M6.1 Receivership

Question 1

What are the different types of receiver?

Answer 1

 Law of Property Act Receiver (LPA Receiver)
 Fixed Charge Receiver
 Administrative Receiver (Charges created prior to 15 September 2003)
 Court-appointed receiver - “where just and convenient to do so”
 Others:

 Proceeds of Crime Act receiver
 Drug Trafficking Act receiver
 Agricultural Credits Act receiver

Question 2

Who can appoint an IP in an administrative receivership

Answer 2

A floating charge holder

 Charge must be over substantially the whole of the company’s property
 Or would be so were it not for the appointment of another person as receiver of part of the company’s property

Question 3

What is the latest date that a charge could be created to appoint an admin receiver?

Answer 3

Ability to appoint limited to charges created pre - 15 September 2003

Question 4

From where does an admin receiver obtain his powers?

Answer 4

IA 86 Usually extended by the debenture document

Question 5

What are the directors powers when a co is in admin receivership?

Answer 5

Directors powers cease upon appointment of AR

 Subject to limited continuing statutory responsibilities

Question 6

What are the tax advantages of admin receivership vs administration?

Answer 6

Preservation of in year losses as against chargeable gains

Question 7

What is the position of preferential creditors in receivership?

Answer 7

Payments to preferential creditors from floating charge assets may be recouped from assets available to the unsecured creditors
(Administrator would treat shortfall to secured creditors as an unsecured claim)

Question 8

When can a creditor appoint an LPA receiver?

Answer 8

A mortgagee [lender] shall not exercise the power of sale or the power to appoint a receiver unless:
 Notice requiring payment has been served on the mortgagor [borrower]and default has been made in payment for three months; or
 Interest is in arrears and unpaid for two months; or
 There has been a breach of some provision contained in the mortgage deed
(BUT: This provision isgenerally varied or excluded under the wording of the mortgage deed

Question 9

When and how can a creditor appoint a fixed charge receiver? (inc LPA)

Answer 9

Notice of default/ formal demand for payment made in accordance with the terms of the document/deed
 Sufficient time to remedy breach/ pay the demand
 Typically 24 hours notice
 Once sufficient time has elapsed, the lender may appoint a receiver
 Appointment is made by deed [“appointing instrument”]
 The appointing instrument will also set out the Receiver’s powers and duties

Question 10

When and how can a creditor appoint an admin. receiver?

Answer 10

1) Appointor must hold a floating charge
 over all or a substantial part of the assets of the company created pre - 15 September 2003

2) Default in relation to the charge must have occurred
 Notice of default / formal demand duly given
 Time to remedy –24 hours advisable/ 1 hour may be sufficient

3) Appointor MUST appoint an insolvency practitioner

4) No statutory form for appointment
 Clearly set out who is appointed
 (if joint) whether they may act solely or jointly

Reminder - some exceptions to this eg Capital market investment debt £>50m, social landlords, etc

Question 11

When is the appointment of a receiver effective?

Answer 11

Appointment time = receipt of instrument
(provided that the appointment is then accepted by the end of the next business day)

Question 12

What happens if appointment of a receiver is invalid?

Answer 12

Appointor is liable

the court may order the person by whom or on whose behalf the appointment was made to indemnify the person appointed against any liability which arises solely by reason of the invalidity of the appointment.

Question 13

How long does a receiver have to notify the Registrar of Companies of the appointment?

Answer 13

Within 7 days of appointment

Question 14

Other than notify CH, what else must the receiver do?

Answer 14

All documents to contain a statement that a receiver or manager has been appointed
 If appointment is over land: Notify HM Land Registry

Notify:
 Any other mortgagee
 Any insolvency office holder

[N.B. If in administration – permission of administrator is required]

Question 15

Where an admin receiver is appointed, what additional duties?

Answer 15

 Notify the company forthwith and
 Publish notice in the prescribed manner
 R4.5: Must advertise appoint ment in the London Gazette/ may advertise in
such other manner as thinks fit
 Notify all creditors within 28 days
S47 IA86
 Forthwith require some or all of the company’s officers to make out
a statement as to the affairs of the company

Question 16

What is the status of an LPA or fixed charge receiver?

Answer 16

Deemedto be agent of the mortgagor (borrower)
 Any tenant of the borrower will have a new landlord
 The borrower loses ability to deal with the charged property
 The receiver’s agency terminates on the appointment of a trustee in bankruptcy or liquidator

Question 17

What is the impact of an LPA/ fixed charge receiver if a trustee/ liquidator appointed?

Answer 17

The receiver’s agency terminates on the appointment of a trustee in bankruptcy or liquidator

Question 18

What, when and to whom must a fixed charge/ LPA receiver submit accounts?

Answer 18

Must deliver receipts and payments accounts to the Registrar of Companies

 Must be delivered within one month after the expiration of 12 months from the date of his appointment; and
 Every subsequent period of 6 months, and
 Within one month after ceasing to act

Final R & P must show:
 Amounts for the final period; and
 Cumulative amounts for the whole period of the appointment

Receiver liable to a daily default fine

Question 18

What are the duties of an LPA or fixed charge receiver?

Answer 18

Duty of care to:
 Mortgagee (thelender/appointor)
 Mortgagor the borrower, for whom they act as agent)
 Any guarantor of the mortgage

Should sell property for “Best price reasonably obtainable”

Liable in negligence if in breach of duty  Non-excludable
 Can limit potential claims by excluding personal liability in contracts (other than contract of employment)
 e.g. sale agreements

Question 19

What powers does an LPA retriever have?

Answer 19

Limited - usually extended by mortgage document:

Power to demand and recover rents

 Acts as agent of the mortgagor (borrower)
 Powers delegated by mortgagee (lender)

.e. it is permissible to delegate the Mortgagee’s power of sale (but not automatic)

Question 20

What powers do a fixed charge or LPA receiver usually have?

Answer 20

Contained in the appointing document: Power to:
Sell
Run a business
Complete developments
Borrow

Question 21

What are fixed & LPA receiver’s liability in relation to contracts?

Answer 21

 Receiver is personally liable on contracts entered into, unless the contract provides otherwise
 Subject to an indemnity out of the assets

Receiver has 14 days to decide whether to adopt contracts of employment
 If adopted, the receiver becomes the employer and is liable under the contracts
 Not limited to qualifying liabilities
 If dismissed within 14 days, the mortgagor (borrower) is liable

Question 22

What are an admin receiver’s general duties?

Answer 22

 Principal duty: Repay the appointing creditor

Agent of the company, unless and until it enters liquidation

Question 23

In whose interest does an admin receiver act?

Answer 23

The interests of their appointor

May give their appointor’s interest priority
 Subject to duties to:
 Manage the business of the company with due diligence
 Obtain true market value at the time of sale

Question 24

What are an administrative receiver's additional duties?

Answer 24

Initial notifications Require a statement of affairs Report to Registrar of Companies and creditors Invite creditors to form a committee Deliver receipts and payment accounts Pay preferential creditors from floating charge assets Make available the prescribed part for unsecured creditors

Question 25

How long does somebody have to comply with a request for a SA in admin receivership?

Answer 25

21 days

Question 26

How long does somebody receiving an SA have to comply with a request for a statement of concurrence?

Answer 26

5 days from receipt of SofA to concur or qualify that they do not agree or that they are without direct knowledge

Question 27

s48: How long does an admin receiver have to send a report (and the SA) to CH and others?

Answer 27

3 months

Question 28

To whom must an admin receiver send, or provide access to, the s48 report

Answer 28

Within 3 months to:  Registrar of Companies (with SA)  All secured creditors (other than opted out creditors); All unsecured creditors of the company (other than opted-out creditors), or  publish a notice stating an address to which unsecured creditors of the company should write for copies of the report to be sent to them free of charge PLUS: Send a copy to any liquidator appointed within 7 days of the above, or if appointed later, 7 days of the liquidator’s appointment

Question 29

What is contained in an admin receiver's report?

Answer 29

S48 IA86 The report must contain:  The events leading up to the appointment  Details of any disposal or proposed disposal of property  Details of the carrying on or proposed carrying on of the business  Amounts payable to the debenture holder by whom they were appointed  Amounts payable to PREFERENTIAL CREDITORS  The amount (if any) likely to be available for other creditors R4.13  The report must also contain estimates of the prescribed part and of the value of the company’s net property, (unless seriously prejudicial to the commercial interests of the company)

Question 30

What is the role of the Committee of creditors in an admin receivership?

Answer 30

Very limited: No involvement in sanctioning actions or fixing basis of remuneration Can require AR to attend before it - not less than 7 days' notice & furnish information as may reasonably require.

Question 31

What is the admin receiver's duty to submit accounts?

Answer 31

AR must deliver a summary of receipts and payments to:  Registrar of companies,  Company  Their appointor  Each member of the creditors’ committee Within two months after  Every 12 months from the date of appointed  Upon ceasing to act as administrative receiver

Question 32

What are an admin receiver's powers?

Answer 32

all the powers conferred on them by the instrument under which they were appointed and (provided they are not inconsistent with that instrument) those specific powers set out in Schedule 1 of the Insolvency Act 1986: Include powers to carry on the business, bring and defend legal proceedings and to do all things necessary to realise the property of the company BUT DOES NOT INCLUDE a power to pay the unsecured creditors of the company (other than the prescribed part)

Question 33

What are the management powers afforded to office holders generally (inc admin rec)

Answer 33

>Require continued supply of utilities >Get in the company’s books, records and property >Enforce co-operation from past/present directors, officers, employees or promoters >Make inquiry by way of private examination These powers CANNOT be given to other types of receiver

Question 34

When can an admin receiver dispose of property subject to a prior charge?

Answer 34

The AR can apply to court for permission to dispose of property subject to prior security  Must be likely to promote a more advantageous realisation than would otherwise be achieved  Net proceeds paid to prior charge holder  May have to make up shortfall if sold at an undervalue

Question 35

What is the admin receiver's status?

Answer 35

AR is agent of the company unless or until it goes into liquidation  AR is personally liable on contracts entered into, unless the contract provides otherwise;  And to for qualifying liabilities on any contracts of employment adopted  Subject to an indemnified out of the assets of the company [Will also obtain an indemnity from floating charge holder] Existing contracts will not be affected–NO POWER TO DISCLAIM AR not to be taken to have adopted a contract of employment by reason of anything done or omitted to be done within 14 days after his appointment

Question 36

What is the waterfall of payments in an LPA receivership?

Answer 36

 All rents, taxes, rates and out goings in relation to the property  Annual sums or other payments, with interest, that have priority over the mortgage under which they were appointed i.e. Payments due to a prior mortgage  The receiver’s commission (fees) and the cost insurance premiums  Interest on the mortgage  Principal sum borrowed under the mortgage Balance to the person entitled to the income, if they had not been appointed (i.e. usually the borrower or an insolvency office holder)

Question 37

What is an LPA receiver's remuneration and expenses?

Answer 37

S109(6) LPA 1925  Receiver entitled to retain out of any money received their remuneration together with payment of all costs, charges and expenses incurred  as long as these do not exceed 5% of all moneys received  or at such rate as the court may allow Unusual to rely on statutory position  Fee arrangements with all types of receiver usually agreed by appointor pre-appointment  Court has inherent jurisdiction to review

Question 38

What is waterfall of payments in an admin receivership?

Answer 38

Waterfall is largely a matter of case law Different waterfalls apply to fixed and floating charge realisations  No equivalent concept of a “receivership expense”  Dealt with via receiver ’s indemnity out of the assets No rule setting out basis of remuneration S35IA86:  The receiver or their appointor can apply to court for directions S36IA86:  The receiver’s remuneration may be challenged by a subsequent liquidator

Question 39

What is the waterfall of payments for fixed charge assets in an admin receivership?

Answer 39

Higher ranking security Costs of preserving assets AR’s remuneration and expenses Sums due to appointing chargeholder Junior lenders (or their receivers) Company (or its liquidator) NB: Preferential creditors: Other than when the company is in liquidation, all receivers appointed under floating charge (where or not over substantially the whole of the company’s property) must pay preferential creditors out of the proceeds of floating charge assets (see separate waterfall)

Question 40

What is the waterfall for floating charge assets?

Answer 40

Higher ranking security Costs of preserving assets AR’s remuneration and expenses Sums due to preferential creditors Prescribed part for unsecured creditors Balance due to appointing chargeholder Junior lenders (or their receivers) Company (or its liquidator)

Question 41

What is the effect of liquidation or bankruptcy on a receiver?

Answer 41

On a company being wound-up or an individual being adjudged bankrupt, the receiver will cease to be the agent of the company or individual  If the receiver continues to act, he will do so as principal  In this situation the receiver will incur personal liability on contracts, subject to their indemnity out of the assets they hold  The receiver will want to mitigate this risk by obtaining an indemnity from the appointing party The termination of agency does not affect the receiver’s powers  Prevents them from putting new liabilities on to the borrower Receiver will become liable for business rates and may incur liabilities to employees. Therefore, it is likely that trading will cease if another insolvency process intervenes

Question 42

What is the impact of a receiver's loss of agency?

Answer 42

The receiver’s agency is useful in 2 respects:  It protects the mortgagee (lender) against personal liability during enforcement  Enables receivers to put liabilities on to the mortgagor (borrower) The termination of agency does not affect the receiver’s powers  Prevents them from putting new liabilities on to the borrower Receiver will become liable for business rates and may incur liabilities to employees. Therefore, it is likely that trading will cease if another insolvency process intervenes