Question

Question 2 “If a company is in financial difficulty, a secured creditor or the court may put the company into receivership.”

REQUIRED: Answer the following questions in relation to receivership. Please support your analysis with relevant legislation and/or case law.

a) Who/what is a receiver? Who appoints a receiver and why?

b) What is the effect of the receiver’s appointment on

• the company;

• the directors;

• shareholders;

• secured creditors; and

• unsecured creditors?

Answer 1

a) Receivership

Corporate insolvency occurs when a business reaches a point where it cannot pay its debts when they are due. The three most common corporate insolvency procedures are:-  Voluntary administration, Liquidation & Receivership.
When in receivership, an independent person, known as the 'receiver', takes control of some or all a company's assets in order to repay the debt owed to the secured creditor.
A receivership may occur as a step in a company's restructuring process, with the goal of returning the company to profitability.
A receivership could also arise during a shareholder dispute to complete a project, liquidate assets, or sell a business, for example.
A receivership can help creditors to recover amounts outstanding under a secured loan when the borrower defaults on its loan payments.

• A receivership itself is not a legal process, but it is usually invoked during legal proceedings, with either the secured creditor (lender) or a court of law appointing a receiver to act as trustee of a business. Privately appointed receivers will generally act only on behalf of the secured creditor that appointed them, but court-appointed receivers act on behalf of all creditors.
• The receiver must be an independent party, with no prior business relationship to either the borrower or lender, and can never act for the benefit of one party and the detriment of the other.
• A Receiver is an officer appointed by the Court who is given custody of specified assets with direction to liquidate them and distribute the proceeds. A Court order is typically required to appoint a Receiver, and the terms of the order describe the Receiver’s duties and powers.
• The appointment of a Receiver often comes at the request of a government law enforcement agency, such as the United States Attorney’s Office or the Securities and Exchange Commission. In federal court, the appointment of a Receiver generally is allowed under F.R.C.P. 66 .
  A federal court may appoint a receiver to take control of a failed bank, to liquidate the assets of insolvent company or to administer the assets of investment company. Both state and federal governmental agencies such as the Attorney General, U.S. Securities and Exchange Commission and U.S. Commodity Futures Trading Commission, can petition the Court for the appointment of a receiver in instances of alleged fraud.
• The vast majority of receiverships in New Zealand & Australia are private receiverships.
  For e.g., the right to appoint a receiver will usually be conferred by a deed or agreement under the Receiverships Act 1993.
• A Receiver can only act in accordance with the instructions and authorizations of the Court that appointed him or her. If the general appointment order does not give specific authorization, then the Receiver must seek additional approval before pursuing a certain course of action.
• The Receiver is paid from the assets placed in his or her custody, and the Receiver’s fees have priority over other claims. Fees earned by the Receiver must be approved by the Court before they are paid.
  The statute provides that a Receiver can receive up to 5% of receipts and disbursements as his fees.
• In the case of a restructuring, the appointed receiver generally has ultimate decision-making power over the company's assets and management decisions, including the authority to stop paying dividends or applicable interest payments.
• The receiver also ensures that all previous company operations comply with government standards and regulations while maximizing profits.
• The receiver primarily works with the company to help avoid bankruptcy and complete liquidation of all assets. However, a receiver may choose to sell select assets for the purpose of paying some creditors and bringing the company into a period of recovery.

In Ohio, for example, the state receivership statute provides that “no party, attorney, or person interested in an action shall be appointed receiver therein except by consent of the parties. No person except a resident of Ohio shall be appointed or act as receiver of a railroad or other corporation of Ohio.”

Purpose of receivership

A Receiver plays an important part in three common situations:

1. Dissolution of a business
2. Preservation of property
3. Collection of a debt

Why should a Receiver be Appointed

A Court can appoint a Receiver for variety of reasons including:

1. Dissolution of an insolvent corporation;
2. Dissolution of a limited liability company;
3. Enforcement of a judgment;
4. Prosecution of a debt adjuster;
5. Estate of a missing person;
6. Administration of insolvent banks or insurers; or
7. Administration of the property of a person or entity violating the Consumer Finance Protection Act.

Example of receivership - In New Zealand, national construction firm Ebert Construction had creditor claims of more than $45 million but assets of only $30 in 2018 -2019, which predicts there will be no money for unsecured trade creditors.
Ebert was working on 15 projects, when directors halted all the work citing fund crunch. Some 95 staff were also laid off.
Ebert’s receivership was initiated by the Bank of New Zealand, as a secured creditor of Ebert. The Receiver’s primary duties are to act in the best interests of its appointing creditor, the Bank of New Zealand.
Ebert Construction Limited was placed into receivership and Lara Bennett, John Fisk and Richard Longman were appointed as receivers. The receivers said unsecured Ebert creditors were owed $33.8m at the time of the receivership and any payout was unlikely.
The Receivers’ initially secured Ebert’s project sites, before making arrangements for subcontractors to collect their tools and equipment.  The Receivers subsequently determined that it was not feasible to complete active projects, and therefore returned control of all sites to principals. Ebert’s staff numbers were reduced to three employees who have been retained because of their institutional knowledge of the company, its systems and assets.
The receivers had paid all known preferential creditor claims, negotiated with customers or principals, disposed of fixed assets, made insurance and other claims, answered creditor questions, assessed and tried to reach resolutions with creditors claiming a security interest, liaised with liquidators while preserving and securing physical and electronic books and records.

b) Effect of the receiver’s appointment on

1) The company

The term receivership describes the process in which a ‘receiver’ is appointed by the creditor, typically a bank, to administer and ‘receive’ (i.e. liquidate) the company’s assets so the secured creditors can recover their money.
If a business acquires a loan by using a current or long-term asset as security, such as equipment, inventory, property or accounts receivable, the lender has the right to seize possession of those assets if the loan is unpaid.
The receiver appointed for this purpose can do whatever necessary to get the job done.

In the majority of cases, the result of a receivership is the complete closure of the business to repay its secured debts.
If it is possible that the value of the company’s assets is sufficient to cover the level of debts owed, then the business can continue to operate after the receivership.
It is upto the receiver to decide whether the best result for the creditors will be achieved by allowing the business to continue to trade, or by facilitating the sale of the business to recover the full debt owed. Ultimately, it is the receiver who will decide the fate of the business, and advice from the company directors may not be sought.
The receiver must also investigate the conduct of the company directors to ensure they have acted within the regulations governing receivership, before reporting their findings.

2) The Directors

In a receivership, the powers of the directors depend on the powers of the receiver, as detailed in the security document, and the extent of the assets over which the receiver is appointed. If the receiver is appointed over all or most of the assets of a company, the receiver effectively has control, although the directors still have certain responsibilities and duties, and may retain residual control.

The director must:

• cooperate with the receiver so that the financial and business affairs of the company can be resolved fairly and equitably, and
• provide the company's accounts, records and any other information the receiver requires.
• a director is requiredto attend the creditors’ meeting to provide information about the company and its business, property, affairs and financial circumstances.

3) Shareholders

The receiver’s primary duty is to the company’s secured creditor. The main duty owed to unsecured creditors and shareholders is an obligation to take reasonable care to sell collateral for not less than its market value or, if there is no market value, the best price reasonably obtainable. A receiver also has the same general duties as a company director.

There is no obligation for the receiver to report to the shareholders on the progress or outcome of the receivership.

4) Secured Creditors

The fundamental distinction between receivership and other forms of external administration is that receivers are usually appointed by a secured creditor (such as a bank) for the purpose of ensuring that the secured creditor gets paid. Therefore, a receiver acts only for the benefit of the secured creditor for whom it was appointed and not all creditors. In most instances a receiver will be appointed under the provisions of a security instrument (such as a fixed and floating charge), which specifies the powers of the receiver.
Depending on the nature of the security, a receiver may be appointed to simply realise and sell the secured assets, or to also take control of the company from the directors.
The receiver’s role is to collect and sell enough of the charged assets to repay the debt owed to the secured creditor (this may include selling assets or the company’s business). The receiver’s primary duty is to the company’s secured creditor

5) Unsecured Creditors

Receivers have no powers to make distributions to unsecured creditors.
The main duty owed to unsecured creditors is an obligation to take reasonable care to sell charged property for not less than its market value or, if there is no market value, the best price reasonably obtainable. A receiver also has the same general duties as a company director.
The receiver has no obligation to report to unsecured creditors about the receivership, either by calling a meeting or in writing. However, the receiver will usually write to all of the company’s suppliers to inform them of their appointment. Unsecured creditors are not entitled to see the receiver’s reports to the secured creditor.
Legal action may be commenced or continued against the company despite the appointment of a receiver. This means that an unsecured creditor can apply to the court to have the company put into liquidation on the basis of an unpaid debt when it is of a large amount.