The advantages and disadvantages of receivership

A creditor finds receivership beneficial, but a director facing it sees drawbacks. Directors lose control swiftly, a disadvantage. Yet, for creditors, it’s advantageous – quick liquidation of company assets and prompt distribution of proceeds.


What Are the Benefits and Drawbacks of Receivership?

When a company violates the terms of a debenture secured by a fixed or floating charge (established before September 2003), it could face administrative receivership, a formal insolvency procedure. 

In this scenario, the debenture holder (creditor) appoints a receiver to take full ownership and control of the company’s assets. The receiver’s task is to evaluate the company’s finances and operations, deciding on the best course of action to swiftly and efficiently recover the debt owed to the appointing debenture holder.


Advantages of Receivership

Directors view receivership with little advantage, losing control as the business is handed to the receiver appointed by the debenture holder

However, guidance from an Insolvency Practitioner can help minimise the risk of wrongful trading accusations.

Creditors, on the other hand, find receivership highly advantageous. It enables them to take control of secured assets, streamlining the debt recovery process.


Disadvantages of Receivership

1.The procedure kicks off swiftly and with little warning.

2.An Insolvency Practitioner appointed by the debenture holder takes control of the business, usually liquidating all assets at a discount to book value for quicker debt recovery.

3.The company stops trading, and the director loses their job, along with any prospect of receiving owed salary or monies.

4.The director’s conduct undergoes investigation for potential wrongful trading, malfeasance, etc.

For the debenture holder appointing the receiver, receivership is less favourable than other debt recovery methods. They have to cover any costs incurred by the receiver, and other creditors of the company may not recover owed monies, as the receiver is not obligated to settle their debts, only those of the appointing debenture holder.


Ways to Bypass Receivership as a Director

To prevent your company from entering receivership, secure funding for repayments or reach an agreement with the creditor on a workable repayment plan before breaching debenture terms.

    1. Company Voluntary Arrangement (CVA) – Firstly, explore a Company Voluntary Arrangement (CVA). An Insolvency Practitioner creates a proposal, negotiating new repayment terms with all creditors. It’s advisable to consider a CVA proactively, anticipating the need for rescheduled payments, rather than waiting for a breach. Some creditors may still agree to a CVA post-breach, finding it easier and more cost-effective than alternative actions.

    1. Pre-Pack Administration – If a CVA isn’t feasible and securing funds for debt relief isn’t an option, a pre-pack administration procedure may be considered. In this process, the company is sold, and the sale proceeds are utilised to settle debts. Administration serves as a final resort, allowing the business to be sold to a current member of the company’s Board of Directors. This effectively transfers ownership from one employee to another, maintaining control within the same group.

    1. Invoice Factoring and Asset Financing – An alternative is to enhance cash flow through invoice factoring, with support from an Insolvency Practitioner. They assess your books to identify potential assets for collateral and secure funding. By factoring invoices and employing asset financing strategies, the Insolvency Practitioner obtains a secured loan from a creditor on your behalf. This loan aids in repaying secured creditors, preventing your company from succumbing to receivership.

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If uncertain about the risk of receivership for your company, swift action is crucial. Contact us for a complimentary consultation, and we’ll assist in crafting a suitable plan to avert receivership and navigate the challenges of debt.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.