What is administrative receivership?

 

When a company borrows money from a bank, they will usually be required to sign a debenture providing the bank with a charge over the freehold property and all other assets of the company, thus providing security for the loan.  If the company defaults on the terms of the loan, the bank can appoint an administrative receiver to ‘receive’ and liquidate (i.e. sell) the company assets in order to repay the loan.  They can do this regardless of whether the company is officially declared insolvent or not.

This process is called administrative receivership. Its purpose is to allow a creditor with security over a limited company’s property to recover its money. The administrative receiver must be a licensed insolvency practitioner, who will be primarily accountable to the charge holder that appointed them.

The administrative receiver will be able to seize and dispose of the company’s assets, either piece-by-piece, or by selling off the company’s business as a going concern (e.g. if it is a profitable trading business) in satisfaction of the debt owed.

The particular powers of the administrative receiver are set out in Part 3 of the Insolvency Act 1986 and under the Law of Property Act 1925.  Often the bank or other lender will want to extend the statutory powers of the insolvency practitioner in the security agreement with the borrowing company.

 

How does administrative receivership compare with other forms of company insolvency?

 

Many may not recognise the difference between receivership and liquidation of the company. Liquidators will act on behalf of a group of creditors collectively, whereas the administrative receiver will act in the interests of only the charge holder who appointed them.

It differs too from administration, in which an insolvency practitioner will again try to improve the position for all creditors, rather than only one and will at least consider rescuing the company if it proves possible.

In the case of all forced liquidations and all administrations, the insolvency practitioner is only appointed because the company is already insolvent. In the case of the appointment of an administrative receiver, it might just be a temporary cash-flow problem that has led to the default on the loan.

What are the consequences for a company?

 

Typically, if a company is in default on a loan, they are already in some financial difficulty. A receiver seizing and selling their assets will only make things worse, for both them and unsecured creditors, and in most cases will cause the company to cease operating.  If the tangible assets of a company are forcibly removed, a company may be left with supply and demand problems and significant staff redundancies.

This in turn can cause reputational damage for the company which will be difficult to recover from in full. That said, it may have its benefits.  Depending on how much is taken to satisfy the debt, a company may be able to continue operating, pay off its debtors and avoid bankruptcy and potential liability for the directors for wrongful trading. However, if not, then the control of the company will be returned to the directors, who may then need to make redundancies and shut the company down if it is no longer viable.

For further information on administrative receivership – whether it might help or hinder your business, and what alternatives may be available to you – please don’t hesitate to contact our commercial solicitor, David Cammack. Please call 07909 564799 or contact him by e-mail: [email protected]