Receivership involves the process of the appointment of a receiver who will gain control over the company and seize certain assets, sell them off, and repay debts with funds raised.
While no longer as common as it once was, due to the fact it only applies to companies that were incorporated prior to September 2000, receivership can be a huge red flag for a business, and in many cases will result in the company being forced to close. We explain what happens when a company goes into receivership and the processes involved.
What is the Meaning of Receivership?
Receivership, or administrative receivership as it is still known as, is a legal tool utilised by creditors to help recover funds owed to them. The process of receivership entails a receiver being appointed by the defaulting lender who then ‘receives’ company assets in order to liquidate to then in turn repay the lender.
A receivership is a court-approved method of debt repayment. Generally, a floating charge holder (a bank or lender) will apply to have a receiver appointed against a large debt, commonly property.
Receivership should not be confused with administration. While they may seem similar, the goal of administration being also to repay debts — but where administration will focus on attempting to turn the business around while also repaying the debt, a receiver has only one core focus, to liquidate assets and raise the funds necessary to pay off the debt.
During receivership the company continues to operate, but the directors have effectively conceded their administrative authority, meaning the receiver is the one ultimately making key decisions.
Why Might a Company Go into Receivership?
There are a variety of important reasons a receivership may be deemed to be the best solution. Generally it involves a company falling behind on the repayment of debts to the point that the bank begins to take a serious vested interest in recovering the money owed. Common reasons a company might go into receivership are:
- A company consistently ignores correspondence from their creditor regarding the repayment of a debt, to the point that they feel that they have no choice.
- Should the debtor come to some repayment agreement then not be able to meet these payments, it is possible for a receiver to be appointed.
The Rights of a Company Receiver
The rights of a company director are set out within the Law of Property Act. However it may be possible for the lender to supplement the receivers rights with additional provisions. Rights of a receiver may include:
- Taking possession of assets
- Selling or renting assets to raise funds
- Remove directors/employees
- Grant or terminate company leases
The Receivership Process in the UK
The receivership process in the UK has three stages — from the initial intervention once it’s deemed that too much time has passed without a debt being paid, to the official appointment of a receiver who will attempt to liquidate assets to pay arrears, and the conclusion of the receivership once the debt has been paid and the receiver stands down.
The process of receivership in the UK in more detail is as follows:
Step One: Intervention
Receivership will never be the first step of a creditor seeking repayment. Typically, receivership will only take place once various attempts to reach out and secure payments have been made and either failed or been ignored. It is often seen as a last resort for repayment.
Once the arrears have remained unpaid for a sufficient amount of time , the fixed charge holder will often contact the debtor to request increased security from directors/shareholders in the form of a personal guarantee. They may also request additional capital.
It is at this stage that the lender will assess the situation and determine the optimum method of debt repayment (receivership, administration, etc.), and will begin the process.
Step Two: Appointment
Should it be deemed that receivership is the correct choice, the fixed charge holder may seek out and appoint an independent licensed insolvency practitioner to act as receiver, to seize company assets and sell them in order to repay outstanding debts.
The role of a receiver upon appointment is to act with the best interest of the creditor and the repayment of debt at the forefront, regardless of the effect it may have on the business.
Step Three: Conclusion
Receivership will only come to a true end once the total sum of money owed is repaid to the creditor. If this cannot be achieved through the sale of company assets then alternative methods of repayment may need to be considered.
Once the amount has been repaid, the receiver will officially step back and stand down from all business operations, allowing the debtor to take stock and assess what its options are for the future.
It is common for a company entered into receivership to be forced to enter into liquidation and close upon the conclusion of the process due to insufficient funds and assets to continue operations while also paying off the total debt in full.
Can a Receivership be Stopped?
It is possible to stop a receivership. However, it is difficult and uncommon. The only way to stop a receivership is to completely pay off all of the debt before the date of the receivership. It could also be possible to attempt to negotiate with your lender to find new terms/give more time to repay the debt.
However, because receivership is often a final straw in the process of getting a debt repaid it may be difficult to convince a debtor to negotiate.
What is the Difference Between Administration and Receivership?
From a company perspective, the differences between administration and receivership are stark. There are relatively few benefits to receivership compared to administration. The way receivership is conducted can often lead to assets being sold on quickly, at a reduced price in order to recoup debts as quickly as possible, leaving debtors in a tricky situation once the dust settles.
The aftermath of receivership will often be for a company to either close down entirely, or at the very least it may need to restructure to survive. It is also possible following a receivership for directors to be investigated for how they allowed the situation to get to that point. While it is possible that the business and directors may come through receivership unscathed, it is not the goal of the operation and therefore can be seen as relatively unlikely.
Conversely, administration does represent more hope for a company. While the aim of administration is also to repay all debts, returning the business to profitability is also considered a main goal.
In administration, the administrator takes total control over operations (much like a receiver), however instead of seizing and liquidating assets as quickly as possible, they will create a recovery plan detailing to all parties how they intend to pay debts and maintain the long-term viability of the business.
For example, an administrator may opt to recommend a method of business recovery, such as company voluntary arrangement.
Expert Receivership Assistance from Inquesta
Entering into receivership is one of the most stressful things that can happen to a business owner. It likely means that the company finances are in a bad way, and the future may not seem hopeful.
If you are concerned about the potential threat of receivership, or are seeking clarification on just what happens when a company goes into receivership, Inquesta are perfectly placed to help.
We boast a dedicated team of expert advisors who have dealt with all manner of legal matters relating to business recovery and insolvency. We know exactly what receivership can do to a business, and can advise you accordingly.
For more information about how Inquesta can help your business’s current operation, as well as secure its future, book a free consultation or contact our team today.