Receivership
Receivership
What is receivership?
It is a a process where holders of debentures secured by a floating charge appoint a ‘manager’ or receiver in the event a company fails to pay debts to the holders of the floating charges.
The purpose of a receiver is to use the floating assets of the company to pay back the debts as fully as possible and pay back any excess to the company.
A company in receivership can, in theory, continue trading. Receivership acts as a final safeguard for viable businesses before bankruptcy, although given the financial circumstances which result in receivership, in practice most companies will go into liquidation.
What is a floating charge?
A floating charge is a charge on assets which are used during the normal course of business and change from time to time. Fixed charges are charges on assets that remain constant over the course of business e.g. business premises.
Why all this talk of floating charges?
It is important to determine which charges are floating and which are fixed because it is relevant to determining the priority of competing creditors. Floating charges are lower priority than fixed charges when it comes to receivership.
Are there any other types of receivership?
There are two types of receiver – ‘administrative receiver’ and ‘other receivers.’ The powers of ‘other receivers’ are governed by the common law and the Property Act 1925 section 109.
What is the process of administrative receivership
The process of administrative receivership was revised by the Enterprise Act 2002. Under the Act, only the following classes of creditors can appoint an administrative receiver: public-private partnerships, capital market creditors, utility companies, project financed creditors and registered social landlords.
An administrative receiver may only be appointed if the power to do so has been written into the agreement concerning the security instrument between the company and creditor.
What are the powers of administrative receivers?
Administrative receivers can:
• Possess and control the assets of the company in receivership
• Sell the assets of the company to satisfy the creditor’s debts
• Borrow money using the company’s assets
• Ensure that the company’s day-to-day business is carried on
• Make payments in the company’s name
• Employ solicitors and other relevant advisers to assist in the insolvency process.
• Dismiss existing members of staff
• Create subsidiaries
• Sell subsidiaries
• Present the courts to have the company wound up
• Execute any practical actions in order to realise the property of the company
How does receivership end?
Receivership ends when the debts of companies relating to its floating charges have been fully or partly paid back to creditors.
Depending on the financial state of the company, there are several possibilities. If the business is viable, control will be returned to the company directors and shareholders. If the company is in a bad financial state, it will be put into administration or be wound up.