How is a Receiver Appointed
A Receiver is appointed under a general security agreement (GSA) or a deed, or by the High Court. A Court appointed Receivership is less common. Receivers are most commonly appointed over all present and after acquired personal property and undertakings of the company but can also (subject to the security agreement) be appointed over specific assets. A Receiver is most often appointed for financial reasons however Receivers can also be appointed as a result of shareholder dysfunction risking the welfare of the business or perhaps for the reason of fraud.
A Receivership is a mechanism for secured creditors to recover moneys due to them when the debtor fails to pay. There must be a default by the debtor for a Receiver to be validly appointed. The defaults that can be relied on are usually defined in the security documentation or in the case of the ADLS standard GSA in the memorandum that accompanies the document.
What happens in Receivership
The Receiver takes control of the company, its assets and its business undertaking. The appointment of Receivers most often leads to the company assets being realised for the benefit of the secured creditor (the appointor). In some cases the Receivers recover the indebtedness owing to the appointor (and any higher ranking creditors) and then retires handing back the business to the directors to continue to trade. In most cases the Receivership leads to the sale of business and the remaining company is left with debt and is ultimately placed into liquidation by the shareholders or on application of a creditor, by the High Court.
Appointing a Receiver does not necessarily mean the business is over. A receiver can be appointed to manage a business and then return the control to the Directors.
A Receivers Duty of Care
A Receiver occupies a difficult position. A Receiver is required to carry out duties with the interests of the company, its creditors and shareholders in mind. A Receiver has obligations to the company (which is likely in extreme financial difficulty) and to the secured creditor (the appointor) and must act with due care, skill and judgment in obtaining the best results reasonably possible in the circumstances. It is a statutory duty for a Receiver to obtain the best price reasonably obtainable.
A Receiver is entitled to favour the interests of the secured party who appointed him/her but must not conduct the receivership without having regard to the interests of others affected.
It is the duty of a Receiver as agent to act with reasonable care in dealing with the company assets to obtain the best possible price. This duty is not only to the company to reduce indebtedness to the secured creditor but also to the guarantor – who is liable to the same extent as the company.
A Receivers duty is similar to a mortgagee in possession exercising a power of sale. A mortgagee owes duties to the mortgagor and subsequent security holders who receive any surplus after the mortgagee is paid. A mortgagee in possession has a duty to obtain the true market value of the mortgaged property at the date of sale.
A Receiver that trades on a company in an attempt to trade it out of receivership must take reasonable precautions and be satisfied that there is a realistic prospect of trading out of indebtedness.
A Receiver cannot act hastily and must properly organise and advertise. Receivers have been criticised for taking casual approaches. If a Receiver does not for example rely on specialist advice when the circumstances warrant it, the Receiver can be held liable for negligence.
Examples of acting with a duty of care are:
• Ensure proper advertising of sale of business/business assets to attract the best interest and offers;
• Ensure the advertisement fully details the asset being sold and is published to reach the widest circle of possible buyers;
• Ensure customers of the debtor are advised of the sale of business;
• Gain expert advice on the best method for sale;
• Engaging experts/specialists such as brokers and real estate agents to sell specialised assets to the best advantage;
• Using reliable methods of sale for the type of assets – public auction or trademe for cars is an established well known method for sale;
• Gaining advice from specialist brokers for specialist equipment particularly when the market may be offshore;
• If assets are sold at auction sufficient time must be granted for purchasers to inspect the assets.
Receivers have a duty of care and occupy a difficult position.