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What is receivership
My bank is making threatening noises - what should I do?
If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured (think about a CVA), or if just not viable then consider administration or the longer receivership guide below.
Please call us on 020 7877 0050 (London) or 01289 309413 to talk to an expert turnaround advisor if you want more help.
This process should not be confused with administration. A receiver is appointed by a floating charge holder – typically a bank. What does this mean?
- The company requires finance for its activities and borrows from a bank (or other secured lender).
- In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company.
- If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:
a) Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership).
b) Demand formal repayment of the loans without notice.
c) Appoint a receiver to administer and receive the company's assets.
- The receiver has a duty to collect the bank's debts only, they are not generally concerned with the other unsecured creditors or shareholders' exposure.
Receivership; A typical appointment:
Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.
As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers and cheques are returned (bounced) by the bank. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control. See bank's view page for further understanding of their approach. When this happens the bank will review the account and will typically take some or all of the following steps:
- The bank will ask for a reduction in its exposure.
- It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture.
- It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing.
- It can ask for a new business plan from the directors, along with regular reporting.
- It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company.
- If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:
a) Is the business viable?
b) Is the company stable?
c) Does it have a long term future if the present difficulties can be overcome?
d) Is the bank's exposure sufficiently covered in the event of a failure?
e) In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis).
f) Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example.
g) If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator.
h) Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.
At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach.
Once they are appointed what are a receiver’s role and powers?
- A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment).
- They may remove directors and employees without impunity.
- They ultimately decides the way forward and will (often) not take advice from the directors.
- They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections.
- If a deal is to be done with directors the receiver must first advertise the business and its assets for sale.
- They must conform to the tight rules and regulations governing receivership and report to the DBERR.
- A receiver must investigate the conduct of the directors of the business and file a report with the DBERR.
Disadvantages of receivership:
The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost. The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.
From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs.
Advantages of receivership
The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.
Preferential creditors may see their debts repaid by the receiver.