Q. I read your answer on liquidation and insolvency last week with interest. However, I have a different set of circumstances. I have a trading company with the trading premises held within the company and financed by a large bank loan. The lending bank has a fixed charge over the property and a floating charge over the other assets. I am not going to be able to keep the repayments going on the loan much longer. I have only been able to do so by increasing the period during which I can pay my creditors and I can’t do this much longer as the creditors have me under huge pressure. I have been told that the bank might appoint a receiver but your answer last week did not refer to this. What is a receiver and how is a receiver different from a liquidator?
A. Unfortunately, I think that what will happen here is that the bank will end up appointing a receiver to your company so I have summarized below when a bank can appoint a receiver and the rights and powers of a receiver. Your bank will be entitled to appoint a receiver when you go behind in your payments or when the process of appointing a liquidator to the company commences, both of which are usually events of default.
The High Court also has jurisdiction to appoint a receiver on application by a creditor but this is relatively rare. When the receiver is appointed, a notice of appointment must be sent to the company and, within 14 days, the company must swear a statement of affairs and submit it to the receiver. This statement must then be sent by the receiver to the Registrar of Companies and the appointing bank, together with a note of the receiver’s comments. A receiver can be appointed as either a ‘Receiver’ or a ‘Receiver Manager’.
The powers of a receiver generally include the power to take possession of the charged property and the power to sell that property. A receiver manager acts as manager of the business for the duration of the receivership and so will often have the power to carry on the business of the company, to borrow money, to employ or dismiss employees, to compromise debts of the company and to insure and repair property. In your case, because the loan agreement creates a charge over the entire undertaking and business of a company, the bank will probably appoint a receiver manager.
Unlike liquidation, on the appointment of a receiver, the legal status of the company is not affected. However, the following will occur;
— any floating charges in relation to the company’s assets crystallise and become fixed charges.
— the powers of the company and the authority of the directors are suspended.
The receiver is an agent of the bank but most loans will state that the receiver acts as an agent of the company. Because of this, the company is responsible for the acts and defaults of the receiver as well as his or her remuneration. Most loans will provide that a receiver will have the power of attorney on appointment enabling him or her to do all acts necessary to enforce the security.
A receiver’s primary duty is towards the appointing bank. Nevertheless, a receiver is obliged to exercise all reasonable care to obtain the best price reasonably obtainable for the property as at the time of the sale. Where a receiver realises assets which are the subject of a floating charge, he or she is obliged to pay all preferential creditors before applying the proceeds to discharge the debts owed to the bank. Any surplus is then paid back to the company. Preferential creditors are primarily the Revenue Commissioners and payments owed to employees.
Where a receiver receives assets which are the subject of a fixed charge or legal mortgage, he or she is not obliged to pay preferential creditors and, accordingly, applies the proceeds to discharge debts owed to the bank and then pay any surplus to the company. Where a receiver has been appointed to a company and a liquidator is subsequently appointed, the receiver’s appointment is not affected.
However, the liquidator can apply to the High Court to have the receivership determined or limited. In such circumstances, the court may order that the receiver shall cease to act or shall from a certain time act only in respect of certain assets specified by the court. In conclusion, if you go into the default or liquidation is threatened, the bank can appoint a receiver who will sell the company premises held under the fixed charge and repay the bank, realize the assets held under a floating charge, pay the preferential creditors and then the bank and then cease to act. The company normally proceeds into liquidation at that point with a very limited prospect of unsecured creditors receiving any funds.