What is Receivership in Relation to a Company?

BusinessLegal

  • Author Nick Wood
  • Published May 14, 2023
  • Word count 879

Receivership is a legal process that occurs when a company is unable to pay its debts, and a receiver is appointed to manage its assets and financial affairs. The receiver's primary objective is to recover as much money as possible for the company's creditors.

Receivership can happen in various situations, such as when a company is facing financial difficulties, is insolvent, or has defaulted on its debt payments. It can also happen when a court orders receivership due to legal disputes or breaches of fiduciary duties by the company's directors.

Types of Receivership

There are different types of receivership, depending on the circumstances that led to it. Some of the most common types are:

Administrative Receivership - This type of receivership occurs when a lender appoints a receiver to recover the money owed to them. This is usually done when the lender has a floating charge over the company's assets.

Law of Property Act (LPA) Receivership - This type of receivership is appointed under the Law of Property Act 1925. It usually happens when a lender has a fixed charge over a specific asset, such as a property or a piece of machinery.

Court Appointed Receivership - This type of receivership occurs when a court orders the appointment of a receiver due to a legal dispute or a breach of fiduciary duty by the company's directors.

How Receivers are Appointed

Receivers can be appointed by various parties, depending on the type of receivership.

In an administrative receivership, the lender appoints the receiver.

In an LPA receivership, the lender can appoint the receiver or ask the court to do so.

In a court-appointed receivership, the court appoints the receiver.

The receiver is usually a licensed insolvency practitioner or an accounting firm. Their role is to take control of the company's assets, such as its bank accounts, stock, and property, and manage them in the best interests of the creditors.

Implications of Receivership

Receivership can have significant implications for the company, its shareholders, and creditors. Some of the most notable ones are:

Loss of Control - When a receiver is appointed, the company's directors lose control over its affairs. The receiver takes over the management of the company's assets and financial affairs, and the directors can no longer make decisions about them.

Job Losses - Receivership can lead to job losses, as the receiver may need to sell some of the company's assets to repay the creditors. This can result in redundancies and the closure of some or all of the company's operations.

Impact on Creditors - Receivership can affect the company's

Impact on Creditors - Receivership can affect the company's creditors, particularly if the company is insolvent. In such cases, the receiver will sell the company's assets to repay the creditors, but they may not receive the full amount owed to them.

Effect on Shareholders - Shareholders may also be impacted by receivership. If the company is insolvent, they may lose their investment entirely, as the assets may not be enough to repay all creditors. Even if the company is not insolvent, the value of their shares may decline due to the negative impact on the company's reputation and future prospects.

Opportunity for Reorganization - While receivership can be a difficult and challenging process, it can also provide an opportunity for the company to reorganize and restructure. By selling off assets, reducing costs, and focusing on profitable areas of the business, the company may be able to emerge from receivership as a stronger and more viable entity.

FAQs

Can a company continue to operate during receivership?

Yes, a company can continue to operate during receivership, but it will be under the control of the receiver. The receiver may decide to sell parts of the business or close it entirely, depending on the circumstances.

Can a company avoid receivership?

Yes, a company can avoid receivership by taking proactive steps to address its financial difficulties. This may include negotiating with creditors, selling assets, reducing costs, and seeking professional advice.

What happens to the company's debts during receivership?

The company's debts continue to exist during receivership, and the receiver's primary objective is to repay them to the extent possible. However, some debts may be written off if they are not recoverable.

Can a receiver be removed once appointed?

Yes, a receiver can be removed if there is sufficient reason to do so. This may happen if the receiver is not performing their duties correctly or is not acting in the best interests of the company's stakeholders.

Conclusion

Receivership is a legal process that occurs when a company is unable to pay its debts, and a receiver is appointed to manage its assets and financial affairs. There are different types of receivership, depending on the circumstances that led to it, and receivers can be appointed by various parties.

Receivership can have significant implications for the company, its shareholders, and creditors, including loss of control, job losses, impact on creditors, and effect on shareholders. However, it can also provide an opportunity for reorganization and restructuring.

If your company is facing financial difficulties or is at risk of receivership, seeking professional advice from a licensed insolvency practitioner or an accounting firm can help you understand your options and make informed decisions about the future of your business.

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