What Is It?
Administrative Receivership, which can often be confused with Administration, is the appointment of Insolvency Practitioner (“IP”) by a creditor who holds a floating charge over the assets of the company. It is likely that the creditor concerned will be a financier, i.e a financial institution who will have been granted a debenture as security over the assets of the company, incorporating fixed and floating charges, or private individuals who have loaned funds to the company.
Who Can Benefit From it?
The granting of the floating charge provides the lender with the ability to appoint an Administrative Receiver whose principle duty is to secure repayment of the outstanding loan.
Indirectly appointment of an Administrative Receiver can also benefit directors in so much that the procedure associated with creditors voluntary and compulsory liquidation is often dispensed with. With regard to the former this includes the requirement of the directors to attend meetings of creditors and shareholders to explain the circumstances of the company to the creditors.
The Procedure In Brief
More often than not the lender will have become aware of the company’s inability to meet its loan repayments in respect of its borrowings and in these circumstances is likely to have instructed an IP to undertake a viability review as indicated within the Other Services section of this web site.
The review will consider the future viability of the company particularly taking into consideration its future ability to meet its existing and future repayment obligations, the exposure of the lender and the current level of security available from the assets of the company.
If the viability review recommends the appointment of an Administrative Receiver to secure the lender’s position formal demand for repayment of the borrowings is made to the company, which if unsatisfied, enables the lender to appoint an Administrative Receiver who will assume control the affairs of the company.
The director’s powers cease at the date of the Administrative Receiver’s appointment subject only to handling certain statutory matters.
The principle role of the Administrative Receiver is to secure the best outcome for his appointer albeit retaining a limited duty of care to the remaining creditors of the company. The Administrative Receiver has certain powers contained within the Insolvency Act 1986, which are more often than not expanded within the terms of the debenture. For example the debenture is likely to provide the Administrative Receiver with the ability to manage and trade the company with a view to achieving its sale. Alternatively, the Administrative Receiver may wish only to complete outstanding work in progress in order to maximise realisations prior to formally closing the business.
When the Administrative Receiver has completed the realisation of the assets of the company via the sale of the business as a whole or on a break up basis, if there are insufficient funds to enable full repayment of the outstanding loan, interest payable on the loan, his own costs, and preferential creditors, unless a creditor has petitioned for the winding up of the company it is likely the company will be struck off the register some 3 months after the Administrative Receiver has filed notice of his ceasing to act.
In the event that a surplus is available after discharging the above costs, the company is likely to proceed into liquidation to enable a liquidator to distribute a dividend to the unsecured creditors of the company.
Advantages of Administrative Receivership
The Company
By virtue of the floating charge, the chargeholder can take control of the business by the appointment of an Administrative Receiver where the directors may have already lost control. This can in many instances provide the Administrative Receiver with the ability to act quickly to save the business through its sale.
Directors
Although the appointment of an Administrative Receiver does not preclude creditors from seeking the appointment of a liquidator, the Administrative Receiver cannot bring an action for fraudulent or wrongful trading, misfeasance, transactions at an undervalue or preferences, against the directors of the company.
Disadvantages of Administrative Receivership
Directors
Directors lose control of the company and quite often their own jobs.
The Administrative Receiver is required to report on the conduct of the directors to the Disqualification Unit at the Department of Trade and Industry.
Creditors
From a creditors perspective this procedure is costly and the terms of the Administrative Receivers remuneration is agreed with his appointer and not the general body of creditors. The cost of this procedure has historically been very high and impacted on the potential dividend prospects to creditors.
Administrative Receivers cannot bring an action against the directors for fraudulent or wrongful trading.
