Receivership | Limited Company Debt
What is Receivership?
When a company borrows money from a bank on an overdraft or loan, it will be common for the bank to ask for a security (debenture) against such a loan. If anything goes wrong with the business this security gives the bank more power to get their money out of the company. Essentially it is like a secured loan or a mortgage on your house. If the company runs into financial difficulty then the bank can call the money in more easily than without the security.
Before September 2003 this used to be a very common debt recovery tool for the banks. On 15th September 2003 the UK Government introduced changes, set out in the Enterprise Act 2002, to phase out Receivership as a debt solution. The reason for this is that the banks were usually first to be aware of a company's financial worries and made sure they got their money out quickly without any consideration for the other creditors.
It is less commonly used now and will disappear gradually. Most often banks use administration as a solution now.
Note: If your company has borrowed money from a bank before 15th September 2003 and you granted a debenture (security) before that date, then it is still possible for the bank to appoint a receiver. If the borrowing was after that date they cannot appoint a receiver at all.
What is the role of the Reciever?
The Receiver's role is mainly concerned with getting back any money owed to the bank. The Receiver may sell the business as a whole or sell assets individually, to pay off the bank, and the costs of the receivership, which are usually quite high.
Advantages of Receivership:
- The bank can take control where directors have perhaps lost control.
- The receiver has power to act to save the business quickly.
- The bank can ensure that its exposure is (at least) not increased and can hopefully recover all of its money.
- It can mitigate the risk of wrongful trading
Preferential creditors may see their debts repaid by the receiver.
Disadvantages of Receievership:
From the company's point of view the company is rarely saved in its existing form, its assets will be subject to "meltdown", often jobs and economic activity are lost.
From the directors' perspective he/she will typically lose their employment and any monies the company is due to them and the company may cease to trade. In addition the director's conduct may be investigated.
From the creditors' perspective it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. The cost of receivership can be very high and the bank has to pay the receiver's costs.
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