Receivership

Objective

In the context of an insolvent or near insolvent company, a receiver will be appointed, in the ordinary course, by a secured creditor seeking to have the assets which are the subject of its security realised to enable the payment of its claim. The appointment, most often, will be made under the agreement by which the security is granted or might be made under one of the property law statutes which authorise the appointment of a receiver by the court for the purpose of enforcing a security.

As a matter of practice, the issue rarely arises; however, it is usually important to be certain that the security agreement permits not only the appointment of a receiver but also a manager. The ability to appoint a manager and the making of that appointment will mean that the appointee can operate the business of the borrower. Such appointments can be important if the business of the company is to be sold as a going concern. Unlike voluntary administration (VA), receivership does not result in a moratorium in relation to claims against a company.

An alternative to the appointment of a receiver which is available to a secured creditor with an enforceable charge over the whole or substantially the whole of a company’s property is the appointment of a voluntary administrator. While the introduction of the reforms concerning “ipso facto” clauses has changed the landscape to some extent (see Ipso Facto), it may be that a secured creditor will assess that the environment of a VA, particularly the moratorium provisions and the option of seeking court intervention to restrain - say, a lessor from exercising its rights - will better protect the value of its security. This will especially be the case if the value of that security is represented by the company’s business as a going concern that is able to be sold as such.

Process of appointment of receiver

For a receiver to be appointed, the secured creditor must be able to identify a contractual basis, usually described in the security documentation as an event of default, for making the appointment.

Additionally, the security agreement, typically, will describe the process which must be followed as a prerequisite to the appointment. Most often this will involve the secured creditor demanding that the borrower cure or remedy the event of default within a prescribed period of time, usually by payment of the outstanding liabilities of the borrower to the secured creditor.

If there is either no contractual basis for appointing a receiver or the process required to be followed as a prerequisite to the appointment is not observed, the appointment will be invalid. In such circumstances, the receiver will at least be liable for damages to the borrower, including for trespass and, if any of the property of the borrower is sold, for conversion.

Appointment of receiver

Once the prerequisites for appointing a receiver are satisfied, making the appointment usually requires no more than the secured creditor signing the appointment document and the receiver consenting to the appointment.

For a person to be appointed as a receiver they must satisfy the statutory qualifications for that appointment, including being registered as a liquidator.¹

Notice of the appointment must be given to the company as well as to ASIC.²

A typical timeline for the process of receivership is as follows:

Effect of receivership

The position of directors and other officers of the company, as well as their contracts of employment, are not affected by the appointment of a receiver. However, subject to the powers of the receiver, they may terminate contracts of employment.

Moreover, again subject to the powers and the terms of the receiver's appointment, receivers can take control of the assets of the company and the management of its business to the exclusion of its directors, officers and other employees.
This does not excuse directors from the observance of their duties. Nor does it preclude them from, either appointing a voluntary administrator or seeking the liquidation of the company; although, of course, neither the voluntary administrator nor the liquidator could exercise its powers to the exclusion of the receiver.³

As to other secured creditors with competing security interests, their entitlement to enforce their security will depend upon the priority of that security as against the priority of the security held by the receiver's appointor. However, where the holder of a prior security is refusing to discharge its security in circumstances where the receiver has agreed to sell the charged property, the receiver can seek the court’s intervention to require that security holder to release its charge.

The position regarding the performance of pre-existing contracts which applies in VA also applies in receivership, at least where the receiver is acting as the agent of the company rather than as the agent of the secured creditor. It should be noted that, where a liquidator is appointed to the company, the receiver can apply to the court for authority to continue to carry on its business as its agent.⁴

Preferred creditors

Where the security under which the receiver is appointed charges a company’s inventory, receivables and other similar assets, typically, it will be in the nature of either a floating charge or a circulating security interest. In such circumstances the proceeds of realisation of those assets are required to be applied first, after paying the costs of their realisation, in payment of the outstanding entitlements of the company’s employees who would receive preferential treatment if the company were liquidated.⁵

Powers of receivers

The powers which could be exercised by a receiver are provided for by both the Corporations Act 2001 (Cth) (CA) and, usually, the security agreement.⁶   However, it will be the instrument of the receiver's appointment which will prescribe the powers which they can exercise.

In the ordinary course, it is to be expected that a receiver can and will be invested with very extensive powers when it comes to both taking control of the borrower's property as well as managing its business. As with VA, the receiver is personally liable for debts incurred in the course of receivership.⁷ Usually in Australia, receivers are indemnified by the secured creditor who appointed them for debts and other liabilities incurred by them whilst acting as such.

Duties of receivers

Receivers are officers of the company, and, accordingly, are subject to the statutory and general law duties attaching to such a position.

So, whilst the primary duties of receivers are owed to the secured creditor which appointed them, they also have statutory duties to the company, including to exercise their powers:

(a) with a degree of care and diligence that a reasonable person would exercise if they were in the same position as an officer of the company; and⁸

(b) in good faith in the best interests of the company.⁹

Moreover, they may not use their position or information which they obtained as receivers to gain advantage for themselves.¹⁰

These statutory duties reflect the general law duties of receivers as officers of the company.

Additionally, the CA imposes a duty on receivers, when selling an asset of the company, to obtain a price which is not less than the market value of that asset or, if there is no market for it, the best price that is reasonably obtainable, having regard to the circumstances existing when the asset is sold.¹¹ When assessing whether that duty has been discharged, the courts, which have been more concerned with process than outcomes, take into account a number of considerations, including:

(a) the nature of the property to be sold and any special qualities it may have;

(b) whether an expert valuation of the property was obtained;

(c) the means by which the sale of the property was advertised;

(d) the method by which the property was sold; and

(e) whether any expert advice was obtained about the way in which the property should be sold.

Limitation on powers of receivers

One limitation on the exercise by receivers of their powers is that they must retire once they are in a position to discharge:

(a) their own liabilities;

(b) the claims of creditors with preferential entitlements, whether by reason of the Corporations Act or on account of some prior ranking security; and

(c) the claims of their appointor.

Moreover, the court may remove receivers once the objective or purpose of their appointment has been achieved.¹²

Clearly, such a limitation on the powers of receivers, or the implications of the jurisdiction of the court, may impact upon the ability of receivers to assume control of a company’s affairs on a medium to long-term basis for the purpose of undertaking a restructure of either the company itself or its business.