If your company is facing receivership, or you have been warned that it may be a possibility, it can be difficult to understand what this actually means in practice. Receivership is often misunderstood and, in many cases, it is confused with other insolvency processes such as administration or liquidation.
This article explains what receivership is, why it happens, and what it may mean for a company and its directors.
What is receivership?
Receivership is a process where a secured creditor, most commonly a bank or financial institution, appoints a licensed insolvency practitioner to take control of certain company assets in order to recover the money it is owed.
This form of receivership is known as administrative receivership. It can only be used where the creditor holds a qualifying floating charge that was created before 15 September 2003.
Since changes to insolvency law were introduced to encourage company rescue rather than asset recovery, this type of receivership has become increasingly rare. Most modern lending arrangements no longer qualify, which is why administration is now far more commonly used by lenders.
As a result, receivership today is usually limited to older lending agreements or specific, excluded arrangements.
Why might a company go into receivership?
Receivership is triggered by default on a secured loan. This could involve property, equipment, stock or other assets that were used as security when borrowing.
Importantly, a company does not have to be insolvent to enter receivership. The key issue is whether the terms of the secured lending agreement have been breached.
Before a receiver is appointed, creditors will often explore other options. These may include requesting updated financial information, asking for revised business plans, seeking additional security or encouraging alternative funding arrangements.
If these steps do not resolve the issue, the creditor may instruct an insolvency practitioner to review the company’s position. That review assesses whether the business is viable and whether the secured assets are likely to cover the outstanding debt. If not, the creditor may proceed with appointing a receiver.
What does a receiver do?
Once appointed, the receiver’s role is to act primarily in the interests of the creditor who appointed them. Their responsibility is to recover as much of the secured debt as possible.
To do this, the receiver may decide to sell individual assets, sell the business as a whole, or continue trading for a short period if that improves returns. Directors do not retain control of the assets subject to the receivership, and the receiver is not required to take instructions from them.
The receiver must settle certain priority debts from the proceeds of any asset sales. These can include employee wage arrears, holiday pay and, in more recent cases, certain unpaid tax liabilities.
There is no fixed timeframe for receivership. Some cases are resolved within months, while others may take considerably longer depending on the complexity of the assets involved.
What powers does a receiver have?
A receiver has wide-ranging powers over the secured assets. These can include taking possession of property, collecting income, selling assets, managing leases and, in some cases, removing directors or employees where necessary to protect the value of the assets.
How is receivership different from administration?
The key difference lies in purpose.
Administration is designed to give a struggling company breathing space and, where possible, rescue the business as a going concern. The administrator acts in the interests of all creditors and the company as a whole.
Receivership, by contrast, is focused on the recovery of a specific secured debt. The outcome is often the sale of assets, and in many cases the company does not continue trading afterwards.
Because of this, receivership is generally seen as a more serious intervention and offers less scope for business rescue.
Can receivership be avoided?
In some cases, early action can reduce the likelihood of receivership. Engaging with creditors, understanding the company’s true financial position and seeking professional advice at the earliest opportunity can open up alternative options.
Once a receiver is appointed, options become much more limited, as control over key assets has already passed to the creditor’s representative.
Final thoughts on receivership
Receivership is now relatively uncommon, but where it applies, it can have a significant impact on a business. It is a creditor-led process focused on asset recovery rather than company rescue.
If there are concerns that a company may be heading towards receivership, seeking advice early from a licensed insolvency practitioner can help clarify the position and identify whether alternative solutions may still be available.
Understanding the process early allows directors to make informed decisions rather than reacting under pressure later. Please get in touch for more information.
Adcroft Hilton: Debt, Insolvency & Bankruptcy Specialists
Helping you make the right choice for your financial future.
