What is a receivership?
If a company is in financial difficulty, a secured creditor or the court may put the company into receivership.
Most often, a company goes into receivership when a receiver is appointed by a secured creditor who holds security over some or all of the company’s assets.
It is possible for a company in receivership also to be placed in provisional liquidation, liquidation or voluntary administration, or to be subject to a deed of company arrangement.
What is a secured creditor?
A secured creditor is someone who has a ‘charge’ (such as a mortgage) over some or all of the company’s assets to secure a debt owed by the company.
Lenders usually require a charge over company assets when they provide a loan.
The charge (or security) may comprise:
- a fixed charge over particular assets of the company (such as land, plant or equipment); or
- a floating charge over assets that are used and disposed of in the course of normal trading operations (such as debtors, cash and stock).
What is a receiver?
A receiver is an independent and suitably qualified person who is appointed either by a secured creditor or the court to take control of some or all of the company’s assets.
The powers of a receiver are set out in the charge documents and the Corporations Act 2001.
What is the receiver’s main role?
The receiver’s main role is to:
- collect and sell enough of the company’s charged assets to repay the debt owed to the secured creditor (this may include selling assets or the company’s business);
- pay out the money in the order required by law; and
- report any possible offences or other irregular matters to the Australian Securities and Investments Commission.
If a receiver (under the terms of their appointment) has the power to manage the company’s affairs, they are known as a receiver and manager.
How does a receiver distribute money?
A receiver will usually obtain money for distribution to a company’s secured and unsecured creditors through sale of its assets.
A receiver may continue to trade the business until it is sold as a going concern.
Money from the sale of fixed charge assets is paid to secured creditor after the receiver’s costs and fees for collecting the money are paid.
Money from the sale of floating charge assets must be paid out as follows:
- the receiver’s costs and fees;
- certain priority claims, including employee entitlements; and
- repayment of the secured creditor/s’ debt.
What is the receiver’s duty to unsecured creditors?
The receiver’s primary duty is to the company’s secured creditor.
However, the receiver also has a duty to unsecured creditors to take reasonable care to sell charged property for not less than its market value or, if there is no market value, for the best price that is reasonably obtainable.
The receiver also has the same general duties as a company creditor.
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.
Unsecured creditors are not entitled to see the receiver’s reports to the secured creditor/s.
Are you or your company facing an uncertain financial future? David Clout is a highly regarded expert in insolvency, an experienced negotiator and strategic thinker. As a registered Liquidator and Bankruptcy Trustee, he is qualified to accept a range of insolvency appointments. Call +61 7 3129 3316 to arrange a consultation.