An Introduction to Receivership
Administrative Receivership is the process where the holder of a qualifying floating charge appoints an administrative receiver to realise the assets of a company that has breached the terms of the security agreement or debenture.
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 becoming the less common of the two, as it can only be used by creditors who hold a qualifying charge issued prior to 15th September 2003.
Who can Appoint a Receiver?
Administrative Receivers can be appointed by the holder of a qualifying floating charge.
The holder of the qualifying floating charge (this is normally, though not always, a bank) can appoint an administrative receiver if the company breaches the terms of the security agreement. The security document normally provides that they can only do so where the company has substantially breached the terms of the document, rather than for small administrative errors.
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 company trading to make it more financially profitable before selling it, by realising some or all of the company’s assets immediately through a quick sale or by selling the company itself.
At all stages, the administrative receivers are in complete control of the company: and can remove the company’s directors and employees.
What are the Disadvantages?
There are several disadvantages to administrative receivership, many of which were the driving force behind the government’s decision to remove it as a recourse for creditors with security entered into after 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. There’s often no surplus funds after the relevant creditor has been repaid, 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 020 8444 2000 or use our Contact Us form.