What is the Role of a Receiver?
A Receiver is appointed either under a general security agreement (GSA) or a deed, or less frequently, by the High Court. 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 usually appointed for financial reasons, although receivers can also be appointed as a result of shareholder dysfunction which may be placing the ongoing business at risk.
A Receivership is a mechanism for secured creditors to recover moneys due to them when the company/debtor fails to pay. There must be a default by the debtor for a Receiver to be validly appointed. The security documentation, or in the case of the Auckland District Law Society (ADSL) standard GSA in the memorandum that accompanies the document, will outline what a default is. Payment arrears is the normal default.
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 most 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. That is on the proviso that there are any assets left. In most cases the Receivership leads to the sale of the business and the remaining company is left with debt, and is ultimately placed into liquidation by the shareholders or on application of a creditor to 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 once the appointor has been paid back, return the control of the company back to the directors. It may be that a part of the business is performing poorly and needs to be divested to give the remaining business an opportunity to succeed.
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. The Receiver has obligations to the company (which is most likely in extreme financial difficulty), and to the secured creditor (the appointor) and must act with due care, skill and judgement to obtain the best results reasonably possible under 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 interest of others affected.
A Receiver that trades on a company in an attempt to trade out of receivership must take reasonable precautions and be satisfied that there is a realistic prospect of trading out of indebtedness. A Receiver is therefore quite rightly cautious and will review and analyse past trading, and consider any future prospects without the rose-tinted glasses that directors of struggling companies so often have. Independent valuations of the plant and equipment are usually obtained by two suitably qualified valuers to understand a fair value that the receiver would expect to realise.
Receivers have a duty of care and occupy a difficult position. However, the Receiver is the enforcer if you are owed money under a GSA that is in default!