What is receivership?

Receivership, also known as administrative receivership, is a legally sanctioned procedure where a lender, like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds. The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default. Receivership should not be confused with administration.The Historical Context of Receivership Receiverships are now very rare, with only 1-2 appointments each year. This is due to the Enterprise Act 2002 which promoted company rescue and saving struggling businesses. A receiver can only be appointed by a holder of a qualifying floating charge that was created before September 2003, making this procedure now an uncommon event.Why a Company Would Go into Receivership A company might go into receivership if it has borrowed against a business plan that has not worked and is suffering from cashflow problems. The bank will review the account if it sees signs that the directors are losing control. The bank will typically take some or all of the following steps:Ask for a reduction in its exposure and for new capital to be introduced by shareholders. Demand formal repayment of the loans without notice. Request a new business plan from the directors, along with regular reporting. Ask for investigating accountants to look at the business to ascertain if it is viable and if the bank's exposure is sufficiently covered.If the investigating accountant (an IP) thinks the company is at serious risk of failure and the bank may lose money, they will usually recommend that the bank appoint a receiver. The bank may also require the directors to "request the bank to appoint a receiver," which is often a face-saving measure.The Receiver's Role and Powers A receiver has a duty to collect the bank's debts only; they are not generally concerned with the other unsecured creditors or shareholders' exposure. They will quickly ascertain what the prospects for the business are and decide whether to sell some or all of the assets or the business as a whole. They may wish to get rid of assets and staff as soon as possible and may remove directors and employees without impunity. The receiver must pay the preferential debts first from any floating charge collections. They must conform to the tight rules and regulations governing receivership and report to the Department for Business & Trade. The receiver may also look at the possibility of legal actions against the officers of the company or debtors to recover funds. 

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