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Receivership
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How to Stop Your Company From Going into Administrative Receivership
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 If you don't feel like reading all of the information below and you have a question about receivership, administration, or any other insolvency issue, feel free to ask one of our experts. You can also reach our free directors support line.
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What is Receivership?
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.
How Does Administrative Receivership Happen?
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:
- Appoint advisors to ascertain what the best course of action would be going forward (receivership or administration is not always the wisest option). These are known as independent bank reviews.
- Appoint a receiver to assume control of the company's assets
How Does the Debenture Holder Decide to Appoint a Receiver?
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:
- The bank/lender may request that the borrowing company submit regular reports or even a comprehensive revised business plan that contains details about how the company plans to repay the amount owed. This plan may need to include cash flow forecasts, and as such many struggling companies will need the assistance of an accountant or insolvency practitioner to comply with such a request.
- The debenture holder may also require additional security in the form of personal guarantees from the directors. If these personal guarantees are defaulted on then the bank would be able to hold the directors personally liable for the debt in an insolvency proceeding.
- Along with increasing security on the loan, the bank/lender may request a reduction in exposure (a lessening of the amount being borrowed) by requesting that the directors/shareholders contribute additional capital to the account.
- If the borrowing company has clients that owe money on outstanding invoices, and those clients have a reliable history of paying on time and in full, then the bank/lender may recommend that the company considering invoice discounting and factoring or other forms of asset-based financing.
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.
What is the Role of the Appointed Administrator?
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).
The Advantages and Disadvantages of Receivership
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:
- It is rare for a company that has entered into receivership to come out intact without any significant changes made to it.
- Some or all of the assets may be sold at discounted prices.
- Most cases end in liquidation and dissolution.
- The directors and employees will probably lose their jobs, and any money owed to them will be difficult if not impossible to recover, as any funds raised during the sale of the company's assets must first be distributed amongst creditors before any leftover amount is appropriately distributed up amongst members/shareholders.
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:
- The appointed receiver may be able to bring about a recovery through their expertise of business management. Although recovery is not always the outcome (liquidation is more common), if the receiver feels that continuing the business as a going concern will the best outcome for creditors then they may elect to do so.
- Since the receiver will be assuming control of the insolvent company, their appointment actually reduces the likelihood that directors will be accused of wrongful or fraudulent trading, since the company will no longer be under the guidance of the directors. The longer a business is operated whilst insolvent the higher chance there is for the directors to be accused of some form of misconduct, especially if the company is in debt with no prospect of recovery.
- The receiver may be able to raise the funds needed to repay preferential creditors.
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Is it Possible to Stop Your Company from Entering Into Receivership?
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 or send us an email for a free consultation.
Further Reading on Receivership
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