Receivership, a broad overview

Introduction

A receivership is an appointment made by a secured lender (typically a bank or finance company) who have a security in assets of the debtor company.

Almost all receiverships are appointed by secured creditors who have a General Security Agreement (GSA) granting the finance company a security interest in all present and after acquired property and all other property. Essentially meaning the finance company has an interest in all assets owned by the debtor.

The security agreement must also contain a clause granting the secured creditor the right to appoint a receiver.

A receivership commences when the debtor defaults on its loan, and the secured creditor decides to appoint a receiver.

What constitutes a default is determined by the loan and/or security agreement, but general examples of default include:

1. Non-payment of debt: For example, the debtor has not been making the scheduled loan payments
2. Collateral at risk: Circumstances lead the secured creditor to believe that their collateral is at risk (for example, if the business ceases trading and the debtor is locked out of their premises)
3. Insolvency: If the debtor company becomes insolvent (for example stops paying it’s tax on time)

In some circumstances the debtor may also request the secured creditor appoint a receiver.

It is the responsibility of the receiver to review the appropriate loan and security documentation to ensure that the secured creditor has the right to appoint a receiver and that a default has occurred.

On appointment, the receivers will take control of the company and take steps to realise the assets of the debtor company or settle the appointors debt through other means. This can include continuing to trade the business as a going concern, ceasing trading, or facilitating a legal settlement.

Why Do secured creditors appoint receivers?

Receivership is not the first option when customers default, however sometimes it is necessary.

Examples of when secured creditors appoint receivers include:

1. The debtor is in default or ceases to constructively engage with the lender
2. The debtor is insolvent and requests the secured creditor appoint a receiver
3. The secured creditors are at risk (for example, the debtor is disposing of assets of the company i.e. selling vehicles)

While the receivership process can be disruptive it allows for the receiver to take control of the affairs of the debtor.

Receivership Process

Preparation (optional, but preferred)

If we are anticipating a receivership appointment, and particularly if the debtor is cooperating, we will take steps to assess the affairs of the company, to come up with an action plan. Steps taken can include:

• Reviewing and analyzing financial information of the company and determining whether it would be feasible, or optimal to continue trading in receivership
• Preparing a general receivership strategy

Asset realisation stage

Upon appointment, we will take steps to secure the assets of the company. This usually includes attending the premises of the company and forming a view as to whether we will continue to trade the business.

Certain businesses, for example construction contractors and certain service based business are very difficult to trade in insolvency. Construction customers (particularly commercial) require a degree of certainty to ensure their projects proceed on schedule. That being said, we have traded construction businesses in the past for short periods of time to facilitate a handover of construction projects (and preserve any accounts receivable).

If we decide to cease trading, we will come up with a plan to realise the assets of the company. This could include running a sale process to sell the assets in-situ, meaning in place.

For example, we may run a sale process to sell a hospitality fit out, or engineering workshop to interested parties in-situ. An in-situ sale process represents a halfway between selling the business as a going concern (which is likely to produce the biggest return) and selling the assets via auction (which is likely to produce lesser recoveries). An in-situ sale process requires the cooperation of the landlord, among other parties. ?

Many companies have numerous secured lenders (for example, asset financing or suppliers of inventory). We will communicate with all secured creditors to determine where sale proceeds should be allocated, or if they would like to sell their assets independent of the receivership process.

We have prepared numerous case studies based on our previous receiverships, please see the following examples:

• Radiant Security: This involved the receivership of a security company. The company did not own any physical assets and its only asset was outstanding accounts receivable. A key challenge associated with service-based businesses is ensuring that customers do not face any disruption. We continued trading the business, eventually handing over the contracts to a new customer and getting our clients debt (a factoring company) paid in full.

• Fibre Optic installers: This was a small construction company, which had ceased trading prior to our appointment. We worked with the director to sell a motor vehicle with a specialist fit out to another operator in the sector and negotiated a deal to receive a payment from a customer.

• Highbrook Construction: A construction company, which had disputed an invoice our client had factored. Upon appointment we liaised with the customer, the director of the company and secured a legal settlement which involved a substantial payment to our client (75% of their debt) and the company. The receivership was concluded within five working days.

How do receivers recover money?

In contrast to liquidations, receiverships have a much narrower focus, with an emphasis on recovering and selling assets, once a receivership is concluded, control of the company will revert back to the debtor.

Classes of recoveries (general)

The table below sets out general categories of assets and descriptions.

With respect to fixed assets: This will be paid to the secured creditor first. If there is a specific charge on an asset (i.e. a vehicle finance loan has an outstanding balance), it will be paid to this creditor first, with the balance paid to the GSA holder.

Regarding Accounts receivable and inventory:Proceeds must be paid to certain preferential creditors (primarily certain former employee entitlements and Inland Revenue for unpaid GST and PAYE). Once these preferential debts have been paid in full, the balance can be paid to other secured creditors.

Real Estate / Land

Receivers can be appointed over companies where land is owned by the company.

The outcomes for real estate can vary greatly depending on the level of security. For example, whether the secured creditor has a first ranking, or second ranking mortgage, for whether the secured creditor is relying on a caveatable interest.

Mortgages are straightforward and will be paid ahead of all caveatable interests. The first ranking mortgagee will be paid in first, followed by the second ranking mortgagee.

Caveatable interests on the other hand are not straightforward; the priority of payment can depend on the nature of the cavetable interest (for example, and date of the obligation).

A common situation for a receivership is an appointment by a secured creditor because the property owned by the company has several caveats placed on it (preventing the sale of the property); in these cases it’s the receivers role to assess each caveat and work with various parties to facilitate the sale.

Investigating security interests (Priority between security interests)

The Personal Property Securities Act 1999 (the PPSA) articulates how competing security interests are ranked (i.e. who gets paid first out of a specific asset).

Receivers are generally appointed by secured creditors who have a security interest in all present and after acquired personal property this is a general security interest which effectively means the lender has an interest in all the assets of the company, there are exceptions, but this is a good general rule to follow.

Notwithstanding this, most companies we deal with have more than one lender, for example a finance company or bank will have a security interest in all present and after acquired personal property and a finance company will have a security interest in a specific motor vehicle.

Without going into detail, if the finance company does not have properly worded security documentation or does not register a financing statement within a specific timeframe (if at all), a situation can occur where the finance company funding a vehicle loan does not have the right to be paid first.

It doesn’t happen often, but it does happen.

Legal settlements and payment arrangements

As mentioned earlier, a receivership does not mean the end of a company.

The events leading to receiverships can vary greatly, however in some instances, the relationship with the lender company may have broken down, or alternatively the debtor company may have simply stopped responding. We have also encountered examples where governance issues in the debtor (for example the working relationship between two directors) has broken down.

It follows that it is possible for situations where a default has occurred under the loan agreement, but the underlying company is trading, or the debtor company may have alternative collateral, for example providing a personally owned property as security.

In these situations, the receivership debt can be refinanced, either through the same lender or a different lender, or paid in full.

A sub-optimal version of a legal settlement is a payment arrangement, which essentially involves the debtor providing a new timeframe and schedule to repay the loan. These are usually necessary if the assets of the business are insufficient to enable the repayment of the loan, but the debtor wishes to continue (for example if the business is a consulting company).

Read the full article by Waterstone senior analyst Michael Turner