Restructuring & Insolvency

Receivership

A company is placed into receivership when an independent and suitably qualified person (the receiver) is appointed by a secured creditor, or in special circumstances by the Court, to take control of some or all of the company’s assets, whichever are subject to the security of the secured creditor.

The security interest held by the secured creditor, under which the appointment of a receiver is made, may comprise:

  • a non-circulating security interest (e.g. a security interest in land, plant and equipment); and/or
  • a circulating security interest in assets that are used and disposed of in the course of normal trading operations (e.g. a security interest in debtors, cash and stock).

The difference between a receiver and a receiver and manager is that a receiver and manager’s powers include the management of the business. The powers granted under the appointment are set out in the security agreement and the Corporations Act 2001 (the Act).

It is possible for a company in receivership to also be in provisional liquidation, liquidation, voluntary administration or subject to a deed of company arrangement.

The following article will go into further detail about the receivership process and how it impacts on directors and the company.

Directors’ powers and duties during a receivership
The directors’ powers and duties continue during receivership.

A receivership does not affect the legal existence of the company. The directors continue to hold office, but their powers over assets depend on the powers of the receiver and the extent of the assets over which the receiver is appointed.

Control of the assets which the receiver is appointed over is taken away from directors. This may, and often does, include the company’s business.

Directors must provide the receiver with a report about the company’s affairs and must allow the receiver access to books and records relating to the collateral he was appointed over.

The receiver’s role
The receiver’s role is to:

  • collect and sell enough of the charged assets (collateral) to repay the debt owed to the secured creditor. This may include selling all of the company’s business;
  • pay out the money collected in the order required by law; and
  • report to ASIC any possible offences or other irregular matters they come

The receiver’s primary duty is to the secured creditor that appointed them.

The main duty owed to unsecured creditors is an obligation to take reasonable care to sell collateral for not less than its market value or, if there is no market value, the best price reasonably obtainable. This is a high standard, higher than that expected of a liquidator or administrator.

A receiver also has the same general duties as a company director.

The receiver has no obligation to report to unsecured creditors about the receivership, either by calling a meeting or in writing.

However, the receiver will usually write to all of the company’s suppliers to inform them of their appointment, advise them of the treatment of amounts owed to them at the time of the receiver’s appointment and possibly request the creation of new credit accounts.

Unsecured creditors are not entitled to see the receiver’s reports to the secured creditor.

Placing the company in liquidation or voluntary administration during a receivership
Directors and members will likely consider whether the company, once in receivership, should be placed in liquidation or voluntary administration. The answer to this question depends on the powers that the receiver or receiver and manager possess and what assets they have taken control of.

If the receiver controls a key income-producing asset – i.e. the entire business or key plant and equipment, then the following issues should be considered:

  • the company will inherently become insolvent, if it is not already, as there is little to no prospect that the company will be able to service any future debts;
  • if the company is left without assets to pay current creditors and employees, directors and members will likely have to answer incoming queries from creditors; and
  • legal action may be commenced or continued against the company despite the appointment of a

It follows that the directors or members should act quickly to consider liquidation or voluntary administration to avoid incurring debts that the company is unable to pay.

In the event that the receiver has not taken control of a key income-producing asset and ordinary business debts are able to be met, then the company may not require external administration.

Distributing funds in a receivership
The most common way a receiver will obtain money from the assets they are appointed over is to sell them. In the case of a company’s business, the receiver may continue to trade the business until they sell it as a going concern.

The money from the realisation of assets is distributed as follows:

  • money from the sale of non- circulating assets is paid to the secured creditor after the costs and fees of the receiver in collecting this money have been paid
  • money from the sale of circulating assets is paid out in the following order:
  1. the receiver’s costs and fees in collecting this money;
  2. certain priority claims, including employee entitlements (if the liability for these hasn’t been transferred to a new owner); then
  • repayment of the secured creditor’s

In both cases, any funds left over are paid to the company or to its liquidator or administrator, if one has been appointed.

If the receiver is appointed under a security interest comprising both non-circulating and circulating security interests (which is common), there will be costs and fees of the receivership that cannot be directly assigned to realising the non-circulating assets or circulating assets. Such costs are allocated in proportion to the dollar amount realised from the non-circulating assets and circulating assets.

If employee entitlements are to be paid by the receiver under a circulating security interest, the payments must be made in the following order:

  • outstanding wages and superannuation;
  • outstanding leave of absence (annual leave and long service); then
  • retrenchment

Each class of entitlement is paid in full before the next class is paid. If there are insufficient funds to pay a class in full, the available funds are paid on a pro rata basis (and the next class or classes will be paid nothing).

The receiver has no obligation to pay any other unsecured creditors for outstanding pre-appointment debts.

Pre-existing contracts in a receivership
The appointment of a receiver does not automatically terminate pre-receivership contracts with the company. However, the law surrounding the survival and obligations of contracts is complex and usually legal advice is sought to deal with such issues.

It is worth noting that it is possible for the contract to remain in place without the receiver taking personal liability for the company’s obligations under the contract.

Commencing legal action during a receivership
Legal action may be commenced or continued against the company despite the appointment of a receiver. This means that an unsecured creditor can apply to the Court to have the company put into liquidation on the basis of an unpaid debt.

Unsecured creditors may choose to commence legal proceedings if:

  • there is an expectation that there will be money or property left over after the secured creditor is repaid;
  • there are possible recoveries that may be available to a liquidator for the benefit of unsecured creditors, which are not available to a receiver;
  • there is a desire for a liquidator to investigate potential offences by those associated with the company; or
  • there is a desire for a liquidator to review the validity of the appointment of the receiver and of the security interest, and to monitor the progress of the

Can a liquidator remove a receiver?
If a liquidator is appointed over a company in receivership, they will review the validity of the security interest and of the appointment of the receiver. If they determine the receiver was not validly appointed, or the secured creditor had no right to appoint, then the liquidator can bring an application in Court to remove the receiver and possibly sue the receiver for trespass.

Ending a receivership
A receivership usually ends when the receiver has collected and sold all of the collateral or enough collateral to repay the secured creditor, completed all their receivership duties and paid their receivership liabilities. Generally, the receiver resigns or is discharged by the secured creditor.

Unless another external administrator has been appointed, control of the company and any remaining assets go back to the directors.

If your business is experiencing financial difficulty, contact us to arrange a free, no-obligation discussion to give you clarity on your position and options available.

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