When a company is in financial difficulty, a secured creditor can place a company into receivership in an attempt to recover a debt owed to them. Receivership is just one form of external administration (i.e. insolvency arrangements). Below, we answer five FAQs about receivership including the impact on directors, the difference between a secured and unsecured creditor, and the role of the receiver. We will also look at the order in which a receiver will distribute any funds.
1. What is the Role of the Receiver?
A secured creditor of the debtor company appoints the receiver. Their role is to collect and sell the company’s assets to satisfy the debt owed to the secured creditor. This can include the physical assets of a company or an entire business. The receiver will only sell enough of the debtor company’s assets as is necessary to repay the debt owed to the secured creditor. The receiver’s duty is to the secured creditor and not the debtor company or other creditors.
2. How Does Receivership Impact Directors?
Company directors will continue to hold their positions during receivership. However, the extent of their powers to control the company will depend on the receiver’s power and the particular assets over which they are appointed. For example, a “charge” will generally exist over the company’s business. Once a company has been placed into receivership, control of that business will pass from the director(s) to the receiver. The director(s) of the company have an obligation to provide the receiver with access to the books and records of the company.
3. What’s the Difference Between a Secured and Unsecured Creditor?
A secured creditor has a charge or lien (i.e. a proprietary interest) over a debtor’s property. The secured creditor has the right to sell that property to satisfy the debt the company owes. For example, a bank lending money to a company may require a charge over that company’s assets, and as such, will be a secured creditor.
By comparison, an unsecured creditor is a person or institution who lends money or provides services without obtaining any security over the debtor’s property. As an unsecured creditor takes on considerable risk by not having a charge over a debtor’s property, it is common for them to require a higher rate of interest.
4. How Does the Receiver Distribute Funds?
Once a receiver sells the debtor company’s assets, they must distribute those funds, in the order determined by law. That order is ultimately determined by whether the asset being sold is secured by a fixed or a floating charge. The difference between a fixed and floating charge comes down to the debtor’s ability to dispose of the asset. For example, a fixed charge will be used to secure assets such as land, shares and equipment. A floating charge, on the other hand, will be used to secure current and future assets like stock.
Money raised from the sale of assets secured by a fixed charge will be distributed:
- Firstly, to the receiver in payment of his/her costs and fees associated with collecting that money; and
- Secondly, to secured creditors.
Money raised from the sale of assets secured by a floating charge will be distributed:
- Firstly, to the receiver in payment of his/her costs and fees associated with collecting that money;
- Secondly, to particular priority claims such as employee entitlements (including outstanding wages/superannuation, outstanding annual and long service leave, and any retrenchment pay, to be prioritised in this order); and
- Finally, to secured creditors.
Any remaining funds will be paid either to the company or any other external administrator (if applicable). Distribution is made to each class in full before the next class is paid. In circumstances where there are insufficient funds to pay a class in full, the funds will be distributed on a pro rata basis.
5. What About Unsecured Creditors?
A receiver is under no obligation to pay unsecured creditors. An unsecured creditor wishing to recover an outstanding debt will need to commence general debt recovery proceedings with the aim of having the debtor company placed into liquidation. An unsecured creditor can commence debt recovery proceedings while a receiver is appointed. There are several beneficial reasons to put a debtor company into liquidation concurrently with a receiver being appointed:
- You believe there will be sufficient assets remaining, after the sale and distribution of funds from charged assets, to satisfy the debtor company’s debt (either in whole or in part);
- A liquidator may be able to recover or realise funds that a receiver cannot;
- A liquidator has the power to investigate possible director offences;
- The liquidator can investigate the appointment of the receiver, review the charge, and watch over the progress of the receivership.
If you are an unsecured creditor of a company which is in receivership, and you have any questions about the available debt recovery options, get in touch with our disputes team on 1300 544 755.