Welcome to our insightful guide on an insolvency proceeding known as company receivership in the UK. Delving into the world of financial distress, this article sheds light on the receivership process, offering businesses and creditors a comprehensive understanding of the crucial steps and implications involved.
Join us as we navigate through the practical aspects of managing insolvency challenges and exploring receivership within the context of corporate entities.
What Is Receivership?
Receivership, often termed administrative receivership, is a formal insolvency proceeding to help an insolvent company. This legal arrangement happens when a creditor, often a bank or financial institution, chooses a person called a receiver. Here’s a thing to remember: The receiver must be a licensed insolvency practitioner.
This receiver takes the company’s assets to sell them off and repay the money owed. If necessary, this receiver’s main task is to handle and sell the company’s assets to repay the lender.
Receivership helps creditors by recovering defaulted funds, potentially avoiding liquidation. It’s different from administration, and a receiver can only be appointed by a holder of a specific charge created before September 2003. The Enterprise Act 2002 aimed to encourage company rescue and assist struggling businesses.
Note: To appoint a receiver, a creditor must possess a qualifying floating charge established before September 15, 2003. Creditors with debentures made after this date can’t use this method anymore because of the Enterprise Act 2002. This law changed the old rules (Insolvency Act 1986) to help companies facing money problems get back on track.
Types of Receiverships
In the United Kingdom, several types of receivership apply to insolvent companies. These are the methods creditors use to collect debts. The types of receivership include:
Administrative Receivership
Appoints a receiver for companies with a creditor holding a floating charge created before September 15, 2003. The receiver manages and sells company assets to repay debts.
Fixed Charge Receivership
This involves a receiver appointed by a creditor with a fixed charge on specific company assets, usually to manage or sell those assets to satisfy the debt.
Court-Appointed Receivership
In this receivership, a court appoints a receiver, often in legal disputes over assets, to manage and protect those assets.
Law of Property Act (LPA) Receiver
Appointed under the Law of Property Act 1925, primarily for rent-producing property, to collect rents and income.
Statutory Receivership
In statutory receivership, a receiver is appointed under specific laws, like the Insolvency Act 1986, with duties and powers defined by those laws.
Agricultural Receivership
A farmer looking for money for their farming business can create an agricultural charge based on the Agricultural Credits Act of 1928. This type of charge might have both fixed and floating parts. If there’s a receiver appointed under this charge, they’re different from an administrative receiver. The charge will outline the receiver’s role and powers, similar to a Law of Property Act receiver.
Bank-Appointed Receivership
Bank-appointed receivership occurs when a lending institution, like a bank, appoints a receiver to oversee a company’s assets. This usually happens because the company has defaulted on its loan obligations, breaching the loan agreement terms. The receiver’s main task is to manage and collect assets to recover the outstanding debts owed to the bank.
Objectives of Receivership in the UK
The main objectives of receivership in the UK are:
- Debt Recovery: The primary purpose of receivership is to help creditors, often banks or lenders, recover money owed to them by a company that has failed to pay its debts.
- Asset Management: The receiver takes control of the company’s assets, managing them efficiently, including selling them to repay the creditor.
- Protecting Asset Value: By managing or selling assets, the receiver aims to maintain or maximize their value to raise enough funds to pay off debts.
- Business Assessment: The receiver evaluates the company’s situation to decide the best course of action, whether to continue business operations or shut down.
- Legal Compliance: Receivership ensures that the debt recovery process complies with legal requirements, protecting the rights of all parties involved.
In a nutshell, receivership in the UK primarily focuses on recovering debts for secured creditors by managing or selling a company’s assets while also evaluating and potentially sustaining the business’s operations.
Reasons for a Company Going into Receivership
Your company might enter receivership due to various reasons.
For instance, when your company needs money, it may borrow from a bank or another secured creditor. To secure the loan, your company may agree to a debenture, offering security as a fixed and floating charge on its assets.
If the company breaches the loan agreement or doesn’t comply with the creditor’s terms, the lender can take specific actions:
- Engage investigating accountants to evaluate the debt security and explore the best way forward (this doesn’t always lead to receivership).
- Demand immediate repayment of the loans without warning.
- Appoint a receiver to handle and gather the company’s assets on behalf of the bank.
The appointed receiver focuses solely on collecting the bank’s debts, not typically involving other creditors or shareholders’ interests.
Receivership in the UK Process
The receivership process in the UK follows three main stages. Initially, it begins when debts remain unpaid for an extended period, prompting intervention to seek repayment. Then, a receiver is appointed to liquidate assets and settle the outstanding debt, concluding the receivership once the debt is fully paid.
Here’s a detailed breakdown of the receivership process:
Step One: Default and Creditor Action
Receivership typically occurs as a final effort after multiple attempts to collect unpaid debts. If arrears persist for an extended period, the creditor may request increased security or additional capital from the debtor. At this point, the lender evaluates the situation to decide on the best approach for debt repayment, which may include receivership.
Step Two: Appointment of the Receiver
If receivership is chosen, the fixed charge holder appoints a licensed insolvency practitioner as a receiver. The receiver’s primary duty is to prioritize debt repayment, even if it impacts the business adversely.
Step Three: Conclusion of Receivership
Receivership concludes when the entire outstanding debt is repaid to the creditor. If the sale of company assets doesn’t cover the total owed, alternative repayment options may be considered. Once the debt is settled, the receiver steps back, allowing the debtor to assess future options.
Often, companies in receivership may need to go through liquidation and cease operations due to insufficient funds to continue while repaying the debt in full.
Impact of Receivership on a Company
Unlike an administrator, a receiver doesn’t automatically become the company’s agent when appointed. However, the legal document allowing their appointment often states they’ll act as the agent for the person who mortgaged or charged the assets. This means they have similar rights to the company over the assets they’re safeguarding, such as selling or leasing them.
They might sell most of the business/assets when protecting various assets. This can impact the company’s ability to operate and the interests of directors, shareholders, and employees. It also affects the company’s contracts. In such cases, the receiver takes personal responsibility, needing an indemnity from the company and their appointor for any personal liability.
Impact of Receivership on Directors
The directors typically stay in their positions. Their impact varies based on the assets the receiver oversees and their importance for the company’s operations. If the receiver manages most of the company’s assets, their involvement might be more significant than handling just one asset. When appointed to sell a specific asset, the receiver holds similar rights to the person who gave the charge on that particular asset.
Impact of Receivership on Creditors
Because receivership differs from other insolvency proceedings like administration or liquidation, its impact on creditors can vary. The receiver’s role is to recover money owed to the entity that appointed them and protect the assets under their control. They must follow a specific order the law outlines when distributing funds, prioritizing payments such as rents, rates, insurance, and other property-related expenses before settling their fees and the appointor’s outstanding sums.
For instance, if they collect rent or sell property, any surplus proceeds go back to the company to pay those entitled to it, such as second mortgage holders and other secured parties, or to be reinvested in the company.
Who Is a Receiver in Company Law?
According to company law, a receiver is a person appointed by a creditor to manage a struggling company’s assets when the company has a debt to that particular creditor. This receiver’s job is to collect money from selling the company’s assets to pay off the creditor’s debt. They might also oversee the company’s operations, replace its directors, and examine whether they have acted wrongly or fraudulently.
Receivership typically occurs when a company defaults on a loan secured by specific assets, and the creditor invokes their security rights. The role of a receiver involves significant responsibility in managing a company’s assets to recover debts owed to secured creditors.
Per the Companies House Law, What Is the Role of a Receiver?
Now, about the role of a receiver, we mentioned earlier:
Under the regulations of Companies House, a receiver is appointed by a creditor to recover a company’s assets in a financial struggle. Their main aim is to take hold of a company’s assets to recover funds owed to the appointing creditor. They gain complete control over the company when appointed, often disregarding the directors’ suggestions.
A receiver’s role involves selling some or all of the company’s assets to secure the best outcome for the appointing creditor, which could mean selling the business as a whole or in parts. They may also continue business operations while negotiating deals like a Company Voluntary Arrangement (CVA).
The receiver can dismiss directors and employees but must follow UK insolvency law, requiring them to honor employee contracts within two weeks of their appointment. Additionally, they must investigate the conduct of the insolvent company’s directors for potential wrongful or fraudulent actions and prepare a report with their findings.
Right and Power of a Receiver
The receiver’s legal abilities are outlined in section 109 of the Law of Property Act (LPA), but lenders often enhance these powers through additional clauses in the mortgage document. The receiver’s standard powers under the LPA are:
- The ability to take possession of a property.
- The ability to collect any income, like rent, generated by the property.
- The authority to allocate some of this income for insuring the property included in the mortgage.
- The authority to remove directors and employees.
Additionally, under the LPA, the mortgage holder can give the receiver extra-contractual powers, which include:
- Capacity to help sell the mortgaged property.
- The power to create and assign leases. This must be expressly granted in writing.
Most receivers are appointed fixed charge receivers based on specific rights outlined in the mortgage deed. These provisions simplify the process for a mortgage holder to appoint a receiver, bypassing specific procedural steps like waiting periods or payment demand procedures. Fixed charge receivers possess the statutory powers under the LPA and additional abilities specified in the mortgage contract.
Therefore, the full extent of a receiver’s powers largely depends on what is stated in their appointment documents, which should always be carefully reviewed.
Limitation on Powers of a Receiver
A receiver’s power is not unlimited and has some limitations:
- Legal Framework: The receiver must operate within the legal boundaries set by laws like the Law of Property Act and the terms of the security agreement under which they are appointed.
- Creditor’s Interests: A receiver primarily serves the interests of the creditor who appointed them, which limits their ability to consider the needs of other stakeholders like unsecured creditors, employees, or shareholders.
- Scope of Authority: Their authority is often restricted to managing or selling specific assets under the charge rather than handling the entire business.
- Accountability and Reporting: Receivers must keep accurate records and report their activities, ensuring transparency and accountability.
- Professional Conduct: They must act professionally, reasonably, and without bias, following the ethical guidelines of their profession.
These limitations are in place to ensure that while a receiver is focused on recovering debts for the creditor, they do so within a defined legal and ethical framework.
Appointment of a Receiver
When a company defaults on its debt, the creditor issues a formal demand following the terms of the security document. The company is usually given a brief period to make the payment. Once the demand is made, a Receiver-to-be is given a Deed of Appointment, which they must accept by the end of the next business day. This appointment must be reported to the Companies House within seven days. All communications from the company must acknowledge the presence of the receiver.
Key stakeholders, such as the Land Registry, other creditors, and any previously appointed administrators or liquidators, must be informed and consent to the receiver’s appointment.
A fixed charge holder, often a bank, appoints a receiver to protect and potentially sell the secured asset to repay the debt. The receiver acts in the creditor’s best interests, following the duties and powers outlined in the security document.
This quick appointment process, aimed at benefiting the creditor, can cause considerable disruption for the company. In situations where multiple creditors have claims against the company, the order in which they are repaid depends on the level of security each creditor holds.
What Happens When a Receiver Is Appointed to a Property?
After a UK company receivership ends, the receiver’s role is concluded. They step down from managing the company’s assets or the specific asset they were appointed to handle. The receiver finalizes any remaining tasks, like distributing the proceeds from asset sales to creditors according to their legal priority. Then, if involved, they provide a final account of their actions and financial dealings during the receivership to the relevant parties, such as the creditors and the court.
Once all these steps are completed, the receiver’s legal authority over the company or its assets ceases. If the debt isn’t entirely settled, the company may face further insolvency proceedings, like administration or liquidation.
Corporation Tax, VAT, and Receivership in the UK
A company might owe corporation tax if it earns money after administrative receivership, like interest or profits from selling assets. This tax is the company’s responsibility and can’t be claimed in receivership. If the tax was due after the winding-up order, it’s paid from available funds as a liquidation expense.
When an administrative receiver is appointed, the company’s VAT debts are fixed and treated as a claim during the receivership. If the company keeps trading, the receiver must notify HMRC within 21 days. They should also handle VAT returns and pay taxes for the supplies made during their tenure. Credits after the receivership can’t offset pre-receivership VAT debts.
How Long Do Receiverships Last?
There’s no set rule for ending an LPA/fixed charge receivership. The receiver’s powers and duties are in the lending documents. When the legal charge is settled, the receiver’s role ends, and they lose their authority.
The receiver must submit final accounts to Companies House. It’s feasible for the mortgagee to remove the receiver before the charge is repaid, but it needs a new Deed of Appointment.
Advantages and Disadvantages of Receivership
Receivership, as a form of insolvency proceedings in the UK, has advantages and disadvantages for various stakeholders, including the company, its creditors, and employees.
Advantages of Receivership in the UK
Directors facing company receivership might not see direct benefits, but there are a few positive points:
- The receiver might use their business expertise to try and save the company. It doesn’t always happen, as liquidation is more common. But if the receiver believes that continuing the business is good for the creditor who appointed them, they might try to do so.
- When the receiver takes over the company, it reduces the chance of directors being accused of wrongdoing. If the business continues while insolvent, directors could be accused of misconduct, especially if the company is in debt without hope of recovery.
- The receiver might gather funds to repay certain creditors with priority.
Disadvantages of Receivership in the UK
Receivership usually leads to more downsides than upsides when a company can’t pay its debts. Here are the key drawbacks that come with it:
- It’s rare for a company in receivership to come out unchanged.
- Assets might be sold at lower prices.
- Often, it ends with the company being liquidated and closed.
- Directors and employees might lose their jobs, and any money owed to directors becomes hard or impossible to get back. Money from asset sales goes to creditors first, leaving little for company owners.
Preventive Measures and Alternatives of Receivership
When faced with potential receivership, the outcome for your company largely hinges on the severity of the insolvency stage and your immediate actions. If your company has breached terms in a secured debenture, swiftly engaging an insolvency practitioner is vital. They can evaluate informal solutions or formal insolvency procedures tailored to your circumstances.
Seeking advice from a licensed insolvency practitioner is crucial to determining the feasibility of preventing receivership and discussing the specifics of your situation.
Advice for Companies Facing Receivership in the UK
If your company is facing receivership, then there is some advice for you to make the whole process easier and more manageable for you:
- Seek Professional Advice: Consult legal and financial experts to understand your rights and options.
- Review Financials: Closely examine your company’s finances to assess the situation and potential solutions.
- Communicate with Creditors: Engage openly with creditors to explore possible agreements or restructuring options.
- Protect Company Interests: Ensure the receiver acts within their legal powers and respects the company’s and all creditors’ rights.
- Cooperate with the Receiver: Facilitate the receiver’s work by providing necessary information and assistance.
- Inform Stakeholders: Keep employees, customers, and suppliers informed about the situation and any developments.
- Explore Alternatives: Consider alternative solutions like refinancing, finding new investors, or restructuring to avoid receivership.
- Plan for Post-Receivership: Prepare for what might happen after receivership, whether continuing business, restructuring, or winding up.
- Stay Compliant: Ensure compliance with all legal and regulatory requirements.
Remember, facing receivership is challenging, but a company can navigate this difficult period more effectively with the right approach and professional guidance.
FAQs
Q1: What Is a Debenture?
Answer: A debenture is a debt instrument not secured by physical assets or collateral. It represents a medium to long-term investment in a company.
Q2: Can a Company Operate During Receivership?
Answer: It depends on the receiver’s assessment. Sometimes, the business continues to operate, and others may cease operations.
Q3: What is the Difference Between Receivership and Liquidation?
Answer: Receivership focuses on repaying a specific secured creditor, whereas liquidation involves winding up the company and distributing assets among all creditors.
Q4: Can a Company Avoid Receivership?
Answer: Avoiding receivership may be possible through early negotiation with creditors, refinancing, or restructuring debts.
Q5: How Long Does Receivership Last?
Answer: The duration varies based on the complexity of the case and the time needed to manage and sell assets.
Q6: What Happens After Receivership Ends?
Answer: The company may resume operations, enter into another form of insolvency proceedings, or be dissolved, depending on its financial state and the outcome of the receivership.
Last Words
Understanding the ins and outs of insolvency proceedings, particularly in company receivership, is key for businesses and creditors alike. Individuals can better maneuver through this challenging terrain by grasping the implications, options, and legalities involved.
Remember, being well-informed about receivership in the UK helps businesses and creditors make informed decisions for a more secure financial future.
