Company 2 Receivership PDF

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LW231 Company Law II Topic 4 - Receivership

1.

What is a Receiver?

The most common way for a debenture holder to realise his security is to appoint a receiver. A receiver is a person appointed whose function is to receive a debtor’s asset for a creditor who has an entitlement over the asset. The receiver will take control over the charged asset(s) and sell them to discharge the debt owing to the debenture holder. The main legislative provisions concerning receivers are set out in Part 8 Companies Act 2014.

2.

Appointment of a Receiver

A receiver may be appointed in either of two ways:

1. On foot of a Court order on application to the High Court by a creditor. The receiver who is appointed by the Court has the status of an officer of the Court. The circumstances in which this jurisdiction is commonly exercised is where a debenture holder fears that the their security is in jeopardy and applies to the court for the appointment of a receiver, even though, under the terms of the debenture itself, an event of default entitling the debenture holder to appoint a receiver may not yet have occurred. 2. By a secured creditor, on foot of the powers contained in a debenture. A receiver appointed pursuant to the debenture is essentially a creature of the contract and the criteria for appointment will depend on the terms of the debenture itself, and will vary from debenture to debenture. They may include the following; o the principal sum falling due becomes payable; o the company fails to pay any instalment or interest; o the company ceases, or threatens to cease carrying on its business; o a resolution is passed to wind-up the company;

o the company acts in such a way as to endanger or jeopardise the security created by the debenture; or o the company is unable to pay its debts. A creditor owes no special duty to a company in deciding whether or not to appoint a receiver. It is probable that the debenture holder owes a duty to take reasonable care to appoint a competent receiver but otherwise he is entitled to subordinate the company’s interests to his own as long as he is acting in good faith. Shamji v Johnson Mattley Bankers Ltd (1986) 2 BCC 98.

3.

Receivers and Receiver Managers

The appointment of either will depend on the nature of the debenture under which the receiver was appointed. Where the primary property mortgaged or charged is a specific asset or series of assets, the appropriate appointment is of a receiver. However, where the debenture created charges over the entire undertaking and business of the company, the debenture holder may appoint a receivermanager.

4.

Formalities

For a valid appointment, the procedures set out in the debenture must be followed exactly. If deviated from to an appreciable extent, the appointment will be a nullity and the receiver will be a trespasser on company property. Merrow Ltd v Bank of Scotland [2013] IEHC 130 If the debenture itself was invalid (eg. the charge was not registered in accordance with Part 7 Companies Act 2014, or if the charge is a fraudulent preference) the appointment will also be invalid. The appointment will not be effective until communicated to the receiver and accepted by him. The appointment then takes effect from the date of acceptance.



Notice of Appointment:

Where a receiver is appointed in relation to the whole or substantially the whole of the property of the company by a floating charge holder, notice of appointment must be sent to the company and, within fourteen days, the company must make a statement as to its affairs

on the prescribed form, together with a sworn affidavit of its accuracy and submit it to the receiver. S.431(2) The statement must then be sent within 2 months by the receiver to the company itself, the Registrar of Companies, debenture holders and the High Court (where the receiver is appointed by the Court) together with a note of the receiver’s comments (if any). S.430

5.

Qualifications of a Receiver

Any person may be appointed, with the exception of those persons disqualified by the Companies Act 2014. (S.433). Persons disqualified include corporate bodies, undischarged bankrupts and persons closely connected with the management of the company. Persons connected with the company include any person who in the previous twelve months was an officer, employee or auditor of the company, or one of its closely associated companies or the parent, spouse, brother, sister or child of such person. A disqualified person who acts as receiver may be fined.

6. Agent of the company or agent of the debenture holder? Where a receiver is appointed by the High Court, he or she is an officer of the court, and has a duty to act responsibly, and takes his or her instructions from the court. Where a receiver is appointed under a debenture, his or her status will depend on the terms of the debenture. If the debenture does not otherwise state, the receiver will be deemed to be an agent of the debenture holder. However, the debenture itself usually designates the receiver as the agent of the company. If the receiver is the agent of the company, the company will be responsible for his or her remuneration, his torts and any other wrongs. In addition, the receiver may make contracts that bind the company. 

An unusual Agency

As an agent of the company one would expect the receiver to be subject to the directions of the company as his principal. However, as was made clear in Gomba Holdings UK Ltd. v. Homan [1986] 3 All ER 94 the agency of a receiver is a special agency for: ‘although nominally the agent of the company, his primary duty is to realize the assets in the interests of the debenture holder and his powers of management are really ancillary to that duty.’

Even where the debenture provides that the receiver is an agent of the company, the actions of the debenture holder may cause the court to infer an agency relationship between debenture holder and receiver. American Express v Hurley [1986] BCLC 52

As soon as the company goes into liquidation, the agency of the receiver for the company ends. After that the court will determine who his principal is by looking at the surrounding circumstances

7.

Remuneration of the Receiver

Usually the debenture specifies who will be responsible for the receiver's remuneration. If not, he must be paid by his principal.

8.

Removal of the Receiver

The debenture may specify the circumstances in which the receiver may be removed. For example, where the debt has been discharged, for misconduct, where there are differences of opinion between debenture holder and receiver. Even if there is no such provision in the debenture, the court has an inherent power to remove the receiver for serious misconduct or flagrant breach of duty, where the very security may be in danger. Seven days’ notice of the proceedings in which such removal is sought must be served on the receiver and on the person who appointed the receiver. S.435 Companies Act 2014.

9.

Effect of Receivership

i.

Effect on Company 

Any floating charges crystallize and become fixed charges on the assets/undertaking over which they were created. The company can no longer deal with the assets charged without the receiver’s consent.



The powers of the company and the directors’ authority are suspended in relation to the assets affected by receivership, and can only be exercised with the consent of the receiver.



Where the receiver is appointed as manager, then he is entitled to carry on the business of the company.

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ii.

The receiver may, if he considers that the interests of the debenture holder so require dispose of any asset of the company affected by the debenture, including the entire of its undertaking.

Effect on Directors

A bare receivership will have little effect on the directors, with the obvious exception that they no longer have rights over the charged property. However, if the debenture gives management powers to the receiver, the directors will have no say in the running of the business. They may still be entitled to act in the interests of the company, so long as their actions will not affect the debenture-holder's security.

Lascomme Ltd. v. United Dominions Trust (Ireland) Ltd. and James Gilligan [1994] ILRM 227 Keane J: It is clear that when a receiver is appointed by a debenture holder under the powers in that behalf in the debenture, the powers vested by law in the directors of the company are not thereby terminated. They may not, however, be exercised in such a manner as to inhibit the receiver in dealing with and disposing of the assets charged by the debenture or in a manner which would adversely affect the position of the debenture holder by threatening or imperilling the assets which are subject to the charge. Subject to that important qualification, the powers vested by law in the directors remain exercisable by them and include the power to maintain and issue proceedings in the name of the company where to do so would be in the interests of the company or its creditors. Directors retain their appropriate case:

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Wymes v. Crowley (Unrepd, High Court 27th February 1987)

iii.

Effect on Employees

Contracts of employment between company and its employees are not necessarily terminated by appointment of receiver. A receiver can terminate contracts at his own discretion and his obligations will be thereby determined. Where a receiver does not terminate contracts of employment and allows employees to continue in employment, he does not himself become personally liable for their wages from the date of his appointment because there is no new contract, and any contract which exists does so between company and employees.

iv.

The Liquidator

A receiver can still be appointed if a liquidator is already in place. If the company goes into liquidation when the receiver is already in office, he ceases to be an agent of the company if appointed in that capacity, however, he will still retain his powers in relation to the charged assets. However, the liquidator may 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 only, act in respect of certain assets specified by the court. v.

The Examiner

An examiner cannot be appointed when a receiver stands appointed for more than three business days. A receiver cannot be appointed if an examiner is already in place. Where an examiner is appointed and a receiver is already in place, the court may make any order as it deems fit, including an order that:    

The receiver shall cease to act from the date specified by the court; The receiver shall only act in relation to certain assets; The receiver shall deliver to the examiner all books, papers and other records which relate to the property of the company; The receiver shall give to the examiner particulars of his dealings with the property or undertaking of the company.

10. Powers of Receivers 10.1 Power to Manage the Company's Business Where a receiver is appointed by a debenture holder, his powers are contractually determined by the terms of the debenture. Where the debenture is secured by a fixed and floating charge over the entire assets and undertaking of the company, it is usual to confer on the receiver the power to manage the company’s business.

The power to manage is used for the sole purpose of realising the security – not to rescue the company. First City Corp. Ltd. v. Downsview Nominees (1990) Richardson J.

The debenture will usually confer on the receiver many of the powers of the board of directors including:    

The power to dispose of the company’s assets and do such things as are incidental to that power; The power to carry in the business of the company The power to borrow money and give security where necessary The power to institute proceedings on behalf of the company.

*S.437 (1) Companies Act 2014: A receiver may do all things which are necessary or convenient to be done in connection with, or incidental to, the attainment of the objectives for which he or she is appointed. Additional specific powers are conferred by S.437(3): a long list including : Enter possession and take control of charged property, lease, let hire or sell property, borrow money on security, insure, repair, renew, enlarge property, carry on business, engage or discharge employees, appoint an agent, etc.

If the receiver is unsure about the exercise of any power, he may apply to the court for directions under S.438 Companies Act 2014.

11. Duties of the Receiver The receiver’s principal function is to receive and realise the assets which are the subject of the security for the purpose of discharging the debt owed to the debenture holder. The general responsibility of the receiver is to the debenture holder rather than to the company however the manner in which the receiver carries out his functions will be of concern to the company, to other creditors and to guarantors of the company’s debts. 11.1

Duty to exercise care in Selling Charged Property

The receiver has a duty to exercise his power of sale in good faith. As a general rule, neither the receiver nor his agent should purchase any of the company's assets, regardless of fairness of price because of the potential for a conflict of interests. He must also take reasonable precautions to obtain the best price reasonably obtainable at the time. The definition of "reasonable precautions" was set out by Lord Templeman in Tse Kwong Lam v Wong Chitsen [1983] 3 All ER 54 The receiver's duty of care is not merely equitable, it is also statutory. cf. S.439(1) Companies Act 2014

A receiver, in selling property of a company shall exercise all reasonable care to obtain the best price reasonably obtainable for the property at the time of the sale. 

What is the ‘best price reasonably obtainable’?

Re Bula Ltd. (High Court June 2002)

Murphy J. – The court is not concerned with perceived value. “S.316A refers not to value nor cost but to price. The receiver, in selling the property of the company, which he is clearly entitled to do, must exercise all reasonable care to obtain the best price reasonably obtainable for the property at the time of sale.” 

Receiver is not obliged to await an upturn in the market before selling and his duty is merely to obtain the best price reasonably obtainable in any given economic climate:

Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] Ch 949

Casey v. Irish Intercontinental Bank Ltd [1979] I.R. 364 However, if the receiver fails to consider alternative options which are available at the time, he will be in breach of his duty.: Holohan v. Friends Provident [1966] IR 1

Irish Oil and Cake Mills v. Donnelly (High Court 1983)



The duty to obtain the best price possible is owed not only to the company but also to third parties such as guarantors.

A receiver also owes a duty of care to persons who have guaranteed the debts of the company. The exposure of guarantors is possible, where for example, the receiver sells charged assets and there is a shortfall in the amount owed to the debenture holder. The guarantor is secondarily liable to pay the secured debt and so has an interest that the best price is obtained. Amex v Hurley [1986] BCLC 52 Standard Chartered Bank v Walker [1982] 1 WLR 410

Denning MR: ‘the receiver is an agent of the company and owes it a duty to use reasonable care to obtain the best possible price which the circumstances of the case permit. He owes this duty not only to the company… but also owes a duty to the guarantor because the guarantor is liable only to the same extent as the company. The more the overdraft is reduced, the better for the guarantor. It may be that the receiver can choose the time of the sale within a considerable margin, but he should exercise a reasonable degree of care about it… If it should appear that the receiver has not used reasonable care to realise the assets to the best advantage, then the mortgagor, the company and the guarantor are entitled in equity to an allowance. They should be given credit for the amount which the sale should have realised if reasonable care had been used. Their indebtedness is to be reduced accordingly.’ 11.2

Duty to distribute assets

The receiver must pay the debenture holder to the extent of his security and must hand over the remainder to the company. However, if he has been appointed under a floating charge he also has a statutory duty to the preferential creditors under s.621 of the Companies Act, 2014 to repay such creditors in priority to all other debts (including principal and interest under the debenture). If the preferential creditors are not paid, they are entitled to damages against the receiver.

United Bars Ltd. v. The Revenue Commissioners [1991] 1 IR 396

12. Receiver’s Liability on Contracts A receiver will be personally liable on all contracts entered into by him after the commencement of the receivership, whether acting as agent for the company or in his own capacity, unless the terms of the contract exclude liability. (e.g. contracts for the sale of the business or re contracts which he enters as manager while running the business) He will however, be entitled to an indemnity out of the company’s assets in respect of any liability which he incurs. S.438(5) Companies Act 2014 The receiver is not personally liable on any other contracts entered into by the company prior to his appointment. Ardmore Studios (Ireland) Ltd v. Lynch [1965] IR 1

13. Disclaimer of Onerous Contracts

The receiver may choose whether to enforce pre-receivership contracts or repudiate them. Unlike liquidation and examinership, there is no statutory mechanism by which a receiver may disclaim onerous contracts. However, the receiver is entitled to prevent the company from performing its contractual obligations. In rescinding the contract, however, the receiver must exercise his powers bona fide and must not, without leave of the court, repudiate a contract in such a manner that it will have the effect of destroying the goodwill of the company’s business. Re Thames Ironworks Co. Ltd. [1912] WN 66

Further Reading Courtney - ch 22 Keane – ch 22 Callanan – Ch 16...