Receivership is a procedure that takes place when your business becomes insolvent, or unable to pay your debts. It is a form of external administration, meaning that someone from outside your business will attempt to wind up your business. It is important to properly understand what receivership is to mitigate the difficulties you may experience during insolvency. This article will explain the key concepts related to receivership and its impacts on your company.
Definition of ‘Receivership’ and ‘Receiver’
Your business goes into receivership when one or more of your secured creditors, appoint a receiver. A secured creditor is a creditor who is owed money by your company and to whom you have provided some sort of security to protect their position if you stop repaying your debt, or default.
The receiver will possess your company’s assets that are governed by the security agreement with the secured creditor. They must pay the debt you owe the secured creditor by collecting and selling these assets. Creditors may appoint a receiver for only one particular asset, or they may extend general control over your business’ property and affairs.
Importantly, a receiver’s primary duty is to the secured creditor(s) that appointed them. This is different to the individuals responsible for other insolvency procedures, such as administrators and liquidators. In those cases, they owe an equal duty to all creditors. However, a receiver only focuses on paying the secured creditor.
You should also be aware of the difference between a receiver and a managing controller, who exercise different powers. A receiver and manager or managing controller will have additional powers to manage your company’s assets. Throughout this article, we use the term ‘receiver’ as an umbrella term.
Role of a Receiver
The receiver has a duty to the secured creditor under the agreement which appoints them. In essence, once the receiver has been appointed, they must act in the creditor’s best interest and will collect and sell enough assets to do so.
In some instances, the receiver may determine that the best course of action is to sell your assets, or they may continue trading the company’s business without the need to sell. Nonetheless, the receiver has an obligation to make reports to the secured creditor regularly. The reports will outline the asset’s administration status and if you can likely repay the creditor. The receiver also should report any irregularities or concerns they come across to the Australian Investments and Securities Commission (ASIC).
If the receiver determines the best course of action is selling your assets to ensure the debt is repaid, they have an obligation to take all reasonable care in selling the property. This includes selling it for at least its market value. If there is no market value, the receiver should sell for the best price that is reasonably obtainable
Once selling the property, the receiver will pay the creditor either partially or in full. Once their duties end, they then retire.
Continue reading this article below the formHow Does Receivership Commence?
Receivership of incorporated businesses (companies) is regulated by the Corporations Act 2001 (‘Corporations Act’). Importantly, the Corporations Act applies to corporate receiverships.
A secured creditor will commence receivership when it appoints a receiver. The power to do so can be outlined in the contract between your company and the creditor. Most commonly, the right to appoint a receiver is enacted when you fail to make payment/repayment by the due date. Documents related to your financial assets, or security documents, will often require the secured creditor to notify you when you are unable to pay your debt. This gives you an opportunity to remedy the default before the creditor/s appoints a receiver.
Private Appointment of a Receiver
A private appointment usually occurs in response to concerns about your company’s solvency or financial position. The secured creditor must find a receiver who is prepared to act. They will then enter into a Deed of Appointment, and the receiver will also generally require a Deed of Indemnity to protect themselves. Once parties have executed the deeds, the receiver will start taking action immediately.
The secured creditor will generally appoint a receiver if an event or default included in your security agreement occurs. Types of security agreements include a general security agreement or debenture trust deed. Generally, these documents will require you to let the secured creditor appoint an investigating account if they wish. The investigating accountant will independently review your business and determine your financial position. In some circumstances, your financial position may be positive, and they may undertake a restructure so that you continue to comply with the security document. A receiver is appointed when this is not possible, and the secured creditor’s assets will be better realised by a receiver’s sale.
In some instances, the secured creditor may have concerns regarding your company’s management or the possibility of information being deliberately withheld. Whilst a receiver can be appointed to take over managing the company to protect the secured collateral, they cannot remove or replace directors. An administrator, however, can do so under the Corporations Act, and they may be appointed alongside the receiver.
Impact on the Company
Going into receivership can significantly impact your company and its members, as well as individuals associated with it. During receivership, your company maintains its powers as a separate legal entity. However, it does not have control over the assets which the receiver is collecting and selling. The receiver will usually continue business as they are empowered to do so. This continues until your company is either placed into liquidation or the creditor has been paid, and the receivership ends.
Director’s Obligations During Receivership
Generally, directors’ powers will remain for any assets that the secured creditor does not cover. If the receiver is appointed in respect of all of your company’s assets, the director/s technically retain their positions. However, they give up their powers to the receiver until the receivership ends.
The Corporations Act also gives directors additional obligations under receivership. This includes submitting a Report on Company Activities and Property (ROCAP) to the receiver within 10 business days of the receiver serving notice of their appointment. The ROCAP is a prescribed document that details all assets and liabilities of the company. You should ensure that you comply with this requirement, as you can face legal action if you do not provide a ROCAP to the receiver.
Impact of Receivership on Creditors
There may be surplus funds remaining after the receiver has paid your debt to the secured creditor. Unlike other insolvency processes, they cannot distribute these leftover funds.
Similarly, creditor contracts with your company do not automatically terminate after appointing a receiver. One exception is if your contract states that receivership gives rise to a termination right. In some instances, the receiver can enforce creditor contracts that existed pre-receivership, but it does not have an obligation to do so. If the receiver does not enforce the contract, your company will default on its contractual terms, leaving the creditor with a claim against your company for breach of contract.
Unlike liquidation or administration, creditors are able to commence or continue with enforcement action (including taking steps to wind up the company) when the company is in receivership.
Termination of Receivership
Once the secured creditor has been paid in full or all assets have been realised, the receiver will inform ASIC that the receivership has been finalised. The receiver then retires, usually by executing a Deed of Resignation. Finally, control of the company will return to the directors unless another external administrator has been appointed.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
Key Takeaways
Being insolvent can be a very stressful situation. Understanding what it means to be in receivership is therefore useful to helping you minimise the complexities of insolvency law. Receivership occurs when a secured creditor (lender) appoints a receiver to collect and sell your assets so that you can repay the debt you owe them. This does not affect how other creditors you may owe receive any remaining funds. Under receivership, your company can still operate, but you have limited control over your assets.
If you would like assistance regarding how to navigate going into receivership, contact our experienced insolvency lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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