June 2020

Demystifying the Receivership Process

In this fourth and final instalment of the Demystifying Insolvency series, we focus on the receivership process.

A company goes into receivership when an independent and suitably qualified person (the receiver) is appointed by a secured creditor or the court and is tasked with taking control of some or all of the company’s assets in order to protect the interests of the appointing creditor.

In this article we will focus primarily on receiver appointments by secured creditors and seek to clarify the interactions between receivers and other types of external administrations.

Receivership often occurs at the same time as other insolvency appointments such as provisional liquidation, liquidation, voluntary administration or when a company is subject to a deed of company arrangement. For more information on these processes, see our previous articles here: Demystifying Liquidations, Demystifying Administrations and Demystifying safe harbour.

Importantly, entering into receivership does not always spell the end of a company. Often companies will trade successfully at the end of the receivership period.

Who is a secured creditor?

A secured creditor is someone who holds a security interest over some or all of the company’s assets, such as a mortgage (over a non-circulating asset such as real property) or a PPS registration (over a circulating asset such as debtors or stock).

The security interest provides the creditor with security for the debt owed by the company. In order for the secured creditor to have the power to appoint a receiver, or a receiver and manager, the security document needs to have been prepared in a way which allows for the appointment.

A secured creditor needs to be careful:

  1. when drafting the security documents to ensure that issues with appointment are minimised; and

  2. not to inadvertently waive its rights under the security document, for instance by lodging a proof of debt or voting at a creditor’s meeting in a manner that unintentionally surrenders its rights.

Purpose of Receivership

The main purpose of receivership is to allow a secured creditor to recover the debt owing to it by appointing a skilled and independent person to enter the business and realise assets that are subject to the security. In contrast to other insolvency processes, directors are able to remain in office during the course of a receivership, however their powers (in respect of the secured assets) are limited.

If a receiver is appointed with the power to manage the company’s affairs they then become a receiver and manager. The powers of the receiver and manager are found in the security document under which the receiver was appointed.

It is important to keep the distinction between ‘receiver’ and ‘receiver and manager’ in mind not only when drafting and entering into a security document but also, as the creditor, when choosing to enliven the provision in the security document which allows you to appoint a receiver.

In addition to the powers found in the security document, a receiver is also provided with specific powers under the Corporations Act 2001 (Act). Specifically, the receiver’s ‘power to do all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed’ comes from section 420 of the Act.

The receiver has a wide discretion when disposing of the charged property in the company. If another creditor also has an interest over charged goods it is necessary to remain informed about the actions of the receiver, and in some circumstances seek independent legal advice.

Interactions between receiver and other appointments

It is important to understand the interaction between receivership and other insolvency appointments.

Administration

Where a company is already in administration, the general rule is that securities are not enforceable whilst the administration exists.

There are, however, limited classes of secured creditors that can enforce their security in an administration, such as:

  1. creditors with security over perishable property;

  2. creditors with security over the whole (or substantially the whole) of the company’s property (who have 13 days from appointment of the administrator to make a decision about enforcing their security);

  3. secured creditors with the consent of the administrator; and

  4. secured creditors with leave of the court.

A receiver appointed before the company goes into administration is generally allowed to continue enforcing their security throughout the administration.

Liquidation

A liquidator does not have any power to disturb a secured creditor’s right to appoint a receiver once the winding up of a company has been commenced. Indeed, in certain circumstances a secured creditor may look to appoint a receiver over a major asset of a company in liquidation in order to preserve it whilst steps in the liquidation process take place.

If the security interest is over the whole (or substantially the whole) of the company’s property, the liquidator will have no recourse to those assets until the receivership has concluded. However, in some circumstances, having a liquidator appointed may be a useful way for another creditor to obtain information about the receivership that would otherwise be unknown, and also access company property out of the reach of the receiver.

If a liquidator is appointed to a company that already has a receiver appointed, the receivership will usually continue undisturbed. The commencement of winding up a company does not affect the receiver’s power to collect, hold and dispose of property that is the subject of a security or their power to continue trading the company incidentally to the beneficial disposal of the assets.

Obligations to creditors

Unlike administrators and liquidators, receivers have no obligation to report to unsecured creditors about the receivership and unsecured creditors are not entitled to see any report prepared by the receiver for the secured creditor who appointed them. The only obligation that a receiver has to an unsecured creditor (except employees) is to take reasonable care to sell any assets of the company for not less than market value, or the best price reasonably obtainable.

When non-circulating assets of the company are sold,  the receiver can apply the proceeds to pay the debts of any creditors secured by the asset (in order of priority), after the costs and fees of the receiver are paid.

When circulating assets of the company are sold, the proceeds are distributed first to the receiver’s costs and fees in collecting the money, then to priority claims and then to pay the secured creditor’s debt. The most common priority claim is employee entitlements There are specific rules that govern payments to employees, which are not covered in this article.

Continuing to trade with a receiver and manager

In most cases, a receiver and manager will continue to trade the company whilst the receiver investigates the affairs of the company and seeks to realise the relevant security. In this scenario, a receiver will usually communicate with the other creditors and ask them to advise if they wish to continue trading with the company.

It is important that the receiver’s directions to a creditor in respect of continuing to trade are followed. This is to ensure that the creditor begins trading with the receiver appointed for the company and does not simply continue to trade with the company itself.

Any debts arising from the receiver authorising the purchase of goods or services during a receivership are required to be paid from the realised assets. These form part of the costs of the receivership. The receiver will be personally liable for the shortfall between the amounts realised from assets and the costs of the receivership.

Conclusion of Receivership

A receivership will usually end when the receiver has:

  • collected and sold enough of the company’s collateral to satisfy the debt owing to the secured creditor that appointed them;

  • paid the liabilities incurred during the receivership; and

  • completed all other duties, such as reporting to ASIC any irregular matters or offences.

Following the receiver’s retirement, unless a liquidator or administrator has been appointed to the company, the company and any remaining assets is handed back to the directors.

Authors: Gavin Stuart & Emma Boyce

See related articles:

Demystifying safe harbour in the era of COVID-19

Demystifying the Administration Process

Demystifying the Liquidation Process