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Receivership: Advantages and Disadvantages
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The advantages and disadvantages of receivership
For a creditor, receivership has many advantages, whereas for a director subject to this process, it can be seen to have many disadvantages. The disadvantages for directors is that control over their company is lost almost immediately; however, this is an advantageous process for creditors who can quickly have company assets liquidated and see proceeds distributed.
What Are the Advantages and Disadvantages of Receivership
If a company breaches the terms of a debenture that is secured by a fixed or floating charge (created before September 2003), they may be subject to a formal insolvency procedure known as administrative receivership. During this process the debenture holder (creditor) appoints a receiver to assume complete ownership and control over the company’s assets. The job of the receiver is to assess the company’s finances and operations, and then determine the most suitable course of action to recover the debt owed to the appointing debenture holder as quickly and efficiently as possible.
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Advantages of Receivership
From the perspective of a director receivership offers almost no advantages, as control of the company is lost and the business is essentially handed over to the receiver appointed by the debenture holder. However, with the help of advice from an Insolvency Practitioner the procedure you can minimise the risk of being accused of wrongful trading.
From the perspective of a creditor receivership is highly advantageous because it allows them to take control of secured assets and facilitates the process of recovering debts owed.
Corporate Restructuring Options
When a company is in difficulty, sometimes a process of financial and/or operational restructuring is needed. From CVAs through to Administration, there are a range of rescue and recovery options to help you get back on track.
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Disadvantages of Receivership
- The procedure can begin rapidly and without much warning.
- The business is handed over to the Insolvency Practitioner appointed by the debenture holder and in most cases all of the assets are liquidated and are often sold at a discount to book value to speed up the debt recovery process
- The company ceases to trade and the director loses their job as well as any prospect of receiving salary or monies owed to them by the company.
- The conduct of the director is investigated to determine whether they’re guilty of wrongful trading, Misfeasance, etc.
For the appointing debenture holder receivership is less advantageous than other methods used to recover debts because they have to underwrite any costs incurred by the receiver. In addition, the company’s other creditors often never recover the monies due to them because the receiver is not obliged to recover their debts, only the debt of the appointing debenture holder.
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Ways to Avoid Receivership as a Director
The best way to keep your company from falling under receivership is to either secure funding that will allow you to make repayments, or come to an agreement with the creditor regarding a viable repayment plan before violating the terms of your debenture.
- Company Voluntary Arrangement (CVA) - The first option considered should be a company voluntary arrangement (CVA), during which an Insolvency Practitioner drafts and submits a proposal that will negotiate new repayment terms with all creditors. Ideally, you should anticipate the need to negotiate rescheduled payments and pursue a CVA before breaching the terms of any creditor agreements. However, some creditors are willing to agree to a CVA even after the terms have been breached simply because it is easier and cheaper than taking action.
- Invoice Factoring and Asset Financing - Another option is to improve cash flow by using invoice factoring, an Insolvency Practitioner can assist you by examining your books and determining whether you have any existing or prospective assets that could be used as collateral to obtain funding. After factoring your invoices and examining your books the IP will use asset financing tactics to obtain a secured loan from a creditor on your behalf. This loan can be used to make repayments to secured creditors and keep your company from falling victim to receivership.
- Pre-Pack Administration - If a CVA is not possible and there is no way to obtain funding to provide debt relief then a pre-pack administration procedure may be considered, during which the company is sold and the proceeds of the sale are used to repay debts. Administration is a preferred last-chance solution because the business can be sold to a member of the company’s existing Board of Directors, effectively transferring ownership from one employee to another and keeping the company within the control of the same group.
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If you’re unsure about whether your company is in danger of receivership, acting quickly is absolutely essential. Call us for a free consultation and we’ll help you devise a suitable course of action to avoid receivership and recover from the burdens of debt.
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