How do you appoint a receiver?

Estimated reading time: 6 minutes Other

A receiver must be an independent and suitably qualified individual. This means, in nearly all cases, that the receiver must be a registered liquidator and satisfy a range of other requirements that apply to receivers.

How do you appoint a receiver?

Summary

  • Receivers are appointed to ensure payment of the debt of certain secured creditors;
  • They are distinct from liquidators or voluntary administrators, though, as with those appointees, they can also be appointed in the case of insolvency;
  • Unlike liquidators or voluntary administrators, receivers act only in the interests of certain secured creditors;
  • The inefficiency that arises in the case of appointing receivers, as well as liquidators or voluntary administrators, raises the question of whether receiverships should be restricted in Australia.

In Australia, there are various ways in which new controllers can be appointed to companies to achieve positive outcomes for creditors. Where a company is insolvent, or at risk of insolvency, a voluntary administrator or liquidator may be appointed in order to achieve a positive outcome for creditors as a whole. Another possibility is the appointment of a receiver. Receivership involves an independent and suitably qualified person being appointed to secure payment of a specific debt of a secured creditor. In this article we look at:

  • Secured creditors and receivership;
  • The appointment process for receivers and the cessation of receivership; and
  • The future of the receivership role.

Secured creditors and receivership

A secured creditor is someone with a ‘security interest’, such as a general securities agreement, in all of the company’s assets. This ‘secures’ the debt.  In order to ensure enforceability, a security interest over personal property must then be registered on the Personal Property Security Register (PPSR). The details of the security interest must also be specified in a ‘security agreement’ which should establish a ‘trigger event’ determining when a receiver will be appointed (such as after a certain period of non-payment of the debt). Traditionally, receiverships have been a common mechanism for Banks seeking to enforce their security interest, however, those types of receiverships are declining as Banks weigh up the reputational risks of appointing a receiver.

The security interest may be  ‘non-circulating’, which means a security interest is in land or plant and equipment. Or, it may be ‘circulating’, which means a security interest in assets used and disposed of in normal trading, such as debtors, cash or stock.

When the trigger event occurs, a receiver will be appointed to take control of some or all of the company’s assets in accordance with the security agreement and requirements specified in the Corporations Act 2001 (or in some cases when appointed by the Court; we will not discuss court-appointed receivers in this article). The goal of the receiver is to secure repayment of the debt through their sale or possession of the charged assets (‘collateral’).

The practical effect of a receiver’s appointment on a business is distinct from the appointment of a liquidator or voluntary administrator. While it is common for a company under receivership to be experiencing financial challenges:

  • receivership means that the company may continue to trade;
  • a company under receivership is not always on the path to being wound up (though this is often the case).

Notably, the receiver is obligated only to the secured creditor who appoints it, rather than creditors as a whole.

Appointment of receivers

A receiver must be an independent and suitably qualified individual. This means, in nearly all cases, that the receiver must be a registered liquidator and satisfy a range of other requirements that apply to receivers (such as a prohibition on being an officer of the company in question as per s 418 of the Corporations Act).

In addition to their primary obligation to the secured creditor, the receiver has an obligation to pay any money in accordance with the priority rules dictated by the Corporations Act 2001 as well as report to the Australian Securities and Investments Commission (ASIC) any possible offences or other irregularities.  Where the terms of their appointment include the ability to manage the business itself, the appointed person is not simply a receiver but a ‘receiver and manager’.

On appointment, the receiver will usually require an indemnity from their appointor – this makes the appointor liable for their fees (if unrecoverable) and possibly for any damages incurred. There is a trend in the industry for the appointor to only provide limited indemnities as set out in an indemnity deed. Note also, that the Court has a broad supervisory role over receiver fees (see Corporations Act 2001, s 425). Where the receiver is appointed in an insolvency, the creditors have the power to review receiver fees in accordance with the Insolvency Practice Rules (Corporations) 2016 (see in particular divisions 60 and 70).

Once the receiver has collected and sold all of the collateral or enough collateral to repay the secured creditor, completed all their receivership duties and paid their receivership liabilities, they will be discharged by the secured creditor, or resign.

The future of receivers

In 2016, the Parliamentary Joint Committee on Corporations and Financial Services, looked into receivership in practice in Australia and identified a range of concerns with how receiverships had been occurring, including:

  • receivers selling properties and assets at less than market value;
  • receivers not considering or taking up sale options put forward by borrowers;
  • the level of receiver’s fees;
  • harm to businesses caused by receivers lacking relevant experience or poorly administering businesses;
  • lack of information provided to borrowers by receivers.

Another general worry with the operation of receiverships in Australia is where the appointment occurs at the point of insolvency. This means the appointment of both a receiver and a liquidator (and sometimes a voluntary administrator). This can lead to conflict as the liquidator acts in the interests of all creditors whereas the receiver acts only to achieve a specific outcome for one secured creditor.

In addition, there is inefficiency arising from the duplication of costs inherent in the appointment of both types of insolvency practitioner.  This has the potential to further deplete the company’s assets and returns available for all creditors. As secured creditors already have priority according to priority rules in the Corporations Act 2001, this raises the question whether receivership as a separate option in insolvency is still required. Receiverships have been largely discontinued in the United Kingdom on this basis. It remains to be seen whether Australia will follow suit at some point.

Conclusion

Receivership is an option for any secured creditor that wishes to enforce a loan. Parties appointing receivers need to consider carefully any indemnity for the receiver’s fees. Furthermore, any company agreeing to the appointment of a receiver at the occurrence of a certain trigger event needs to consider the potential impact on the business more generally and the general pool of creditors. It is still an open question whether receiverships as currently conceived should continue to operate in Australia.

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