Administrative receivership, better known simply as receivership, is an insolvency procedure in which the owners of a floating charge give control of a company to a receiver in order to recoup their debts.
Receivership is frequently confused with other insolvency procedures, including administration and liquidation. Although receivership was fairly common decades ago, today it’s only used for businesses with securities issued prior to September of 2003.
If your company is struggling financially and could be at risk of receivership, contact us to talk to our business rescue team. You can also learn more about the receivership process, how it may happen and key differences between receivership and other insolvency procedures below.
Receivership is an insolvency procedure. A company may enter into receivership if the holder of a floating charge decides to appoint a receiver in order to take control over the company.
By law, receivership can only occur to companies with securities issued prior to September 15th of 2003. Under the Enterprise Act 2002, securities issued after this date may not involve the use of a receiver.
Most cases of receivership occur when a company defaults on a loan. Many businesses depend on bank loans to fund equipment and real estate purchases and to fuel business growth. To stay protected from the costs of a loan default, many banks will require a form of security.
This often takes the form of a debenture with a floating charge. If the company fails to make its loan payments or otherwise fails to comply with the terms of the loan agreement, the debenture holder may opt to appoint a receiver to take control of the company.
The receiver’s objective is to recover funds owed to the bank. They’ll typically choose the option that offers the best outcome for the company’s creditors. This may involve:
Not all loan defaults secured in this manner end in receivership. In many cases, a bank will opt to review its options via an Independent Bank Review (IBR) if a company has borrowed money and is displaying signs of insolvency.
Typically, entering into receivership isn’t a good thing for a company. Most companies that enter into receivership are liquidated in order to repay creditors, and the few that make it out will often be subject to significant cuts and changes as part of the receivership process.
However, receivership can also have certain advantages for a financially distressed or insolvent business:
Entering into receivership has significant disadvantages for most companies. These can range from the sale of some or all assets and the closure of the company in order to pay creditors to job losses for both directors and employees:
If your business has broken the terms of a loan agreement and is facing pressure from one or several of its creditors that could place it in receivership, it’s important to take action as quickly as possible.
Depending on your company’s financial situation and the legal action you are facing, you may be able to avoid receivership by proposing a Company Voluntary Arrangement (CVA), raising cash via emergency financing, or by using an alternative insolvency procedure.
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