Usually companies placed in receivership have been facing significant financial difficulties and receivership is a mechanism by which a secured creditor enforces its security to recover the debt due to the secured creditor. Other reasons for the appointment of a Receiver could be to protect assets at risk or because of serious disputes in the management of the company.

A Receiver is appointed by the secured party to take charge of a company’s assets from the existing management. A Receiver cannot be an existing employee of the company, but must be someone who is totally independent of the company.

Although it is common to refer to the company as being in receivership, however it is in reality the assets of the company subject to the charge which are placed in receivership. It is possible that a Receiver may be appointed over only some rather than all of the company’s assets.

Appointment of a Receiver

Receivers are generally appointed by a creditor of the company by a contractual power contained in a security agreement completed between the company and the creditor. Normally this General Security Agreement “GSA” is registered on the Personal Properties Securities Register (PPSR). Generally a Receiver is appointed by a secured creditor because of payment defaults, or the creditor is concerned that the company is likely to default. The Receivers role is to take charge of the company’s assets and business that are subject to the security interest, to run and/or to sell off assets and repay the creditor from the earnings or sale proceeds.

The Receiver is appointed by the secured creditor and therefore acts as the agent of that secured creditor. The Receiver while having a duty to the company, is not acting in the same statutory agency capacity as a Liquidator, and the significance of this difference is important as a Liquidator is personally indemnified by the assets of the company in liquidation whereas a Receiver is not. The Receiver is generally indemnified by his or her principal, that being the secured creditor.

Effect of Receivership

The company’s directors remain in office but, in the usual case where the bulk of the company’s assets are in receivership and the Receiver is managing the whole of the company’s affairs, the directors are left with very little in the say or control of the company during receivership. They have the right to arrange for the company to refinance its indebtedness so as to pay off the appointing secured creditor and terminate the receivership and provided they underwrite the cost, they can in appropriate cases challenge the validity of the appointment of the receivership, or the receivership itself. However, the directors are generally left in the unenviable position of having some of the obligations of directors (such as filing of accounts and annual returns) without having access to the resources from the company to meet those obligations.

Hiving Down

A Receiver may decide to restructure the company’s affairs and may wish to separate performing or profitable parts of the business from those parts of the business which are not performing. By transferring the assets comprising a profitable business unit to a newly incorporated subsidiary company is known as “hiving down”. The new company can then carry on business unaffected by the problems still faced by the old debtor company.

Staff Employment from date of Receivership and Wages

Unless the Receiver gives notice of termination of employment to staff of the company within 14 days of appointment, the staff of the company continue to be employed and generally will be paid by the Receiver during this period. The 14 day period gives the Receiver an opportunity to investigate the company’s position and to decide whether to trade on or close down the business and to decide which employees, if any, will be required to remain and assist.

Termination of Receivership

Once a Receiver has received his fees and expenses and paid off any preferential creditors, any secured creditors ranking prior to the appointing creditor and, finally, the appointing creditor, the Receiver should terminate the Receivership and return control of the company’s remaining assets to its directors or (if the company is in liquidation) to the Liquidator. A Receiver is not required to distribute the realisations of the company’s surplus assets amongst its unsecured creditors.

Removal of Receiver

Where the security agreement gives power to do so, the secured creditor may terminate the Receivers appointment at any time and the Receiver must cease acting from that time. This gives the secured creditor some level of control over the actions of the Receiver who is acting as the agent of the secured.