Receivership

Perhaps one of the most powerful and yet under utilised tools in the corporate reconstruction arsenal is the formal administration tool of Receivership.

Seen by many simply as debt collection tools for banks and finance companies Receivership is misunderstood as to its really value in credit management

The power of the receiver to restructure

Clearly receivership is used to collect secured debt, but used early enough it is a powerful tool for restructuring a business.

Its benefit lies in the ability of the secured charge holder to suspend the powers of the directors  and appoint an administrator to look at the organisation commercially and without emotion.

Of course, left too late, the position may be irreversible, however even where the existing management and directors have destroyed the value of the business in the current legal shell (the present company) a good core business may be salvaged, and sold on to better capitalised and clearer thinking ownership; getting back the secured lenders advances in the process.

The receiverships act 1993

The law in New Zealand surrounding the operation of receiverships is found in the Receiverships Act 1993.

This sets out the obligations of the Receiver and lays down the ground rules for conduct of the administration.

The actual appointment of the receiver however is governed by the type of security that the company has granted to a lender. That document, known as a General Security Agreement or GSA, is registered on the Personal Property Securities Register (PPSR).

The GSA gives the secured lender certain rights when a borrower defaults under a loan agreement. These range from taking control of a single asset through to taking control over the whole company.

How are other charge holders affected by the receivers actions

The interests of every secured party are affected by the actions of a receiver appointed under a GSA.

Once a receiver sells an asset, all security interests that are subordinate to the GSA of the charge holder who appointed the receiver, lose all claim on the assets and their proceeds to the extend that the proceeds from the sale of the assets are needed to meet the GSA holders claim.

The order for payment of any surplus is contained in part seven of the Personal Property Securities Act 1999.

When can a receiver be appointed

Unlike a Liquidation process that can take some weeks (and often months) for an administrator to be appointed, the appointment of a receiver by the GSA holder can be almost immediate.

Usually a demand is made by the lender for payment of the debt and when the borrower does not pay the receiver is appointed. This can be anywhere from minutes after the demand has been made to several days depending on the preference of the charge holder.

Interestingly, it is not a legislative requirement that a demand be made, but doing so helps to head off potential litigation when the borrower subsequently says they could have paid and were willing and able to do so; had the charge holder simply asked.

Duty of care

It is often assumed by persons outside of the Receivership loop (unsecured trade creditors in the main) that the Receiver is all powerful and answerable only to the appointing charge-holder.

But that is not the case.

The Receiver has a primary duty of care to the appointing GSA holder, but he also has a duty of care to the company, other charge-holders and the creditors of the company not to act in a negligent manner.

Further the Receiver has a duty to obtain the best possible value for the assets of the business (which may be different from the best price) and he cannot sell them off cheaply just so he can pay out the GSA holder and then go.

Reporting

Aside from reporting on the progress of the receivership to the Company in receivership and the GSA charge-holder a receiver is also required to report offences under other acts if the offence is material to the conduct of the receivership.

This reporting covers not only an offence by the company but also by any director of the company under:

• The Companies Act 1993
• The Crimes Act 1961
• The Financial Reporting Act 1993
• The Takeovers Act 1993

There is no obligation to report offences under the Tax Administration Act 1994 however most Receivers will advise Inland Revenue if they uncover activity that has/had a material effect on the operations of the company as a result of breaches of New Zealand Tax law.

Liquidators and Receivers

A liquidator and a receiver can be appointed to a company at the same time. In many cases this is desirable as the liquidators interest are those of the unsecured creditors whereas the receiver is primarily interested in the GSA holder who appointed him.

A significant advantage of having a liquidator appointed once a receiver is in place is that the two year voidable preferences timetable kicks in from the date of the commencement of the liquidation. This means that payments where one creditor was favoured over another may be attacked by the liquidator sooner.

If unsecured creditors wait for two years while the receiver completes his administration before seeking to make an appointment, the opportunity to attack such preferences may be lost.