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.
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.
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:
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.
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.
Q: How does receivership happen?
A: Receivership can happen very quickly once the bank loses faith in the directors. The best policy is to work with the bank and produce a survival plan having taken professional and expert advice.
Q: But the bank can’t just appoint a receiver, can they?
A: Yes. Read the terms of the debenture closely – you will be surprised how little power you have to prevent it. The bank will generally have exhausted all possible avenues to help to try to preserve the business. If the directors are manifestly not up to the job or will not listen, they will lose patience quickly.
Q: Can we stop them?
A: Not normally. However, if you talk to an experienced turnaround practitioner, they can often persuade the bank that their involvement will lead to a review of viability followed by a professional recovery plan, and the bank will usually give time for this to happen within strict financial constraints.
Q: I have heard that receivership is a rescue procedure – please explain?
A: Many insolvency practitioners describe selling the business or its assets to a third party out of receivership as a rescue technique. Although some part of the activity may remain, it is difficult to understand how the loss of almost all creditors’ monies, jobs, and all shareholders’ funds, followed by the liquidation of the company, can be described as a rescue!
Q: What happens if the receiver does not get the bank’s money back in full?
A: He/she may rely upon the bank’s other securities. If the directors, shareholders, or a third party has signed a personal guarantee, the receiver pursues this as if it were an asset of the company. The receiver may also look at the possibility of legal actions against the officers of the company or debtors to recover funds.
Q: What happens to my personal guarantees in receivership?
A: Unless the receiver recovers all loans due to the bank after his/her fees and any payments due to preferential creditors, then your PG will crystallise. In other words, the receiver may seek to recover money from you.
Q: What happens to the employees?
A: This is a complex question. If the business is sold in a reasonable time, their employment rights can be continued with the new owners under TUPE. If the receiver makes them redundant straight away, they can claim for payments from the government up to a maximum amount.
Advantages
Disadvantages
If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides on this site. Receivership may be an option. Work out the viability of the business, set out the position, and have a meeting of directors. Decide if the business can continue but needs to be restructured, or if it is just not viable. Be warned, most are still looking for liquidations and receiverships (undertakers). Above all, demonstrate a professional and determined approach to saving a viable business – procrastinate at your peril – the bank will not wait for that silver lining.
Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company’s options.
Written ByKeith Steven
Turnaround Director
Keith is the Turnaround Director of RMT KSA Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
