The most common type of receivership is where a secured creditor appoints a third party as receiver or receiver and manager of a company or its assets. A receiver may also be appointed to a company by the Court, however, these types of appointment are much less common.
This information relates to appointments of receivers made by secured creditors.
Appointment of a Receiver
A receiver is typically appointed when a company defaults on its loan obligations. Under the terms of a security agreement, a secured creditor can have the contractual right to enforce its security and appoint a receiver to a company. A security agreement can grant a secured creditor security over some or all of the company’s assets, and the receiver’s authority is limited to the assets covered by that security. Accordingly, a receiver can only take control of, and deal with, the assets to which the creditor’s security interest applies.
A receiver may be appointed as:
- A Receiver which is only in control of some or all of a company’s assets and has the power to realise those assets; or
- A Receiver and Manager who controls assets and has the power to manage and operate a company’s business.
Role of a Receiver
A receiver appointed to a company generally acts for the secured creditor.
A receiver appointed to a company will:
- Seek to realise or recover assets of the company which are secured by the security under which the receiver is appointed;
- If appointed as a Receiver and Manager possibly manage and operate a company’s business;
- Report to and communicate with stakeholders such as employees, creditors, customers and regulatory bodies; and
- Distribute funds received in accordance with the requirements and priorities set out under the Corporations Act 2001 (Cth).
Distribution of Funds Realised by a Receiver
The funds recovered by a receiver will be distributed as follows:
- In payment of the receiver’s expenses, such as the costs of trading on a business (e.g. staff costs, rent, supplier costs etc), legal and other costs;
- In payment of the receiver’s remuneration;
- From funds recovered from circulating assets (such as cash at bank, debtors and inventory) first in payment of certain priority employee entitlements and secondly in payment of amounts owed to secured creditor(s); and
- From funds recovered from the sale of assets which are non-circulating assets (such as land, real property, plant and equipment and motor vehicles) in payment of amounts owed to secured creditor(s).
Any surplus available to a receiver after paying the above required amounts in full will then be available to be paid to the company or a liquidator of the company if one has been appointed. There is generally no other obligation or requirement of a receiver to use or make a company’s funds available to pay amounts owed to ordinary unsecured creditors whose debts were incurred prior to the receiver’s appointment.
Director’s Duties and Obligations in Receivership
If a Receiver and Manager is appointed to a company then a company’s director loses control of the company’s operations. If a Receiver is appointed to certain assets of a company the director can no longer deal with those assets.
A company’s director has the same duties and obligations during the period of a receivership as the director had prior to the receiver’s appointment. In addition, a company’s director must provide a receiver with a Report as to Affairs for the company, all of the company’s books and records which are subject to the receiver’s appointment and the director must reasonably assist the receiver in carrying out his or her role.
Impact of Receivership on Other Stakeholders
Receivership can have the following impacts on other stakeholders in a company:
- Secured Creditors; the secured creditor who appointed a receiver will benefit from funds realised from the sale or collection of assets. There are various rules which relate to how assets subject to securities by other secured creditors can and should be dealt with and often other secured creditors do not lose their rights.
- Employees; a Receiver and Manager may chose to continue to operate a company’s business in which case employees’ employment may continue, or they may choose to cease trading and terminate employees’ employment.
- Unsecured Creditors; as secured creditors and employees are paid first from funds realised by a receiver there is often little or no return to unsecured creditors once a company is placed in receivership.
- Shareholders; commonly a receivership results in shareholders’ losing all value of their shares as it will result in a company’s business being sold or the company shutting down.
Finalisation of a Receivership
A receivership will end when the receiver resigns from his or her appointment or the appointment is finalised by the secured creditor. This will generally occur when the receiver has realised sufficient funds to pay the secured creditor in full or has realised all assets of the company subject to the receiver’s appointment which are commercially warranted to realise. Upon the finalisation of a receivership control of the company will return to the director(s) unless a liquidator or administrator has been appointed to the company.
How to Possibly Avoid Receivership
The appointment of a receiver to a company will cause significant damage to a company’s business and in most cases will result in the business being sold, ceasing to trade or failing. If possible, all steps should be taken to avoid the possibility of a receiver being appointed and this may be able to be done by:
- If a company is in financial difficulty obtaining professional advice and assistance at an early stage.
- Communicating with a secured creditor in regard to relevant things like how you propose to repay their debt, steps which are being taken to turn around a business, the possibility of refinance and requesting extensions of time to make required payments if necessary.
- Refinance secured creditors debts if possible as once a secured creditor has been paid out they can no longer take any recovery action.
Advice and Assistance Regarding Receivership
If you are seeking advice regarding receivership or if you wish to discuss appointing any of the qualified staff members at Pearce & Heers as receiver please contact our Brisbane or Gold Coast office and our experienced staff will be able to assist you.
