There are various routes which can be taken if your business gets into financial difficulty, some of which are designed to rescue the company and/or business, whilst others return value to the company’s creditors as far as possible, and result in the winding-up and eventual dissolution of the company and business. For an overview of these procedures, please see Corporate insolvency: what are the options for your business?
The appointment of a Receiver is a remedy for a creditor of a company who has security of a particular asset or assets. If the security documentation allows for it, or if the court orders it, they may bring in their own Receiver to protect those assets.
Here we explain what a Receiver does and the practical issues to be considered. However, if you would like legal advice on any insolvency procedures, we recommend you speak with our recovery and insolvency solicitors.
- What is Receivership?
- What is a Fixed Charge Receiver or a Law of Property Act (LPA) Receiver?
- When can a creditor appoint a Fixed Charge or LPA Receiver?
- What does a Fixed Charge or LPA Receiver do?
- How is a Fixed Charge or LPA Receiver appointed?
- What is the effect of a Receivership on creditors?
- What is the effect of Receivership on the company?
- What is the effect of a Receivership on the directors?
- How does Receivership come to an end?
- How much does Receivership cost?
- How can we help?
What is Receivership?
There are several types of Receivership. These can range from a Proceeds of Crime Act Receiver, who would be appointed by the court to recover assets from a person convicted of a crime, to Drug Traffic Act Receivers and to Agricultural Receivers. The most common used to be the Administrative Receiver, who would often be appointed by a lender to protect the floating charge assets over which they held security. However, since a change in the law in 2002, floating charge holders can no longer appoint an administrative Receiver for security created after 2003, instead they must appoint an Administrator. For more information on this, see Corporate insolvency: administration.
The court itself can appoint a Court Appointed Receiver – who is a Receiver appointed by the court when it feels the need to protect certain property that it believes is at risk. This may be the case if there is a dispute over property and the property needs to be protected by an independent third party.
In reality, the majority of Receivers that a business might deal with are either Fixed Charge Receivers, Law of Property Act Receivers (LPA Receivers), or Court Appointed Receivers. Here we will concentrate on Fixed Charge Receivers or LPA Receives
What is a Fixed Charge Receiver or a Law of Property Act (LPA) Receiver?
A fixed charge Receiver is appointed under the terms of a fixed charge contained in the security document that a creditor might hold over assets of a company.
A mortgagee can appoint an LPA Receiver over assets that are subject to a mortgage. There is often no difference between the two types of Receivership, it just depends on the security process in place.
When can a creditor appoint a Fixed Charge or LPA Receiver?
A creditor can appoint an LPA Receiver if there is a default on a mortgage. A Fixed Charge Receiver will be appointed depending on what is agreed in the security documentation (which is not a mortgage) as a default that allows the party taking security the right to appoint a Receiver. The creditor must follow the correct procedure set out in the documentation, giving the relevant notices before being able to appoint a Receiver.
What does a Fixed Charge or LPA Receiver do?
This depends on what assets are secured. For example, a mortgagee might ask a Receiver to take control of the rent collection of the property subject to security, or they may appoint a Receiver to sell the property to recover money they are owed.
Compared to an Administrator or Liquidator, the powers of a Receiver are usually limited, and will be set out either in the mortgage document, or the security documentation. They are limited to only be over the asset they are there to protect, so it would be very unusual for a Receiver to have the power to take over any other aspect of the company (such as hiring and firing for example), although not impossible.
How is a Fixed Charge or LPA Receiver appointed?
When a company is in default, the creditor must serve a demand on the company. This must be carried out in the correct way depending on the terms set out in the security documentation. This must be complied with exactly, so it’s important to check the requirements very carefully. A period must then be given for the company to respond to the demand and make payment of arrears. In practice this period can be very short. It’s likely that negotiations have broken down before a formal demand is served, so the company should be fully aware of the default and have already had time to pay arrears.
Following the demand, the proposed Receiver will be served with a Deed of Appointment. They must accept the appointment by the end of the next business day following service. Once they accept the appointment, Companies House must be notified within seven days. All company documentation sent out for any reason must state that a Receiver has been appointed.
It is also good practice to notify other key stakeholders of the appointment of the Receiver, such as the Land Registry or other mortgagees. It is also necessary to notify any Administrator or Liquidator already appointed. An Administrator already in place would need to consent to the appointment of a Receiver in advance of the appointment in any event.
What is the effect of a Receivership on creditors?
Because a Receivership is not an insolvency process in the same way as administration or liquidation, the effect on creditors may be minimal. It very much depends on what the Receiver has been appointed over. The Receiver is in place to recover monies outstanding to the entity that appointed them. In protecting the asset they are appointed over, they must apply all monies received by them in the order set out under the law. This states that all rents and rates and insurances, and interest payments and all other usual payments due for the property will need to be paid before payment of either the Receiver’s fees, and the Appointor’s outstanding sums due.
For example, if this means collection of rent or sale of that property, then any surplus will go back to the company to pay whoever would have been entitled to it if the Receiver hadn’t been appointed. This might be a second mortgagee, others with security, or to be applied back to the company.
What is the effect of Receivership on the company?
A fixed charge or LPA Receiver is not automatically deemed to be an agent over the company over which they are appointed, as might an Administrator. However, it is likely that the security document which allowed them to be appointed will usually state that the Receiver will act as agent of the mortgagor or chargor when dealing with the assets over which they are appointed. They will therefore have the same rights as the company had over the asset they are protecting, i.e to sell, to lease etc.
If they are protecting a vast range of assets, they may even decide that the majority of the business/assets need to be sold. This may affect the company’s ability to continue to trade, as well as the directors’ and the shareholders’ interests. This will also affect employees, and other contractual terms that the company has entered into. If this is the case, then the Receiver takes on personal liability for these, and this must be approached carefully. They will inevitably require an indemnity from the company and their Appointor for any personal liability.
What is the effect of a Receivership on the directors?
The directors will usually remain in office. How they are affected will depend on the asset(s) the Receiver is appointed over, and how integral they are to the company’s ability to trade. If the Receiver is appointed over the majority of the assets of the company, then the Receiver may play a far greater role than if appointed over one property. If the Receiver is brought in to sell a specific asset, then they have the same rights as the chargor over that particular asset.
How does Receivership come to an end?
There is no statutory provision around the termination of an LPA/fixed charge Receivership. All the powers and duties are contained in the lending documentation, and once the legal charge has been discharged, then the Receiver’s role ends and they have no more powers.
The Receiver will need to file final accounts at Companies House.
It’s possible for the mortgagee who appointed the Receiver to remove them before the charge is repaid, but this will require a new Deed of Appointment.
How much does Receivership cost?
A Receiver’s remuneration and expenses are paid out of any property of the company which is in his custody or under his control at the time their appointment ends, in priority to any charge or other security held by the person or entity they were appointed by. It will therefore be added to the indebtedness owed under the loan. How much they cost depends on their hourly rates, and how much time has been spent in recovering monies under the loan agreement.
How can we help?
At Harper James we have a specialist team of insolvency lawyers with many years’ experience advising companies and directors in financial difficulties. Now more than ever this is relevant to so many companies. If you are experiencing problems and are concerned about what to do, contact one of our team today to discuss your options.