Receivership is a legal process in which a suitably qualified person, the receiver, acts as a custodian to safeguard a company’s assets should the company find itself in financial difficulty. Receivership occurs when one or more of the company’s secured creditors, who holds security over some or all of the company’s assets, appoints a receiver to take control over those company’s assets. There is no requirement for a court to approve the appointment of a receiver, however, in special circumstances, a court may do so.
One distinguishing feature of receivership is that a company may continue to trade while directors remain in office, however, their roles are limited. The directors remain liable to perform their statutory liabilities, such as the filing of annual returns and will retain power over any assets which are not the subject of the receiver's appointment. This is in stark contrast to companies facing liquidation or in administration.
Receivership also allows a company the opportunity to submit a proposal to creditors rather than going into liquidation. Another key difference is that being in receivership doesn’t necessarily indicate that a company is close to winding up in the near future. That company may indeed survive and succeed once the receivership comes to an end.
What are the causes of receivership?
There are numerous factors that may cause a company to go into receivership. Some of these factors are:
- A company that defaults on loan repayments to secured lenders or cannot meet their debts,
- Inadequate resources to cover the costs of making the business viable,
- Poor or improper financial management,
- Lack of expertise and commercial acumen in business operations and practices,
- Unresolved disputes between shareholders or directors of the company, and
- On-going losses and failure to improve trading performance.
What is the role and responsibility of a receiver?
A receiver may have the responsibility of extending their role in managing the company, in order to provide a company with the opportunity to restructure and avoid liquidation. An appointed receiver can carry on the company, or close it down, or sell it off.
The receiver’s main task is to realise sufficient funds to repay the secured creditor. It is interesting to note that a receiver does not owe any general duty of care to the shareholders. Here are some examples of what the role entails:
- Managing a company’s assets, obligations, and its restructuring,
- Assisting a company back into recovery,
- Protecting threatened property and assets during legal proceedings,
- Returning a company to a profitable state,
- Reviewing a company’s practices and overseeing that it’s complying with government standards,
- Collecting and selling charged assets to repay what is owed to secured creditors, and
- Reporting any possible offences or irregular matters that may cause ASIC to investigate the conduct of anyone involved with the company’s management or control.
Who is a creditor?
There are generally two types of creditors; a secured creditor or an unsecured creditor.
A secured creditor is someone who holds security over the company’s assets. The appointed receiver will collect and sell the company’s assets to repay what is owed to secured creditor.
An unsecured creditor is a creditor who does not hold a security interest in the company’s assets and who does not have their debt associated with a particular asset. Unfortunately, a receiver may not be able to assist an unsecured creditor to recover its debt. This is because secured creditors are afforded priority in terms of repayment. If the company survives receivership, it will either continue to operate or will have leftover funds to distribute to unsecured creditors.
How can Sharrock Pitman Legal help?
If you are a secured creditor who is owed money by a company or your company is facing financial difficulty and you wish to discuss receivership or explore other options, we have legal practitioners who specialise in and can assist in corporate insolvency and commercial litigation. Please contact us on 1300 205 506 or by email at litigation@sharrockpitman.com.au.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
Liability limited by a scheme approved under Professional Standards Legislation.
Caroline Callegari is an Associate Principal and leads our Disputes & Litigation team. She has an advisory and advocacy practice in the following areas: Commercial Litigation, corporate and personal disputes, debt recovery and, insolvency and bankruptcy matters. Caroline can be contacted on (03) 8561 3324.
