What is Receivership?

Companies that are struggling to repay debts haven many options available. Formal procedures such as Administration or Liquidation often result in the business being closed.

But, alternatives like Receivership are a good way to repay debts and improve the chance of the business’ survival.

Entering into a receivership is a serious commitment for a business. While it allows directors to negotiate with creditors and repay debts on a more achievable time scale, it can also result in Administration or Liquidation. For that reason, it’s important to understand how receivership works and what your obligations are during the process. In this article we’ll discuss the topic in more detail and how it can affect your business.

What is Receivership?

Receivership is a formal process that allows a secured creditor to recover the money they are owed from a debtor company. If the debtor company becomes unable to make repayments on a secured loan (such as a mortgage over company assets), the creditor can appoint a receiver.

A secured creditor (or the Court) can appoint a receiver where:

• The company has defaulted on loan repayments
• There is a failure in business control
• To resolve disputes between shareholders and directors
• The company experiences continued trading losses
• The directors lack the skill set to navigate financial difficulties

The receiver’s job is to assess the company’s financial position and look for ways it can repay some (or all) of the money owed to the secured creditor. This may include selling the secured asset, selling other company assets and negotiating more achievable repayment terms.

The Role of the Receiver

Receivers are independent, registered professionals that specialise in managing and recovering money from struggling companies. If a company becomes unable to meet the terms of a secured loan or mortgage, the creditor (typically a bank) or a Court has the right to appoint a receiver.

As soon as they are appointed, the receiver immediately takes control of the company, its assets and its day-to-day operations. The receiver is empowered to manage the company while investigating its financial affairs.

The main role of the receiver is to:

• Investigate the company’s finances
• Determine what assets the company owns
• Determine which assets are available to discharge the outstanding debt
• Develop a repayment agreement between the debtor and creditor
• Determine the conditions of the agreement
• Nominate a registered trustee to oversee the agreement

It’s important to note that the receiver only has a duty to the secured creditor that appointed them. The receiver typically isn’t required to share their findings with other creditors, and they aren’t required to make repayments against other outstanding debts (excluding employee entitlements).

The goal of receivership is to repay the amount that is owed to the secured creditor. This can often be done without needing to place the business into Liquidation or Administration.

The Receivership Process

The receivership process is relatively straightforward. The exact steps required depend on the nature of the debt owed and how the debtor company is structured. In general, receivership consists of the following steps:

• The receiver is appointed by a secured creditor. The creditor typically needs to file an application with the court that details the value and nature of the debt owed. If the court approves the petition, the creditor may appoint a receiver.
• The receiver takes control of the company and begins investigating its financial situation. This includes assessing cash flow, day to day expenses and asset inventory.
• Once the receiver has identified which assets are available to discharge the debt, these assets are sold or liquidated.
• Funds collected from the sale of assets are distributed to the appointing creditor. If the sale of assets generates more money than the value of the outstanding debt, the remainder of the money is returned to the company. In some cases, the receiver may be required to pay employee wages and entitlements before repaying the appointing creditor.
• Finally, the receiver completes their tasks, reports any malpractice to ASIC and seeks the court’s approval to close the receivership. Control of the business is returned to its directors if the debt was successfully discharged.

What Happens at the End of a Receivership?

Receivership ends when the receiver has:

• Collected and sold enough assets to repay the secured creditor
• Paid any liabilities incurred during receivership
• Completed other duties, such as reporting findings to ASIC

Once these things are complete, the receiver will resign, or they may be discharged by the appointing creditor.

It’s also common for an administrator to be appointed when a company goes into receivership. The administrator is charged with looking after the interests of unsecured creditors.

Full control of the company is returned to its directors once the receiver and administrator have both resigned. If the receiver is unable to recover enough money to repay the secured creditor, the company may proceed to liquidation.