2nd December 2021
If your company has defaulted on a debenture that was created before 15 September 2003 then you could be at risk of being put into receivership, in which case you should continue reading the guide below, especially if you're interested in saving your company. If you've defaulted on a debenture or loan agreement that was created after the above date then you're at risk of being put into company administration.
We explain what business rescue options are available to you as the business owner, and it is you as the director who stays in control and decides what route to take. It makes no sense for our client directors to feel pressured into something that they do not fully understand.
Administrative receivership is a formal insolvency proceeding in which the holder of a floating charge (i.e. - the bank) appoints a receiver to assume control of a company with the goal of selling the company's assets or performing other actions to recoup the debt owed. If your company owes a secured debt of more than £750 and has failed to comply with a statutory payment demand or other payment request then it could be at risk of being put into receivership. This figure has increased to £10,000 as per the Government's temporary measures which will apply for the period 1 October 2021 to 31 March 2022.
This process is commonly confused with administration, however the primary difference is that although a receiver takes full control of the company just as an administrator does in administration, they're not operating with the primary intention of rescuing the company and allowing it to continue as a going concern.
It should be noted that receivership has become much less common than administration since the Enterprise Act 2002 implemented changes that barred the ability to appoint a receiver in any security created after the date of 15 September 2003. Instead, secured creditors now appoint an administrator in most cases, as the majority of defaulted debentures are less than a decade old.
When a company is in need of funding it may apply for financing from the bank in the form of a loan. If the bank feels that a security is needed (to protect against taking a loss in the event of default), then it may require the borrowing company to sign a debenture that contains a fixed or floating charge. If this debenture was signed before the aforementioned date (15 September '03) and the borrowing company fails to adhere to the terms of the agreement, or does not comply with the debenture holder's request, then the lender can either issue a formal statutory payment demand or:
When the indebted company starts to show signs of insolvency (i.e. - cashflow problems, overdrafts, ceiling borrowing, delinquent payments, etc.) the lender/bank may have their accountants conduct an investigation into the company's account to ascertain what the most ideal process is for recovering the amount owed or securing the debt even further. Before a receiver is appointed a number of preliminary efforts may be taken:
If the above measures are not satisfactory to the bank then they may have their advisors perform a more thorough review to determine if the company is viable, stable, and whether it has a likely prospect of recovery. Normally the accountants will recommend that the bank continues to collect on the debt and only provide additional lending if the directors of the company sign a personal guarantee secured by property for example. However, if the accountants feel that the bank is at risk of losing the money owed to them and that the borrowing company has no real prospect of recovery under the current management and circumstances, then they may recommend that a receiver be appointed to assume control of the business and its assets.
However, if the banks advisors feel that the bank is at risk of losing the money owed to them and that the borrowing company has no real prospect of recovery under the current management and circumstances, then they may recommend that a receiver be appointed to assume control of the business and its assets. .
The main goal of the receiver is to receive the assets of a company with the goal of recovering the funds owed to the creditor that appointed them. Once the receiver is appointed they assume full control over the company and in most cases will not heed the recommendations of the directors.
They have the ability to sell some or all of the assets if this course of action seems like it may provide the best outcome for the appointing creditor (the bank/lender). The business can be sold as a whole or partially, or the receiver may decide to continue trading whilst a company voluntary arrangement (CVA) or other deal is worked out.
The receiver may dismiss some or all of the company's directors and employees. However, they must also abide by the regulations of UK insolvency law, which states that employee contracts must be adopted within 2 weeks of appointment.
Finally, the receiver must investigate the conduct of the insolvent company's directors to ascertain whether there is evidence of wrongful or fraudulent trading, and a reports must be sent to the Department for Business, Enterprise and Regulatory Reform (DBERR).
Below are the pros and cons of a company entering into receivership, from the perspective of the insolvent company's directors:
Disadvantages of Receivership
Since receivership is a generally negative consequence of defaulting on a debt it makes sense that the disadvantages would be more significant than the advantages. Here are some of the most detrimental aspect of entering into receivership:
Advantages of Receivership
From the perspective of the directors of the company being put into receivership there aren't many true benefits, however there are a few relatively positive secondary results that can be considered somewhat advantageous:
Whether or not you'll be able to keep your company from being put into receivership will depend on how far along in the process you are, and how soon you take actions after becoming aware that your company is insolvent.
If you've already breached the terms of a secured debenture that contains a fixed or floating charge it is imperative to contact an insolvency practitioner as soon as possible to discuss the option of setting up a company voluntary arrangement (CVA) or initiating other informal negotiations.
In order to accurately determine whether it is too late to stop your company from going into receivership you'll need to discuss the particulars of your case with an insolvency practitioner. Call us today on 0800 644 6080 or send us an email for a free consultation.