What do directors need to know?
Company receivership is increasingly in decline. From the most recent high of 1,468 receivership appointments at the peak of the recession in 2009, according to the ONS statistics there was only a single administrative receiver appointed in the whole of 2018.
Whilst a company having “gone into receivership” is still a common colloquial term, more often than not the company will have actually gone into voluntary liquidation or administration. There to remain several different forms of receivership and this article will cover off the different types to offer clarity on this term.
Administrative receivership, colloquially known as company receivership, is considered a formal insolvency process, unlike the other forms of receivership. The main reason for the decline in appointments of such a receiver is the Enterprise Act 2002.
An administrative receiver can only be appointed by the holder of a floating charge over the company assets. Under the Enterprise Act 2002, this floating charge must have been created before 15 September 2003. As a result under floating charges created in the last 15 years these appointments are no longer possible, hence the massive decline.
One of the reasons for the changes is an administrative receiver is only appointed over the assets of a company and acts purely for the floating charge holder. An administrative receiver must be a licenced insolvency practitioner.
After the receiver has completed their work, this still leaves the shell of the company, which will likely need to be liquidated before it can be dissolved. The above changes in legislation also improved the accessibility to the administration proceed, and this is now the more likely action the holder of a floating charge will take, if you business defaults on such a charge.
Fixed charge receiver
A fixed charge receiver is appointed by the holder of a fixed charge, properly registered at companies house. Unlike a an administrative receiver, a fixed charge receiver does not need to be a licenced insolvency practitioner, and is more likely to be a chartered surveyor.
Where a floating charge covers substantially all the assets of a company, a fixed charge is specific in what it covers, therefore this type of receiver will only be appointed to realise one of more particular assets within the company.
An appointment as a fixed charge receiver can cover:
- Freehold property
- Leasehold property
- Intellectual property
- Factored or specific book debts
- Fixed plant and machinery
In the event you have defaulted on a fixed charge and a receiver has been appointed, if you are an SME, this can effectively cripple your business, forcing you to sell the remaining assets to pay off creditors.
In order to achieve the maximum value for the assets, you may be able to work with the receiver to arrange a sale of the business as a whole entity. This may at least leave you with sufficient funds to pay your remaining creditors.
If however the value of the assets is significantly less that the total value of your creditors, making your company insolvent, it may be necessary to place the company into formal insolvency such as voluntary liquidation or administration, in order to protect your position.
A Law of Property Act receiver, commonly referred to as an LPA receiver, is a type of fixed charge receiver, in that they do not need to be an insolvency practitioner, but will more commonly be a chartered surveyor, generally 2 surveyors who are jointly appointed.
There are again less instances of when a LPA receiver can be appointed, being that they can only be appointed over land or buildings.
Once an LPA receiver is appointed, they have specific powers which are set out in the Law of Property Act 1925:
- To demand and receive income/rent on the property.
- To insure and protect the property.
As the legislation is closing on being 100 years old, and yet is still a commonly used recourse, additional powers can be delegated under the charge or mortgage the appointment is made under. These powers generally include:
- The power to sell the mortgaged property.
- The power to grant a lease over the property.
One of the more unusual rights which is also worth being aware of is the power to cut down any appropriate trees on the property so they can be sold for timber. A LPA receiver being appointed over an orchard therefore could yield serious consequences.
The appointment of a receiver
Regardless of whether the charge holder is commencing the process for company receivership, or simply appointing an LPA receiver, the main appeal of the process to them is how quickly the appointment is made.
The main warning the action is imminent will be receipt of a default letter, demanding the full balance due under the charge. Once this period has expired, which may be as little as 48 hours, to make the appointment there is a simple passing of correspondence between the charge holder and the receiver confirming acceptance of the appointment.
Due to the speed of this process, the first you will generally be aware a receiver of any kind has been appointed is when they attend the premises to secure the assets in question. Whilst it is possible to liaise with the charge holder, when your business is in financial difficulties, to request they appoint a receiver, may not be the best solution as it will only deal with secured liabilities.
You should take your own advice to find a solution that suits your business as a whole, dealing with all of its creditors. Our BusinessRescueExperts can be contacted to discuss the best solutions for you, creating a solution to suit your business as a whole, not just a single creditor.