Receivership is one of the most severe threats any limited company can face.
This legal process is put in place to protect a company so that secured creditors can recoup their money.
It is formally known as administrative receivership, and it involves a receiver appointed by a floating charge holder such as a bank or other lender.
The receiver will then ‘receive’ any assets of the company it can liquidate to pay back the lender.
This process can assist creditors in recovering funds in default and help troubled businesses avoid bankruptcy.
A receivership could also occur during a shareholder dispute, for example, to complete a project or sell a business.
Why would my limited company go into receivership?
There are several reasons why your limited company could go into receivership.
Perhaps your company requires finance for its activities, and you borrow funds from a bank or other secured lender.
Your lender will require security in return for providing the loan, and the company will typically sign a debenture with a fixed and floating charge. This, in turn, gives the bank security over the company’s assets.
If the terms of your agreement are breached, or your company does not adhere to the lender’s wishes, the charge holder can take the following steps:
- Bring in investigating accountants to work out how secure the bank’s debt is and outline the best route forward (this is not always receivership).
- Ask for formal repayment of the loans without giving notice.
- Appoint a receiver who will administer and receive the business’s assets.
This receiver will collect the bank’s debts only. Therefore, they will not be concerned generally with the other unsecured creditors or shareholders’ exposure.
What is the difference between a receiver and a liquidator?
The purpose of receivership and liquidation are similar processes in that they seek to recover monies for creditors from a limited company.
Liquidators will work on behalf of creditors as a whole, while a receiver’s primary responsibility is to a specific secured creditor.
In the latter scenario, the creditor is typically a bank (also known as the charge holder). They will hold security on a business’ property by way of a debenture and will have decided to take action to recover their money by calling in (or ‘receiving’) the secured asset.
Under the Law of Property Act (LPA) 1925 – and whether or not the company is formally insolvent – once appointed, the receiver can liquidate the property purely based on the secured loan default.
What is the difference between limited company receivership and administration?
Receivership is a more threatening scenario than company administration as a company director.
Administration offers you more breathing space, during which time an experienced Insolvency Practitioner can assess your limited company’s situation to weigh up the options and opportunities available.
Receivers, meanwhile, have a dedicated focus to recover money for a secured creditor. As they hold the power to sell assets, this means businesses will more often than not end up going through the liquidation process once the receiver has finished.
How is a receiver appointed?
The fixed charge holder appoints a receiver to protect and potentially sell the secured asset to repay their outstanding debt.
Once a receiver has been appointed, they then will act in the creditor’s best interests (the bank) to get back the money it is owed.
The duties and powers of a receiver are usually set out in express provisions in the security document.
One feature of receivership to note is the speed of an appointment.
This benefits the lender but can cause massive disruption to the limited company concerned when the receiver arrives to secure the property.
If more than one creditor holds a charge against the company, then repayment priority will be dictated by the level of the securities.
What rights does a receiver have?
The receiver’s rights will depend primarily on whether the lender has added any supplementary powers into their contract.
If they haven’t added any supplementary powers, then the receiver’s rights are documented in the Law of Property Act and may include the rights to:
- collect rental income from a property
- keep the property insured
- take possession of a property
- put a property up for sale
- grant or surrender leases
Can I stop limited company receivership?
In most cases, receivership will result in the closure of your limited company to repay its secured debts.
It is possible that the value of your company’s assets will be sufficient to cover the level of debts owed, and you can continue to operate after the receivership. However, you should note that this is the exception rather than the rule.
Often, the lender involved may strip out assets to secure their debts and leave the empty shell of the limited company – including employee redundancies – for you, the director, to resolve.
What are the advantages of limited company receivership?
Having a receiver in control means they have the power to act and could save your business.
One benefit of entering receivership is that it allows your limited company to pay off a debt to a secured creditor and remove liability from your balance sheet.
The bank can ensure that its exposure is (at least) not increased and will hopefully subsequently recover all of its money.
As a director of a limited company, being in receivership also mitigates the risk of wrongful trading. And preferential creditors may see all their debts repaid by the receiver.
What are the disadvantages of receivership?
Receivership is regarded as a negative process because the receiver will forcibly sell assets and often restricts the directors’ powers. It also sends a negative message to clients, staff, and suppliers.
A company will rarely be saved in its current form when going through receivership. Its assets will usually be sold at a knock-down price), and jobs and economic activity can be lost.
Directors will typically lose their jobs, along with any monies due to them, and the company may cease to trade altogether. The directors’ conduct is also likely to be investigated and scrutinised.
From a creditors’ perspective, it is unlikely unsecured creditors will receive any of their money back, and often they will be losing a valuable customer.
It may be possible to avoid receivership by placing your business into administration. Contact the Future Strategy team today if you want to know more about company administration.
Our initial consultation is FREE. Here we will assess the viability of the business and offer advice on appropriate strategies. We will also advise on the solution options available concerning your specific situation and requirements. These solutions are wide-ranging, cost-effective, and flexible.