Receivership: What a Secured Lender Gets From It

Receivership is a remedy, and a narrow one. It begins when a lender entitled to enforce uses the power of appointment in its security, or occasionally asks a court to appoint. The receiver controls what the security covers, and the company itself carries on existing. In New Zealand, the Companies Register says directors stay in office with their powers restricted, and must cooperate with the receiver and hand over records.

Although appointed by the lender, a receiver commonly acts as the company's agent, by statute or by the terms of the security. English law deems a Law of Property Act receiver to be the mortgagor's agent, and New Zealand's Act presumes the same of a privately appointed receiver. That keeps the lender from being directly responsible for what is done. It also means the lender chooses a receiver and then has to let the receiver decide. A lender that starts instructing one takes on risks the structure was meant to avoid.

Most of what this page describes is New Zealand and Australian practice, where an all-assets lender appoints a receiver routinely. The UK is different. Section 72A of the Insolvency Act 1986 bars the holder of a qualifying floating charge from appointing an administrative receiver, subject to exceptions, and the bar reaches charges created on or after 15 September 2003. The same holder may instead appoint an administrator. Receivers survive in the UK mainly over specific charged property, such as a commercial building.

The order of payment follows the security. In Australia, ASIC's guide sets it out: proceeds of non-circulating assets go to the receiver's costs and then the secured creditor, and proceeds of circulating assets go to costs, then priority claims such as employee entitlements, then the secured creditor. New Zealand has a similar rule for accounts receivable and inventory. The preferential creditors page shows what that takes out.

A maker of steel lockers and school furniture in New Zealand, constructed for this page like every figure in it, owes its bank US$7.5m under a general security agreement and a first mortgage over its factory. A standstill has ended without a plan and the bank appoints a receiver. The receiver has two courses, with these figures for each. They are the example's and are not offered as a market norm.

Trading on costs US$0.45m more in fees and losses and adds US$1.45m to the bank's recovery. It works because a school order book exists that a buyer will pay for, staff are still there to fill it, and a buyer who keeps them means smaller redundancy claims. A breaking-up sale has none of that. The figures hinge on the order book, so the receiver's first days go to testing whether customers will accept delivery from a company in receivership and whether key suppliers will keep supplying.

The bank's shortfall is US$2.3m (7.5 − 5.2). It now looks to any guarantees and to a claim as an unsecured creditor. The company remains on the register with no business left in it, and a liquidator is likely to follow. Nothing in the receivership paid the suppliers who were owed money at the start.

DEFINED IN ONE PARAGRAPH → · WHO GETS PAID, IN ORDER → · WHAT YOUR BANK HOLDS AS SECURITY →

Liquidation serves creditors as a body, and it can do things a receiver cannot, including challenging preferences and pursuing directors for trading while insolvent. That is why unsecured creditors sometimes push for one alongside a receivership. Voluntary administration, or administration in the UK, brings a statutory stay on creditors and puts a different officer in charge, to see whether the company or its business can be saved. A mortgagee sale is narrower: a lender sells one mortgaged property and does not take control of a business.

The processes can overlap. ASIC notes that a company in receivership can also be in liquidation or administration, so a receiver may deal with the secured assets while a liquidator handles what is left.

Appointment is rarely the first move, because a lender usually compares it with a restructure, a refinance elsewhere or a sale by the owners, as Problem Loans and Workout sets out. It tends to come when those have failed, when management cannot be relied on, or when value is leaking fast. Before appointing, a workout team checks what it actually holds: whether the security is valid and registered in time, whether a demand was properly made, and what ranks ahead.

It also asks whether there is still a business to sell. Landlords, licences, key customers and staff can each leave a going-concern sale with nothing to transfer. The desk's best guide is the same sum on both columns, redone with current figures, and that sum can argue against appointing at all. A receiver's costs and the signal the appointment sends to customers are part of the price.