If a company can’t pay its debts when they fall due, the members of the company have a number of options to avoid insolvent trading, which is an offence under the Corporations Act. One option can be to enter into voluntary administration or a deed of arrangement, which will allow the company to stay intact. Alternatively, the company can be voluntarily or involuntarily wound up through a Members’ Voluntary Winding Up or a Creditors’ voluntary winding up.
If you do not wish to totally and immediately wind up your company when facing insolvency, another option available is to go into what is known as receivership. Receivership occurs when a company is appointed a receiver by one or more of its secured creditors, for them to collect and sell the company’s assets in such a way as to repay the outstanding debts owed to secured creditors. This article outlines the important points to understand about receivership.
What is the Purpose of Receivership?
A company is in receivership when a secured creditor or the court appoints a receiver. The receiver takes control of the company’s assets, which are secured.
A secured creditor is a party that has security over a company’s assets, for example, a bank which provides a loan to the company. The receiver’s primary duty is to the secured creditor that appointed them, as opposed to administrators and liquidators who owe a duty to creditors in general.
Notwithstanding that a receiver has a primary duty to a secured creditor, they must ensure that they take reasonable care to sell charged property for not less than its market value or if there is no market value, the best price reasonably obtainable.
The Receiver’s Role
The company’s assets do not vest in the receiver upon their appointment. Rather, the assets remain the property of the company until they are realised.
The receiver’s role is:
- To collect and sell enough of the secured assets to repay the debt owed to the secured creditor (this may include selling particular assets of the company or the entire business of the company);
- To distribute monies collected; and
- To report to ASIC any possible offences of the directors or other irregular matters that they discover upon the investigations.
Some receivers have an additional role and power to manage the company’s affairs. Where this is the case, such receivers are known as receivers and managers.
Receivers will provide reports to the secured creditor. However, unsecured creditors are not entitled to see any such reports.
Receivers look to sell assets to obtain funds for distribution to the secured creditors. Where a receiver has the power to manage a business, they may continue to trade and sell the business as a going concern.
Any funds from the sale of a company’s assets must be distributed by the receiver as follows:
- The fees of the receiver are firstly paid;
- Funds from the sale of fixed charge assets paid to the secured creditor;
- Funds from the sale of floating charge assets are paid out in respect of priority claims, for example, employee entitlements and repayment of the secured creditor’s debt.
Any funds that are left over are paid to the company or its other external administrator if there is one.
Relationship With Administrators
There can be occasions where receivers need to work alongside external administrators appointed to the company.
If a receiver is appointed before the commencement of an administration, then the receivership continues. If an administrator is appointed before a receiver, a creditor cannot appoint a receiver without the administrator’s written consent or leave of the court. However, there are exceptions such as if the secured property includes the whole, or substantially the whole of the company’s assets.
An administrator cannot dispose of property subject to a charge unless the disposal is in the ordinary course of the company’s business, the secured creditor provides written consent or the court provides leave.
When entering voluntary administration, it’s important to be clear about your available options. Receivership is one way for you to avoid winding up your company and to repay secured creditors. If you require advice or assistance in respect of receivership, get in touch with our insolvency lawyers on 1300 544 755.