What-is-Administrative-Receivership-in-Birmingham

How to Stop Your Company From Going into Administrative Receivership 

If your company has defaulted on a debenture created before 15 September 2003, there’s a risk of the bank appointing an administrative receiver to recover the owed money.

For defaults on debentures or loan agreements created on or after 15 September 2003, the bank cannot appoint an administrative receiver. However, they have the option to place your company into administration as an alternative.

 

What is Receivership?

Administrative receivership is a formal insolvency process where the holder of a floating charge (typically the bank) appoints a receiver to take control of a company to sell its assets or take action to recover the debt owed. If your company has a secured debt exceeding £750 and has not complied with a statutory payment demand or other payment request, it could be vulnerable to receivership.

This process is often confused with administration. However, the key difference is that while a receiver assumes full control of the company similar to an administrator in administration, their primary goal is not to rescue the company and enable it to continue as a going concern. Additionally, an administrative receiver works in the interests of the appointer (usually the bank) rather than the company’s creditors as a whole. 

It’s important to note that receivership has become less common than administration since the Enterprise Act 2002 implemented changes that restricted the ability to appoint a receiver for security created after 15 September 2003. Instead, secured creditors typically appoint an administrator, especially as most defaulted debentures are less than a decade old.

 

How Does Administrative Receivership Occur?

When a company requires funding, it may seek a loan from the bank. If the bank thinks security necessary to guard against potential losses in case of default, it may request the borrowing company to sign a debenture that includes a fixed or floating charge over the company’s assets.

If this debenture was signed before the mentioned date (15 September 2003), and the borrowing company fails to comply with the agreement’s terms or the debenture holder’s requests, the lender can either issue a formal statutory payment demand or:

  • Appoint advisors to assess the best course of action (receivership or administration may not always be the wisest option). These are known as independent bank reviews.
  • Assign a receiver to take control of the company’s assets.

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How Does the Debenture Holder Decide to Assign a Receiver?

When a company in debt begins to display signs of insolvency, such as cash flow issues, overdrafts, borrowing reaching its limit, and delayed payments, the lender or bank may instruct their accountants to investigate the company’s accounts to determine the best approach for recovering the outstanding amount. 

Before appointing a receiver, several preliminary actions may be taken:

    1. The bank may request the borrowing company to submit regular reports or a comprehensive revised business plan outlining how the company intends to repay the amount owed. This plan may need to include cash flow forecasts, often requiring the assistance of an accountant or insolvency practitioner for compliance.

    1. The debenture holder may seek additional security, such as personal guarantees from the directors. If these guarantees are defaulted on, the bank can hold the directors personally liable for the debt in an insolvency proceeding.

    1. In addition to increasing security on the loan, the bank may request a reduction in exposure by asking directors or shareholders to repay a portion of the borrowing to reduce the balance.

    1. If the borrowing company has clients with outstanding invoices and a reliable payment history, the bank may suggest exploring options like invoice discounting, factoring, or other forms of asset-based financing.

 

 

If these measures are not satisfactory, the bank may instruct its advisors to conduct a more thorough review to assess the company’s viability, stability, and prospects of recovery.

Typically, accountants may recommend the bank to continue debt collection and consider additional lending only if directors sign a personal guarantee secured by property. However, if the accountants believe the bank is at risk of losing the owed money, and the borrowing company has no real prospect of recovery under the current management and circumstances, they may recommend appointing a receiver to take control of the business and its assets.

 

What is the Role of an Administrative Receiver?

The primary objective of the administrative receiver is to take control of a company’s assets with the aim of recovering funds owed to the appointing creditor. Once appointed, the receiver assumes full control over the company and often disregards the recommendations of the directors.

The receiver has the authority to sell some or all of the assets if it appears to be the best option for the appointing creditor, typically a bank or lender. The business can be sold as a whole or in part, or the receiver may opt to continue trading while negotiating a company voluntary arrangement (CVA) or another deal.

The receiver may terminate some or all of the company’s directors and employees. However, they must adhere to the regulations of UK insolvency law, which stipulates that employee contracts must be adopted within 2 weeks of their appointment.

Finally, the receiver is obligated to investigate the conduct of the insolvent company’s directors to determine whether there is evidence of wrongful or fraudulent trading, and a corresponding report on the findings must be prepared.

 

The Advantages and Disadvantages of Receivership

Here are the advantages and disadvantages when a company goes into receivership, as seen from the viewpoint of the directors of the financially troubled company:

I. Advantages of Receivership

From the viewpoint of the directors when their company enters receivership, there aren’t many direct benefits. However, there are some potentially positive outcomes:

  • The receiver may secure funds to repay preferential creditors.
  • The appointed receiver, with their business management expertise, might bring about a recovery. Although not guaranteed (liquidation is more common), if the receiver sees continuing the business as the best outcome for the appointing creditor, they may choose to do so.
  • With the receiver in control, the likelihood of directors facing accusations of wrongful or fraudulent trading diminishes. Operating a business while insolvent increases the risk of misconduct allegations, especially if the company is in debt with no recovery prospects.
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II. Disadvantages of Receivership

As entering receivership is a generally negative outcome of failing to meet debt obligations, the drawbacks tend to outweigh the advantages. Here are some of the most significant disadvantages:

  • Assets may be sold at discounted prices, or all of them.
  • It’s uncommon for a company in receivership to emerge unchanged.
  • Most cases result in liquidation and the removal of the company.
  • Directors and employees are likely to face redundancy, and any money owed to directors becomes challenging, if not impossible, to recover. Funds raised from asset sales must first go to creditors, with any remaining amount then distributed among members/shareholders.

 

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Can Your Company Avoid Administrative Receivership?

Preventing your company from entering administrative receivership depends on the stage of the process and how quickly you respond upon realising insolvency.

If you’ve already breached the terms of a secured debenture with a fixed or floating charge, it’s crucial to contact an insolvency practitioner promptly. Discuss options like informal negotiations with creditors or entering a formal insolvency procedure.

To assess if it’s too late to halt receivership, consult a licensed insolvency practitioner. Contact us today for a free consultation by calling or emailing.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

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.