What Happens if my Limited Company goes into Receivership?

What happens when a company goes into receivership?Receivership, was formally known as administrative receivership, this type of legal process is whereby a receiver is appointed by a floating charge holder such as a bank or other lender. The receiver then “receives” any of the assets of the company that it can liquidate in order to pay back the lender.

Receivership and administration are two different processes and should not be confused as a receiver can only be appointed by a holder of a qualifying floating charge that was created before September 2003. 

Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses.

Why might a company go into receivership?

Your limited corporation may enter receivership for a variety of reasons. Maybe your business needs money for its operations, so you borrow money from a bank or another secured lender.

The corporation will normally sign a debenture with a fixed and floating charge, and your lender will want security in exchange for the loan. In turn, this provides the bank with security over the assets of the business

There are a number of reasons why a company might go into receivership, including:

  • Financial difficulties: The company may be facing severe financial problems, such as mounting debt, cash flow issues, or losses that make it difficult for the company to meet its obligations.
  • Breach of loan covenants: The company may have breached the terms of its loan agreements, which can trigger a default and lead to the appointment of a receiver.
  • Insolvency: The company may be unable to pay its bills as they come due, which is a sign of insolvency.
  • Legal action: A creditor or other party may seek to have a receiver appointed as part of legal action against the company.
  • Fraud or mismanagement: In cases of fraud or mismanagement, a receiver may be appointed to investigate and recover assets for the benefit of the creditors.
  • Voluntary appointment: The company’s management or shareholders may voluntarily request the appointment of a receiver in order to restructure the company’s operations or to help the company avoid bankruptcy.

In summary, a company may go into receivership due to a financial difficulty, breach of loan agreements, insolvency, legal action, fraud or mismanagement, or voluntary appointment.

What happens when a company goes into receivership?

When a company goes into receivership it means that a creditor (usually a bank or financial institution) with a qualifying floating charge wishes to recover money owed to them, it does the following.

  • The bank will ask for increased security from the directors, usually in the form of personal guarantees.
  • It may also ask for the directors to present a new business plan.
  • Sometimes the bank will ask the company to consider borrowing against accounts receivable (factoring) to reduce the loan amount.
  • If the bank is still not satisfied, it will ask investigating accountants (insolvency practitioners) to investigate the financial health of the business further.

They will ascertain:

  • Whether the business is still viable
  • Whether the bank’s exposure is sufficiently covered by the company’s assets if it cannot repay the loan
  • The value of the business’ assets as a going concern and their value if the business were to close
  • Whether the banks should appoint an administrator or receiver

Depending on the insolvency practitioner’s findings, the receivership process can begin quickly, particularly once the bank has the right to exercise ‘power of sale’.

The whole process will be sped up further if the loan agreement contains a provision allowing for the express appointment of a receiver.

Once a receiver is appointed their rights and powers will be guided by Section 109 of the Law of Property Act, as well as any fixed charge provisions written into the debenture itself.

Essentially, the receiver has extensive powers to recover the money owed so will commence whatever actions are necessary to get the job done.

What is the difference between a receiver and a liquidator?

A receiver and a liquidator are both appointed by a court or a creditor to manage the assets of a company, but they have different roles and responsibilities. A receiver is appointed to take control of a company’s assets and manage them on behalf of the creditors, with the goal of realizing as much value as possible from the assets to repay the company’s debts.

A receiver’s role is typically focused on preserving the value of the company’s assets and operations in order to maximise the return to the creditors. A liquidator, on the other hand, is appointed to wind up a company’s affairs and distribute its assets among the creditors.

The liquidator’s role is to sell off the company’s assets, collect any outstanding debts, and distribute the proceeds among the creditors according to their priorities. The liquidator’s role is to close down the company, its role is more final than that of a receiver

What does it mean when a receiver is appointed?

When a receiver is appointed it means that they will act in the best interests of the creditor to recover back the money it is owed on behalf of the creditor.

If more than one creditor holds a charge against the company, repayment priority will be dictated by the level of the securities.

What does the receiver do?

The  receiver’s job is to act in the interest of the creditor who appointed them to recoup the debt the creditor is owed. 

The receiver will assess the business and its prospects to determine whether to:

  • Sell some or all of the company’s assets
  • Sell the business as a whole
  • Continue to trade 

The receiver will choose the course of action that is likely to achieve the best results for the creditor. Essentially, the company’s fate is in the receiver’s hands – the receiver is not required to seek advice from the directors.

They must pay preferential debts first from any floating charge collections. This may include employee claims for pay arrears or holiday pay. For receiverships that take place after 1 December 2020 preferential creditors also include unpaid VAT and PAYE.

The receiver will also investigate the directors’ conduct and report their findings to the government.

There is no standard timeframe for receivership. In some cases it takes just a few months, while in others it may carry on for several years

Disadvantages of receivership?

There are several disadvantages to administrative receivership, many of which were the driving force behind the government’s decision to remove it as a recourse for creditors with security entered into after 2003.

In most cases, the only party to benefit from the appointment of an administrative receiver is the creditor who appointed them. Administrative receivers often strip and sell companies’ assets in order to ensure that the relevant creditor receives their investment.

There’s often no surplus funds after the relevant creditor has been repaid, so the company’s other creditors lose out on their investments. The directors and employees can find themselves without a job very quickly, and an investigation will be launched into the directors’ actions prior to the appointment of the administrative receiver.

Advantages of receivership?

The advantages of receivership include that a receiver also has power to act to save the business quickly. The receiver does have powers that enable him to turn the company around should this be the decided course of action. This may be beneficial where the company is profitable but is suffering because of poor management decisions.

The process also means that the relevant creditor should be protected from further losses on its loan – it may even be able to recover the full amount of its debt with surplus left over for other creditors

Can you stop receivership?

The simplest way to stop receivership is to complete closure of the business to repay its secured debts.

It is possible that the value of the company’s assets is sufficient to cover the level of debts owed, and the business can continue to operate after the receivership. However, this is the exception rather than the rule.

Be aware it is often the case the lender involved may strip out assets to secure their debts and leave the empty shell of the company including employee redundancies for you, the director, to resolve.

Administration vs. Receivership

The two differences between administration vs receivership is that receivership is a more threatening scenario than administration.

Administration will offer a breathing space during which an experienced insolvency practitioner can assess the company situation with a view to weighing up the options and opportunities available to them.

Receivers have a dedicated focus to recover money on behalf of the secured creditor. With the power to sell assets, this can mean that companies, more often than not, end up in liquidation once the receiver has finished.

Insolvency & Restructuring Expert at Business Insolvency Helpline | + posts

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.