being in default the lender would then have the right to hold the company directors personally accountable for the banks liability that has been personally guaranteed should the company enter into formal insolvency proceedings and the debts remain fully or partially unpaid.
- The lender might demand its exposure is reduced, meaning that the company directors and/or shareholders may need to inject personal funds to bring the total level of borrowing down. This may be in conjunction with or to replace the need for personal guarantees.
If the lenders recommendations above are (for whatever reason) not a possibility, the lender may want to make a thorough review of the company itself to evaluate if, in its opinion, it is not viable and cannot repay the debt. If the lender concludes the debt may not be able to be repaid and the company has little chance of ever recovering from the situation it finds itself in, at this point the lender may have no other option but to appoint a receiver.
What does an administrative receiver do?
The primary objective of a receiver is to take control of the company’s assets that are covered by the floating charge with the aim of recouping money owed to the creditor that appointed them. As soon as a receiver has been appointed, they take complete control of the assets and they are not appointed 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.
Subject to the condition of the floating charge, the receiver is able to break the company up, sell the assets or actually sell the company 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 as a whole. Alternatively, the receiver may determine that the best action to take is to keep on trading whilst a CVA (company voluntary arrangement) or another type of rescue vehicle is implemented.
It is within the receiver’s right to dismiss either all or some of the company’s employees and directors, though it is important to note that the receiver must comply with UK Insolvency Law, which specifies that contracts of employment must be adopted within a framework of two weeks of appointment.