What is receivership and what does it mean for my company?January 25, 2021
If your company is facing receivership, you may be wondering what this means and what might happen to your business.
In this article we’ll explain what happens when a company goes into receivership. This article specifically excludes fixed-charge receivership or “LPA Receiverships” – we shall cover these in a separate article.
What is receivership?
Receivership is a process in which a creditor - usually a bank or other financial institution - appoints a person, known as a receiver, to ‘receive’ the company’s assets in order to liquidate them and recoup their debt.
This is formally known as administrative receivership. The receiver must be a licensed insolvency practitioner. In order to appoint a receiver, a creditor must hold a qualifying floating charge created before 15 September 2003.
Creditors who hold debentures created after this date do not have recourse to this process as it was discontinued with the introduction of the Enterprise Act 2002.
This act amended previous legislation (the Insolvency Act 1986) in an effort to encourage business recovery for companies in financial difficulty.
Why would a company go into receivership?
If a company borrows from a bank or other lender using its assets as security, such as property, inventory or equipment, the lender has the right to seize the assets if the company fails to pay back the loan.
A company can only go into receivership if it has a secured debt of at least £750 on a debenture preceding September 15th 2003.
The company does not have to be insolvent in order to go into receivership - all that needs to be demonstrated is default on the loan in question.
If a creditor with a qualifying floating charge wants to recoup the money it is owed, it may do the following:
- Request a new business plan from the company
- Ask for increased security, often in the form of personal guarantees from the directors
- Ask the company to borrow against accounts receivable in order to reduce the amount of the loan - this is known as factoring
If the creditor is not satisfied at this point, it may ask an insolvency practitioner to investigate the business to assess its financial position.
The insolvency practitioner will determine whether the business is viable, and whether its assets will cover the creditor’s exposure if it is unable to repay the loan. Ultimately it will ascertain whether or not the creditor should appoint a receiver.
Receivership can begin quickly following the insolvency practitioner’s investigation, depending on their findings.
What does the receiver do?
In a nutshell, the receiver’s job is to act in the interest of the creditor who appointed them to recoup the debt the creditor is owed.
The receiver will assess the business and its prospects to determine whether to:
- Sell some or all of the company’s assets
- Sell the business as a whole
- Continue to trade
The receiver will choose the course of action that is likely to achieve the best results for the creditor. Essentially, the company’s fate is in the receiver’s hands - the receiver is not required to seek advice from the directors.
They must pay preferential debts first from any floating charge collections. This may include employee claims for pay arrears or holiday pay. For receiverships that take place after 1 December 2020 preferential creditors also include unpaid VAT and PAYE.
The receiver will also investigate the directors’ conduct and report their findings to the government.
There is no standard timeframe for receivership. In some cases it takes just a few months, while in others it may carry on for several years.
What are the receiver’s rights?
The receiver’s rights include the power to:
- Remove directors and employees
- Take possession of a property
- Collect rental income from a property and keep it insured
- Sell a property
- Grant or terminate leases
What’s the difference between receivership and administration?
Administrative receivership is different from administration.
Administration is a process whereby an insolvency practitioner attempts to rescue a struggling company.
During this process creditors are not allowed to take legal action against the company, giving the directors valuable breathing space as they attempt to form a plan of action.
The administrator acts in the best interest of the company, and if it cannot be saved, tries to achieve the best result possible for the general body of creditors.
Administrative receivership usually represents a more serious threat to a company. In a receivership, the receiver will act primarily in the interest of the creditor who appointed them.
This often results in the company being liquidated or dissolved, and may mean that other creditors are not repaid.
Administrative receivership is becoming less and less common due to the fact that it can only be used by creditors who hold a debenture predating September 15th 2003.
Is it possible to stop receivership?
In many cases, receivership results in the dissolution of the company.
It may be the case that the value of the company’s assets is enough to cover its debt, enabling it to continue trading post-receivership. However, this is rare.
If you think your company may be heading towards receivership, the best thing to do is to take immediate action.
Seek the advice of a licensed insolvency practitioner who will be able to discuss your options and help you put together a plan of action before the receiver is appointed.
If you find yourself in this situation, we can help. Our team of business recovery experts has years of experience helping struggling companies. Get in touch with us today to find out how we can assist you.