Administrative Receivers

Background

A company may grant a fixed and floating charge over all of its assets. This is sometimes called a debenture. This type of security allows the lender to take control of the company, lock stock and barrel upon enforcement by the appointment of an administrative receiver. This type of receiver is different and much more extensive than a fixed charge receiver as described in this guide. The administrative receiver runs the entire business as opposed to managing the secured property only.

The position of an administrative receiver is broadly the same as a company receiver under a fixed and floating charge in Ireland. The principal difference is that the role and duties of an administrative receiver are regulated by legislation, which has no direct Irish equivalent.

The law on administrative receivers was changed fundamentally in September 2003. In the case of floating charges / debenture deeds signed after that date, it is not possible to appoint an administrative receiver. Instead, an administrator may be appointed. The law was changed because it was perceived that receiverships were unfair on unsecured non-preferential creditors and did not give sufficient opportunity to try to rescue the company.

In the case of the charges signed after 15th September 2003, a floating charge holder can appoint an administrator only. See our chapters on administrators. An administrator has wider duties than a receiver. He must consider whether the company can be rescued or whether some alternative realisation proposal can be implemented, which is better than liquidation.

The 2003 changes give the general unsecured creditors a share of the proceeds of the floating charge assets. A floating charge does not take priority over certain payments due to employees and certain pension contributions. A floating charge given within 12 months before insolvency, can be set aside in certain circumstances.

Crystallisation

When a floating charge is enforced, it “crystallises” on all the assets within the wording of the floating charge at that time. The borrower would have been entitled to use and transfer the circulating assets in the course of its business prior to the crystallisation. At that point, the charge fixes on the assets and becomes a fixed charge on those assets. Generally, the following events cause crystallisation to take place;

company enters liquidation;
receiver appointed by another charge holder;
borrower company defaults on payments;
borrower company defaults on loan terms;
another creditor enforces security;
a material adverse change takes place.

In some cases, crystallisation is automatic. In other cases, a demand followed by the appointment of a receiver crystallizes the charge on the assets. The wording of the mortgage debenture determines the position.

Because of the disadvantages of a floating charge, some mortgage debentures attempt to create fixed charges on book debts. This is because accounts receivable frequently comprise one of the company’s most valuable assets. There are practical difficulties in creating a fixed charge on debts. Some attempts to create fixed charges fail, because the borrower is allowed control over the bank account. If the borrower can deal with the account without the lender’s consent, it is likely to be labeled a floating charge and treated accordingly.

An administrative receiver must be an insolvency practitioner. This is different to the position of a fixed charge receiver. A receiver may be both a fixed and floating charge receiver.

A receiver may be appointed over part or one of the company’s businesses as opposed to all of the company’s assets and businesses. An “administrative receiver” is receiver of the whole or substantially the whole of the company’s assets.

Appointment

Generally, the lender will make a demand for payment. The receiver is then appointed in writing, if the demand is not complied with. The form of appointment is not laid down by law. Generally, the insolvency practitioner will require an indemnity in relation to possible liabilities.

There is legislation which protects a receiver against defects in his appointment. Although this gives some protection, this will not assist if the debenture deed itself is invalid. A receiver may be sued for acting without legal authority. For example, a liquidator may seek to attack the appointment of a receiver under a floating charge which is invalidated by reason of being made within 12 months of insolvency, without new consideration.

Agent of Mortgagor

An administrative receiver, like a fixed charge receiver, is deemed an agent of the company. This puts the receiver at arms length from the lender. The receiver will usually have full control of the company’s business under the terms of the debenture and the appointment as agent. The borrower cannot dismiss the receiver and has no control over him. The principal effect of the receiver being the agent of the borrower, is that the borrower company is responsible for his acts and the lender is not responsible.

The directors of the company do not necessarily cease to act, but the scope of their responsibility is greatly limited. The directors’ powers may remain in respect of assets outside the receivership.

Effect of Appointment

The appointment of an administrative receiver has following consequences:

usually crystallises all other floating charges;
prevents an administrator being appointed;
generally does not terminate employment contracts;
suspends directors’ powers.

The administrative receiver has powers:

to collect the company property;
take possession of the company’s assets;
undertake legal proceedings where necessary;
sell the company’s assets;
borrow money and grant security;
retain a solicitor or accountant or other agents;
appoint agents and contractors;
realise the assets;
carry on the business, if necessary;
establish subsidiaries; and
reorganise companies.

Position of Receiver

The receiver may sell company assets, prior to the company going into liquidation either as agent of the company under the power of attorney in the debenture or as mortgagee in possession. Selling as mortgagee in possession overrides lower ranking security holders and gives the purchaser title free from them. The receiver must account for any surplus proceeds (if any) to the lower ranking security holders.

A receiver may be personally liable for his actions. The receiver is entitled to an indemnity out of the company’s assets. Receivers generally attempt to exclude personal liability in contracts that they sign. The company remains liable for the receiver’s acts but outsiders may not be satisfied with the company as a party to a contract (e.g. on a debt).

The receiver is not personally liable, where he acts as agent of the company. If the company is placed in liquidation, the administrative receiver is no longer the agent of the company. He can only sell assets as mortgagee after that point in time.

In a receivership, other creditors may continue to enforce their rights against the company e.g. by repossession, forfeiture etc. (unlike the case with a liquidation). A receiver is not liable if he repudiates and does not perform contracts which had been entered by the company. This leaves the company liable for the breach, but this may be of little relevance if the company is insolvent.

A company is bound by property rights of third parties. If, for example, the company has contracted to sell assets prior to the receivership (other than in breach of the debenture), the receiver must perform the contract. The borrower would usually have had authority to sell floating charge assets. This would not apply if the asset was subject to the fixed charge and the proposed sale did not have the chargeholder’s consent.

Employees

The appointment of a receiver does not automatically terminate employment contracts. The receiver may dismiss employees and /or retain those crucial to the business. There is no obligation on the receiver to keep employees on. A receiver is liable where he adopts an employee’s contract. This liability is limited to payment for work actually carried out during the receivership. These charges will be added as a cost of the receivership. There is no liability to employees during the first 14 days.

A receiver who does not terminate an employee’s employment within 14 days may be personally liable for services rendered after the contract is deemed adopted. A receiver is entitled to an indemnity out of the charged assets for this liability which will rank as an expense of the receivership and be paid ahead of the preferential creditors and the debenture holder.

In the case of an LPA receiver, he may be personally liable where, for example he continues to employ hotel employees. Employees have priority for four-months pay with an aggregate maximum of £800.

Other Creditors

Certain creditors may have priority over the receiver. A landlord with rental arrears is allowed recover from the property directly by taking goods under a particular procedure.

Persons enforcing court orders may only keep assets taken from the company under a completed execution. Owners under leasing and hire purchase arrangements can normally retake their goods. Likewise goods to which title has been retained by the seller,may be taken by the sellers.

Suppliers of utilities such as gas and electricity cannot make payment of existing liability, a condition for continued supply to the company in receivership. They may only require receiver’s personal liability for new supply.

Duties of Receiver

The administrative receiver’s function is, if possible, to realise enough of the assets to pay off the lender. This may involve running the business for a time. It may involve the sale of certain fixed assets to pay off capital and interest or it may involve the sale of the company as a going concern.

A receiver’s primary duty is to the debenture holder who appointed him. There is a secondary duty to the company and other parties who are interested in the proceeds of sale. No duty is owed to the directors or shareholders of the company nor to unsecured creditors.

The extent of the receiver’s duties depend on the circumstances. The receiver is not obliged to continue carrying on a business. If he does carry on a business, he must take reasonable steps to try to do so profitably. A receiver may sell a business as a going concern, if this is reasonable in the circumstances.

The law on receiver’s duties to others, in the context of the sale of assets, has been subject to different opinions. One view is that it is limited to acting in good faith. Another view is that there is an obligation to obtain market value or the best price reasonably available for the assets at the moment the mortgagee chooses to sell. It is clear there is no duty to wait and only sell at the best possible moment. The AR may choose the time of sale.

A mortgagee in possession cannot simply leave the property empty and wait for market conditions to improve. He must account for actual receipts and must take reasonable care to realise value.

Enquiries and Report

Administrative receivers are entitled to obtain statements in relation to the company’s affairs from present and previous directors and employees. The receiver must obtain statements, prepare a report and file it with the Registrar of Companies. Unsecured creditors must be sent a copy or be notified as to its publication and how they can access the report.

The report must contain a summary of the statement of affairs and the administrator’s comments. It should set out the circumstances of the receivership, the disposals or intended disposals of company assets, the amount owing to the debenture holders and preferential creditors and the amounts, if any, likely to be available to other creditors. The receiver need not include information which would prejudice his functions.

The appointment of a liquidator does not terminate the powers of receiver. However, the receiver ceases to be agent of the company. The receiver may not commit the company to new liability. The receiver may not carry on the business of the company. The receiver is still capable of getting in and realising the secured assets.

Order of Priority

The following is the order of payment, on the sale of floating charge assets;.

Prior charge holders (if any);
administrative receiver’s cost expensive and remunerations;
fixed charges within the debenture under which the administrative receivers was appointed;
debts due to preferential creditors;
excess money if any, is due to lower ranking mortgagees.