What is receivership?
Posted on 11th October 2021 at 15:42
A receivership is a tool that is available to secured creditors to recover debts owed under the secured loan agreement. A receivership is also a court-appointed tool that can help secured creditors recover funds that are in default. Having a Receivership in a place makes it easier for the secured creditor to recover their funds.
A Receivership works to realise the assets of a company, to maximise the benefit for the secured creditors. Receivership will usually result in the company also entering liquidation at the same time. Receivership is initiated by those creditors, or banks, that believe the business cannot pay its debts. The receiver will not often take advice from directors, and will investigate their conduct in relation to their company duties and responsibilities. However, receivership does not terminate the powers of the directors in relation to the company, but only the assets secured by a charge.
The receiver must be an independent party who does not have and business relationship prior to appointment with the borrower or the lender and should never act for the benefit of one party and to the detriment of the other.
Receiver’s Role and Powers
A receiver may remove directors and employees without impunity.
These people decide the way forward and will not take any advice from directors.
When the deal is done with the directors then the receiver should first advertise the business and the assets for sale.
The proceeds raised from the sale of the assets pay the preferential creditors first.
The receiver should conform to the strict rules and regulations, which are governing receivership and report to the DBEIS.
Why would a company go into Receivership?
The secured creditors feel company’s trading activities are unable to meet its debts but there are sufficient assets to do so.
Receivership helps the business settle its secured debts through the assets of the company.
The Receiver can evaluate and realise the company’s assets quickly and effectively to repay the debts owed to secured creditors.
The receiver’s duty is to collect the secured creditor’s debts only, and not worry about the other unsecured creditors, staff or shareholders.
When businesses are in trouble and the relationship with the secured creditors breaks down then the secured creditors will appoint a Receiver to realise the assets secured by a charge and settle any debts due. The Receiver will often sell off assets way below their value in order for a quick sale. The secured creditors have no interest in any other creditor, employees or shareholders providing they can recover monies due to them
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