Administrative receivership is now rare in England and Wales. Only the holder of a qualifying floating charge created before 15th September 2003 can appoint an administrative receiver, unless the charge falls within one of the limited statutory exceptions. The appointment typically follows a breach of the security agreement or debenture, and the receiver then realises the charged assets. A lender whose qualifying floating charge was created on or after that date can instead appoint an administrator once its charge is enforceable.
How Does Receivership Compare with Administration?
Administrative receivership should not be confused with administration – though the two processes bear some similarities, they are different. Administration can be used as a powerful tool for turning a struggling company into a profitable one, whereas Administrative Receivership generally results in the dissolution or liquidation of the company. Administrative receivership is now much the less common of the two, as it is generally available only to creditors whose qualifying floating charge was created before 15th September 2003, apart from a few statutory exceptions for specialist financing.
Who can Appoint a Receiver?
Only the holder of a floating charge created before 15th September 2003 can appoint an administrative receiver, unless the charge falls within one of the limited statutory exceptions. Outside those exceptions, the holder of a qualifying floating charge created on or after that date cannot appoint one. Once its charge is enforceable, it can instead appoint an administrator without going to court.
Where the charge pre-dates 15th September 2003 or falls within one of those exceptions, the holder (this is normally, though not always, a bank) can appoint an administrative receiver when the power in the security agreement becomes exercisable, typically on a breach of its terms. For any other charge, a clause in the security agreement that claims to allow this has no effect. When that power arises depends on the wording of the security document. Many allow an appointment once the lender has demanded repayment and the company has not paid, or on any listed event of default, so do not assume a minor breach is excluded.
What does a Receiver do?
The administrative receiver’s job is to realise the assets of the company in order to prevent/ limit the banks’ exposure to a loss on its loan.
They can do this in a number of ways: by keeping the business trading to make it more valuable before selling it as a going concern, by realising some or all of the company’s assets immediately through a quick sale, or by transferring the business to a new subsidiary and selling that. The receiver cannot sell the shares in the company itself, which belong to its members.
The administrative receiver takes control of the property covered by the charge, and can run the business and dismiss employees. The receiver cannot remove the directors. They stay in office, but their management powers over the charged property are suspended while the receiver acts, and their statutory duties continue.
What are the Disadvantages?
There are several disadvantages to administrative receivership, many of which were the driving force behind the government’s decision, in the Enterprise Act 2002, to remove it for most floating charges created on or after 15th September 2003.
In most cases, the only party to benefit from the appointment of an administrative receiver is the creditor who appointed them. Administrative receivers often strip and sell companies’ assets in order to ensure that the relevant creditor receives their investment. Preferential debts, such as certain employee claims and some HMRC debts, are paid from the floating-charge assets before the appointing creditor. After that there are often no surplus funds, so the company’s other creditors lose out on their investments. The directors and employees can find themselves without a job very quickly, and an investigation will be launched into the directors’ actions prior to the appointment of the administrative receiver.
What are the Advantages?
The administrative receiver does have powers that enable him to turn the company around should this be the decided course of action. This may be beneficial where the company is profitable but is suffering because of poor management decisions.
The process also means that the relevant creditor should be protected from further losses on its loan – it may even be able to recover the full amount of its debt with surplus left over for other creditors.
What Should You Do if Being Threatened with Administrative Receivership?
If a creditor is threatening to appoint an administrative receiver, you need to take immediate action. Speak to someone who can discuss your options and put together a plan of action before the creditor appoints the receiver. Call us on 0208 444 3400 or use our Contact Us form.