Companies which are struggling with their cashflow and business debts have a range of options available to them to remedy their financial situation, including insolvency solutions.

The main insolvency solution used by directors is to appoint an insolvency practitioner to place their company into a Creditors’ Voluntary Liquidation (CVL). Other options include administration or a Company Voluntary Arrangement (CVA). 

Sometimes the decision is taken out of the hands of directors by creditors of the company who aren’t optimistic about their chances of recovering their money. If these creditors hold a floating charge, they can initiate a receivership. This can see a company’s assets equal to the remaining value of an outstanding loan being seized in lieu of payment.

In this article, Clarke Bell will discuss the process of receivership, how it works, and what it can mean for your company.

What is receivership?

Receivership, also known as administrative receivership, is a process initiated by a company’s outstanding creditors as a means of receiving alternative forms of payment. The process can be initiated by any creditor who is holding a floating charge over the company in question. This floating charge holder will appoint a receiver, who will repossess assets of equal value to the remaining loan amount. These assets will be liquidated, and the proceeds will be transferred to the lender who initiated the administrative receivership. At this point, the loan will be considered repaid.

Although they share a similar name, administrative receivership and company administration are two very different processes. Company administration is usually initiated by a company’s directors. It typically has the objective of bringing the company back to profitability through restructuring or the implementation of a new business plan. In some cases, administration will see a company sold or even liquidated to retain as much value as possible. This is very different from receivership, as this does not share the same goals.

What is a floating charge?

A floating charge is a type of lien (i.e. a legal claim against property which can be used as collateral to repay a debt) placed on the assets of a company. Unlike a fixed charge, a floating charge is flexible, being applied to assets that can change in value, quantity, or condition. For example, if a company were to stock a range of car parts, placing a fixed charge on each wouldn’t make sense. The quantity will change as stock is sold or replenished, and the condition of the parts will vary over time. As such, a floating charge is placed on the assets as a whole, which acts as a form of protection against any fluctuations. This means that, in the context of a receivership, the amount of assets seized as repayment will often vary from case to case.

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How does receivership work?

In the event a company has outstanding creditors with floating charges over its assets, a receivership may occur if the company cannot make repayments. However, this is not typically the first course of action. Before the point where the seizure of assets is necessary, creditors will typically exhaust other avenues first. For example, a creditor may ask directors to reduce their exposure, request additional money to be raised from investors, or request additional forms of security. If the creditor is still dissatisfied with the company’s direction, they may choose to have an accountant examine the company’s financial state.

The main factor this accountant will look for is viability. If the company is viable, the creditor may suggest restructuring or a new business plan to the directors. If not, or if the creditor is particularly vulnerable to losing their money, they may instead opt to appoint a receiver. When this is the case, the creditor will usually ask directors to request the appointment of a receiver. A receivership will then occur, with company assets of equal value to the outstanding loan being liquidated to raise enough money to make repayments.

When is receivership applicable?

A creditor (with a floating charge) can decide upon receivership if they want to quickly force an at-risk company to make repayments through the sale of some of its assets; or if the company breaks the terms of its loan agreement.

What can a receiver do?

Once appointed, a receiver has a range of powers that it can exercise over a company. To begin with, the receiver will be responsible for investigating the company and its accounts. This investigation aims to ascertain the viability of the company and whether it has a long-term future. Depending on the results, the receiver will allow the company to continue trading as normal, recommend new business plans, or sell off some assets.

To achieve the goals identified, a receiver can exercise considerable influence over the operation of the company. Naturally, the receiver has the power to sell off assets and repay creditors, but it doesn’t end there. A receiver can also dismiss directors and employees should they deem it necessary, and completely ignore the preferences of the company’s directors. In essence, once appointed, the receiver assumes control over the company.

Though they have significant influence over a company, receivers are bound in certain ways. While they can pursue almost any action – provided it results in their goal of repaying creditors – they must uphold certain obligations. Most notably, a receiver must investigate the conduct of the company’s directors and report their findings to the Department for Business, Energy and Industrial Strategy (DBEIS). Should evidence of misconduct be found, the DBEIS will take the matter seriously, and directors could potentially face penalties.

Clarke Bell can help you 

If your company is struggling with financial problems and cannot pay its debts, we can help you determine the best way to deal with the situation.

For more than 28 year, we have been helping company directors to find the best path forward, whether it be a Creditor’s Voluntary Liquidation (CVL), business rescue plan, or another option. 

Contact us today for a free, no-obligation consultation and find out exactly what we can do for you.