Receivership

A creditor with a security interest over some of the companies assets can appoint a receiver to manage the company.

In the event, the directors cease to control of the company, and the receiver will run the business, for the benefit of the creditor that appointed the receiver.

Who is a Grantor?

The company who gives a security interest to someone else is called a grantor, as in they have granted something. If a company allows a bank to take a security interest over the company property, then that company is called the grantor.

What is a Debenture?

A debenture is a loan backed up by some security over a company or its assets. The debenture document will give the creditor rights in the event of a breach of the loan agreement.

In some cases, the debenture holder can take over the asset, or it can appoint a receiver to run the company and recover the money owing.

How does a company go into Receivership?

Normally the lender (who holds the security) will demand repayment of the debt because of a failure to adhere to the terms of the loan.

The company can’t pay, so the lender appoints a Licenced Insolvency Practitioner to act as receiver of the security. Only a Licenced Insolvency Practitioner can be appointed as a Receiver. They are licensed by law to have the necessary qualifications, training and experience to act as a Receiver.

Once that occurs the receiver has the power to run the business in receivership, including hiring staff, managing property, selling assets, entering into contracts. The receiver can call up unpaid capital.

In a receivership the director’s powers are suspended sufficiently to allow the receiver to do his job. The company in receivership, the grantor, must make all documents, bank details etc, available to the receiver.

A receiver only acts in the interest of the Debenture holder that appointed him. The receiver has a primary duty of care to the debenture holder who appointed him.

However, the receiver also has a duty of care to the company and other creditors not to act in a negligent manner. If a receiver is negligent he risks being held liable by other creditors and by the company. The receiver has a statutory obligation to obtain the best price for the assets.

He cannot, therefore, sell the assets cheaply to recover just enough for the debenture holder at the expense of other creditors and the grantor. The receiver must, within two months, and again after every six months after his appointment, report on the progress of the receivership

Once the Receiver has recovered funds from the sale of the secured asset, the receiver pays off any other securities, the company in receivership (the Grantor) and any other security interest in the asset ceases.

If the receiver is unable to sort out competing claims on any surplus, he can deposit the funds with the court and request that the Court resolve the dispute.

Always look at your options because if you can’t pay the demand of a secured creditor you need advice. Call us now.