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Receivership and its consequences
An administrative receiver may be appointed under the authority of a fixed charge and, if this is the case, his authority only extends to assets covered by the fixed charge. If he is appointed under the authority of a floating charge, his authority is over all assets and he has the power to run the company. Most bank debentures are in the form of a fixed and floating charge and they give the receiver the power to take control of all the assets and to manage the company. The directors are relieved of their powers during the course of this type of receivership.
The appointment of a receiver is often, but not always, made by a bank and the circumstances in which a receiver may be appointed depend on the wording of the debenture. A receiver must be a licensed insolvency practitioner and must act in a professional manner, with due regard to the interests of creditors in general and members of the company. However, it should not be forgotten that the first duty of a receiver is to protect the interests of the people who appointed him. Their interests are not the same as the interests of the creditors in general and the unsecured creditors may be disadvantaged.
One of the duties of an administrative receiver is to draw up a report and send it, amongst others, to all known creditors. This will include an estimate of how much (if anything) is expected to be available for preferential creditors and how much (if anything) is expected to be available for unsecured creditors. At the end of the receivership the company may well be put into liquidation and if this happens, the receiver will hand any available funds to the liquidator. If the company is not to be wound up, the receiver relinquishes control and hands control of the company back to the directors, though this does not happen very often.
Imminent legislation is likely to reduce the number of receiverships and increase the number of administration orders, under which unsecured creditors sometimes fare better. Details were given earlier in this article. The appointment of an administrative receiver is almost certainly bad news for an unpaid ordinary creditor.
It means that the company has got problems, probably severe problems and quite possibly terminal problems. It also means that assets that would have been available to fund the payment due to him have been taken out of the pool of assets that may be used for that purpose. It means that he is probably going to be saddled with a bad debt, although this is not always the outcome. Unfortunately there is not much that can be done about it, though he should receive information from the receiver.
No legal action may be commenced or continued against the company and no execution may be levied against the company or its goods. This sounds, and is, gloomy, but before leaving the subject it is worth mentioning two strategies that just may be of some use to an unsecured creditor.
Retention of title
The appointment of an administrative receiver does not prevent the exercise of retention of title rights. This is unlikely to be of use to a claimant who has already started an action because, if it was possible to do it, recovery of goods would presumably already have been accomplished. On the other hand, it might be of use to a supplier who had made supplies in the not too distant past.
Receivers are not known to show excessive compassion in recognising retention of title claims and they will make a supplier show that a claim is valid. You might be able to bluff the company but this will not work with a receiver. This is fair enough and you must be able to show that you are right, but having done so do not be put off. You should assert your claim early and forcefully, and you should threaten the receiver with legal action if necessary. This does work as the writer knows from personal experience. Prompt action is important because, in these circumstances, goods have a bad habit of going missing.
Future deliveries
An administrative receiver has many powers but he does not have the power to make suppliers enter into fresh contracts. They will only do this if they want to do so. The receiver may wish to carry on trading, at least for a short time, and he may badly need further supplies. He will not order with personal liability but he will be very unlikely to place new orders for which payment will not be made.
This may give key suppliers a bargaining position and they may be in a position to refuse unless some progress is made with the old debts. Circumstances vary and the possibilities should not be overstated, but it is worth consideration for a few suppliers. Unfortunately it is unlikely to help most suppliers and the receiver may see things differently.