Author
David HillDirector
What is the meaning of receivership?
In corporate insolvency, receivership is a legal process whereby a secured creditor (often a bank or the court) appoints an independent specialist -the receiver - to sell assets or manage all of a business’s operations and trading. Receivership allows a company the opportunity to put a proposal to creditors rather than going into liquidation.
Who is a creditor?
A creditor is a person, business, or institution that is owed money. In other words, a creditor has provided goods, services, or funds to someone (such as a company or individual) with the expectation of being repaid later.
There are generally two types of creditors; a secured creditor and an unsecured creditor.
Secured creditor
A secured creditor is an entity that holds a secured interest in some or all of the company’s assets. This is usually in the form of a mortgage. Companies regularly obtain finance in the form of a secured loan and provide company assets as a form of ‘security’. In this case, the financial institution that provided the loan is a secured creditor.
Unsecured creditor
An unsecured creditor is a creditor who does not hold a security interest in the company’s assets and who does not have their debt associated with a particular asset. An example includes a supplier who provides goods on credit, or a credit card company.
Who is a receiver?
A receiver is a person or entity appointed to take control of some or all of a company’s assets when the company is in financial distress, typically on behalf of a secured creditor.
A receiver may also be appointed as a receiver and manager, giving them broader powers to operate the business. This allows for the possibility of restructuring the company to help it recover and potentially avoid liquidation.
Roles and responsibilities of a receiver:
- Managing a company’s assets, obligations, and restructuring.
- Protecting threatened property and assets during legal proceedings.
- Reviewing a company’s practices and overseeing that it’s complying with government standards.
- Pay out the money collected in the order required by law.
- Report to ASIC any possible offences or irregular matters they’ve encountered.
- Returning a company to a profitable state.
Causes of receivership
There are several reasons why a company enters receivership. These include:
- Inability to pay its debts.
- Inadequate resources to cover the costs to make the company viable.
- Improper or lack of financial management.
- Lack of knowledge and expertise in business operations and legalities.
- Directors or shareholders disputes.
- Continued losses and poor trading performance.
- Default on loan payments to secured lenders.
How does receivership impact a company and its creditors?
Legal action may be continued against a company despite the appointment of a receiver. This means an unsecured creditor can apply to the court to have the company put into liquidation due to unpaid debt. This may happen particularly if a company owes a large amount, or if there’s an expectation of any money or property left over when the receivership is complete.
If there are any assets or money leftover, they will be returned to the company and under the control of the company’s directors — unless a liquidator or other external administrator is appointed. If a liquidator is appointed, they must carry out the liquidation for the benefit of all unsecured creditors.
How can Mackay Goodwin help?
It is important to protect your own interests and the best way to do so is by obtaining professional advice and representation.
If your company is facing financial difficulty, or you would like more information about receivership, call us today for a free 15-minute consultation.
FAQs
What is receivership and how does it work?
Receivership is a corporate insolvency process where a receiver is appointed by a secured creditor (a bank or court-appointed receiver) that holds security over some or all of a troubled company’s assets. The receiver’s appointment is usually subject to the terms of a charge such as a mortgage over the business's assets. A receiver will collect, sell, and distribute money to creditors in accordance with the law.
It is important to note that being in receivership does not necessarily mean that a company will go into liquidation and cease to exist. In fact, the company may well survive and succeed after the receivership process ends.
Is your bank planning to appoint a receiver?
If your bank is planning to appoint a receiver, it is likely that you have been unable to pay your debts on time. In this circumstance, the creditor is the bank that holds an interest in one of your fixed assets. This may include property, land, plant, or equipment. The role of the receiver is to act on behalf of the creditor (bank).
It is recommended to seek professional advice from receivership experts as soon as possible.
What is the difference between a receiver, liquidator, and voluntary administrator?
There are several key differences between receivers, liquidators and voluntary administrators. These are clarified in the roles carried out by each party.
- A receiver is appointed by a secured creditor who holds an interest in some or all of the company’s assets. Their role is to collect and sell assets, and to repay debts owed to the secured creditor.
- The role of an administrator is to examine the company and report to its creditors. The report will outline information on company assets, management of affairs, processes, and current financial circumstances. Recommendations will also be provided.
- In comparison, a liquidator has a responsibility to all company creditors. Their task is to protect, collect, and sell company assets. The proceeds are then distributed to creditors with an inquiry into the failure of the company also conducted.
A key distinguishing factor of receivership compared to administration is that a company in receivership continues to exist, and its directors remain in their office — though their authority is limited. Under a receiver, certain assets may be liquidated to bring a company back into a profitable, financially secure state.
What is a controller?
Controller refers to a person who is in control of a secured property for the purpose of enforcing a mortgage or charge. A receiver is commonly referred to as a controller.
How does receivership impact a director?
Company directors will continue to hold their positions during receivership but their power and responsibilities will change. The extent of these changes will depend on the powers granted to the receiver and the assets that they control during the receivership period.
Directors must provide the receiver with a Report on Company Activities and Property as per ASIC guidelines. They must also provide the receiver with full access to books and records about the secured assets.
How does the receiver distribute funds?
One of the key roles of a receiver is to collect and sell assets in order to obtain money to pay off debts. Once money from the sale of circulating assets (liquid assets such as stock) is collected, it is then paid out in the following order:
- Receiver's fees
- Priority claims including employee entitlements
- Secured creditor's debt
If there are any funds remaining, they will be paid either to the company or any other external administrator (if applicable).
Can a company avoid receivership?
In most circumstances, receivership is not a choice made by directors but rather appointed by a secured creditor such as a bank. The options of directors are limited during this process, which is why it's important to be proactive if your company is experiencing financial stress.
Acting early provides directors with a number of options including voluntary administration, restructure and turnaround, and safe harbour to name a few. In many circumstances, directors may be able to maintain control while attempting to return the company to a position of financial strength.
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