Corporate Receivers

Overview I

The appointment of a receiver is a mechanism for enforcement of security granted by a company under a floating charge or debenture. The receiver’s powers are determined by the debenture deed. A company receiver is similar to a fixed charge receiver. He is appointed “out of court” by a private deed in much the same way and has powers to collect the secured assets and sell them.  The reference to a “debenture holder” or “charge holder” in this chapter is effectively a reference to the lender/mortgagee.

A debenture deed often grants a single fixed and floating charge over a company’s assets. A company can grant a fixed charge only so that there may be a company fixed charge receiver only.  A company receiver may be both a receiver under the fixed charge and the floating charge. The floating charge enables the receiver to take complete control of the company’s assets.

The rights of the receiver are largely defined by the debenture deed under which he is appointed. The charge holder appoints a receiver who thereby takes control of the assets within the scope of the charge as at the date of the appointment. The receiver may be appointed over both fixed assets and floating assets. The effect of appointment is to fix (or crystallise) the floating security over the assets within its scope


Overview II

The receiver is deemed agent of the company and not the debenture holder. The company and not the debenture holder is primarily responsible for the receiver’s remuneration and wrongful actions.

The primary function of a receiver is to realise the assets within the scope of the security for the benefit of the charge holder. His obligations to third parties are limited. In particular, he does not have any duty to trade or to try to save the company or business.

When a receiver stands appointed for three days, a court may not hear an application for appointment of an examiner.  No receiver may be appointed when a company is in examinership.

Commonly a receiver is in a postion to take peaceable possession of the company assets. A contractual receiver (unlike the much rarer court appointed recevier)  has no greater power to take possession than any private individual. He is not a Court or State official.

The courts have been willing to grant injunctions to pevent the company, its officers and others from intefering with the receiver taking and remaining in possession. An injunction can in principle be issued at the commencement of substantive proceedings and have the effect of speedily granting possession to the receiver.


Grounds for Appointment

The grounds for appointment of a receiver are set out in the debenture deed. There will usually have been a default.  The grounds will generally include

  • non-payment of principal or interest due;
  • breach of the terms of the debenture, loan agreement or another security document;
  • the company ceasing or threatening to cease business;
  • a petition in respect insolvency;
  • anything which jeopardises the security;
  • anything that makes another security enforceable;
  • material adverse change takes place.

In addition, certain events which are precursors of impending insolvency are often default events, which trigger the entitlement to appoint a receiver. They may include the company;

  • being able to unable to pay debts;
  • failing financial covenants;
  • creating a further security without consent;
  • defaulting on another loan.

Many company facilities provide that repayment is due on demand. The charge holder may be entitled to demand repayment at any time. In such circumstances, it must generally allow a reasonable period to allow payment. There are different views on what is reasonable but the balance of opinion is that the time given need only be that required logistically in order to organise and make payment.


Crystallisation

When a floating charge is enforced, it “crystallises” on all the assets within the wording of the floating charge. The borrower would have been entitled to use and transfer the circulating assets in the course of its business prior the crystallisation. At that point, the charge fixes on the assets and becomes a fixed charge on those assets.

In some cases, crystallisation is automatic. In other cases, the appointment of a receiver crystallises the assets. The wording of the mortgage debenture determines the position.

There limits on the effectiveness of an automatic cyrstallisation clause. It is not effective to the extent that the chargor (company) continues to be held out to third parties as having the authority to deal in the assets concerned.


Appointment and Removal I

A receiver is usually appointed under the terms of the debenture deed without the necessity for a court application. The wording of debenture may require a prior demand before the entitlement to appoint a receiver arises.

The appointment must be in writing. The receiver will generally require an indemnity from the charge holder. This usually covers the risk that the debenture /mortgage might later be found to be invalid so that the receiver’s appointment and acts have been invalid. On the appointment of a receiver, the floating charge fixes on all assets within the terms of the charge, at that time.

The debenture itself must be valid and must have been registered in the Companies Office within 21 days of creation. It is essential that the receiver is appointed in accordance with the terms of the debenture. If there is a defect in the debenture deed or appointment, the receiver may be liable for acts which are accordingly undertaken without proper authority. It often happens that a liquidator who is later appointed may challenge the validity of the debenture deed and/or the receiver’s appointment under it.


Appointment and Removal II

An appointment is not valid until accepted by the receiver. The appointment of a receiver must be advertised in the Official Gazette and in at least one newspaper circulating in the area where the company has its registered office. The notice must be filed in the Companies Registration Office. The notices must be published within seven days. The failure to comply does not invalidate the appointment.

A receiver must give one month’s notice of his or her intention to resign to the company and certain other prescribed parties. The appointing document will generally entitle the debenture holder to remove the receiver. Removal or resignation must be notified and filed in the Companies Registration Office. A court may remove a receiver for misconduct or breach of duty. A liquidator may seek to remove a receiver.

Unlike the case in England, there is no requirement for qualifications for acting as a company receiver.  In practice, most company receivers are accountants who specialise in insolvency. Certain categories of people are disqualified from acting as receivers. They include undischarged bankrupts and persons involved in the company’s management or connected to them.


Remuneration

A fixed charge receiver is entitled to charge commission up to five percent of gross receipts or such a higher amount as the court may allow. The 2009 Reforms provide that the rate will be prescribed from time to time by Ministerial Order.

It appears that a purely contractual receiver may be made remuneration in accordance with the terms of the debenture. It may state that it is determined by agreement between the debenture holder and receiver. Expenses incurred in good faith are usually allowed in addition to remuneration.

Any remuneration must be agreed and incurred in good faith. If the debenture makes no specific provision, the courts imply that the receiver is to receive reasonable remuneration.

The company itself, creditors or liquidator may apply to the court to fix or determine the basis of the receiver’s remuneration. This provision is intended to curb excessive remuneration and cannot be used to increase remuneration.

If a receiver’s appointment is invalid, he may not be entitled to remuneration. He may be entitled to payment for the fair value of work done.

A receiver may be given an indemnity by the debenture holder, because of the risk that he may be subject to personal liability for his actions. He is entitled to an indemnity from the assets within the debenture, but this may not be enough to cover the liabilities and expenses incurred.


Effect on Company I

The receiver does not necessarily take over all the powers of the company. The extent to which the powers of the directors are taken over by a receiver depends on the wording of the debenture deed. The debenture may be limited to certain assets or a distinct business. This will depend on the scope of the assets within the debenture.

The receiver will usually be appointed an agent of the company under the debenture deed. This may give the receiver full power to deal with the company’s affairs. The receiver will, therefore, have the powers in the debenture as well as the further powers by reason of being the agent of the company.

When a receiver is appointed under a floating charge over all or most of the company’s assets, a statement of affairs must be given by at least one director and an officer or employee of the company within 14 days. Within two months, the receiver must send copies to the Companies Registration Office, the company and other debenture holders. It must be accompanied by the receiver’s comments. At six monthly intervals, the receiver must send abstracts to the Companies Registration Office dealing with the realisation of assets, receipts, and payments.

Where a receiver has been appointed, this fact must appear on business letters, invoices and equivalent documents.


Effect of Company II

The appointment of a receiver does not necessarily affect the company’s existing contracts. There may be a clause in particular contracts which provide that the contract can be terminated by certain insolvency events, including receivership. This may be the case with financial facilities, leases, and similar documents.

Generally, receivership will not terminate employment contracts or leases. A contract made before receivership can only be enforced against the company. The receiver is not personally liable. The company itself may be liable. This may be of poor consolation given that the receivership signals the insolvency of the company.

There is no equivalent of a liquidator’s power to disclaim onerous contracts. However, in practice, a receiver may be able to frustrate performance by the company of its contracts and in this sense disclaim them. The facilitates a “hive down” arrangement. A hive down is where a receiver passes assets to a new “clean” company formed for the purpose of the sale of the newly formed company without liabilities.


Post-Receivership Contracts

Unless the contract states otherwise, the receiver and company are personally liable on contracts made after the receiver is appointed. The company is liable because the debenture will invariably deem the receiver to be the company’s agent and not an agent of the appointing party. The receiver may be personally liable on contracts made by him in the performance of his functions.

While the receiver is the company’s agent, he can specify that he contracts only for the company. It can also specify in the contract that he shall not be personally liable.When the receiver does not perform an existing contract, the other party to the contract will have a claim against the company for damages. However, he will rank as an unsecured creditor.

The appointment of a receiver does not automatically terminate employment contracts. It may operate as an effective dismissal of the management, as their role may be displaced to a significant extent. Depending on the terms of the debenture, a receiver may retain employees. He is not necessarily liable for prior remuneration of existing employees. If the receiver employs a new employee, he will be liable unless the employment contract provides otherwise.


Leases and Litigation

A receiver is not liable for prior rents. He is not liable for rent accruing after the appointment. If the lender assumes control and management as mortgagee in possession he may be liable for rent and indeed rates. Merely managing the company’s assets is consistent with the company remaining in possession, in which case the receiver is not personally liable.

A landlord can exercise the right of distress. This is the ancient a right of a landlord to seize assets on the property in satisfaction of rent. It may be unconstitutional. A landlord can, of course, seek to forfeit the lease and seek to regain possession.

The continuance of litigation is a matter for the receiver. He may not sue or make a claim in his own name. He may sue in the company’s name. Defendants can usually require security in claims of this nature given the insolvency risk. Where there is litigation against the company, the receiver’s consent will be required if it affects the secured assets.


Third Part Enforcement

The appointment of a receiver crystallises the floating charge so that it becomes a fixed charge with respect to assets within its scope. Accordingly, enforcement cannot take place against the debenture holder’s assets. Uncompleted enforcement cannot be continued after the floating charge crystallises.

It is common for a working capital stock to be subject to retention of title by which the supplier retains the title.  This will hold good against the receiver.

Once a receiver is appointed over floating assets, they are no longer subject to seizure by the sheriff to enforce judgments against the company.

A garnishee order is an order that money owed by a third party to a judgment debtor must be paid to a judgment creditor instead in satisfaction of a debt for which the judgment creditor has obtained a court order against the judgment debtor. Once a floating charge receiver is appointed, the assets cannot be enforced against by garnishee orders or attached by a receiver by equitable execution. See our chapter in relation to these types of enforcement.

The appointment of a receiver does not prevent creditors petitioning to have the company wound up. The courts have the discretion to refuse a winding-up order. A receiver may oppose the winding up application.


Effect of Liquidation

Where a liquidator is appointed, the receiver’s powers may be curtailed. The liquidator can apply to the court to have the receivership terminated or restricted. The liquidator must, however, respect the secured creditors’ rights in respect of the secured assets.

After commencement of liquidation, the receiver is no longer agent of the company. This has certain consequences in relation to his powers. He can no longer act on behalf of the company. He can only rely on his powers under the debenture deed. Any contract made by the receiver becomes binding only on him personally and not the company. The receiver does not automatically become the debenture holder’s agent.

The receiver’s powers which depend on his being an agent are no longer available after liquidation.  He can still take litigation in order to recover assets within the scope of the debenture charge. He is not prevented from trading, but it may be more difficult in practice. He will need to have clear powers in the debenture deed.


Contractual Powers

An “all assets” corporate debenture will require a wider range of receiver powers than those required for a real property security only.   They will facilitate the maintenance of the business and its goodwill, pending sale as a going concern.  The powers may include:

  • power to make demands and take such legal proceedings as are required to take possession;
  • power to carry on, manage, develop, reconstruct any business;
  • power to appoint advisers and agents on such terms as it sees fit;
  • power to raise and borrow money either unsecured or on the security of the secured assets on such terms as the receiver determines;
  • power to enforce calls on shares;
  • power to sell book debts;
  • power to exercise voting rights;
  • power to settle, compromise or agree on any claim or dispute with any creditor of the mortgagor or relating to the secured property;
  • power to bring, defend or cease any legal proceedings in its own name or in the name of the mortgagor in relation to the property;
  • power to form a subsidiary of the mortgagor and arrange for such subsidiary to trade or cease to trade and power to transfer any asset to that subsidiary;
  • power to delegate its powers;
  • power to appoint managers, officers, and employees;
  • power to substitute or improve plant and machinery;
  • power to elect for VAT purposes;
  • power to run the tax affairs of the mortgagor in such manner as it sees fit;
  • power to insure;
  • power to register, maintain and protect intellectual property;
  • power to redeem any prior mortgage and settle accounts in relation to it;
  • power to effect any repair or insurance or otherwise which the mortgagor might do in the course of its business;
  • power to provide or arrange for any service for the efficient use and management of the assets;
  • power to do all things desirable and necessary for realising the asset or incidental or conducive to such rights, powers, and discretion;
  • power to exercise all powers in relation to the asset as if it was the owner;
  • power to use the name of the mortgagor when exercising any of the rights;
  • power to do all things and to execute in the name of and on behalf of the mortgagor any deed, receipt or other documents and to make any payment necessary or incidental to its functions;
  • power to claim in the bankruptcy of any debtor of the mortgagor;

Statutory Powers of Receivers I

The powers of receivers over the assets of a company are set out in detail in the Companies Act, 2014.   Receivers are declared to have the power to do in the State and elsewhere, everything necessary and convenient to be done in connection with, or incidental to the attainment of the objectives for which the receiver has been appointed.

The powers of the receiver may be limited in the case of a court appointed a receiver, by the court, or by the terms of the instrument of under which the receiver is appointed.

The Companies Act 2014 provides general powers for a corporate receiver  to do, in the State and elsewhere, all things necessary or convenient to be done for or in connection with or incidental to the attainment of the objectives for which the receiver has been appointed.  This is intended to assist receivers in poorly drafted corporate debentures.  The listing of powers is without prejudice to this general power.

The receiver’s powers may be limited by the instrument under which he is appointed or by the terms of the court order which appoints him (where applicable).


Statutory Powers of Receivers II

The powers set out in the Companies Act supplement those in the instrument and in other legislation.  There are the following statutory powers;

  • to enter into possession and take control of property of the company by the terms of the order or instrument;
  • to lease, let on hire or dispose of property of the company;
  • to grant options over the property of the company on such conditions as the receiver thinks fit;
  • to borrow money on the security of the property of the company;
  • to insure the property of the company;
  • to repair, renew or enlarge property of the company;
  • to convert the property of the company into money;
  • to carry on any business of the company;
  • to take on lease or on hire, or to acquire, any property necessary or convenient in connection with the carrying on of a business of the company;
  • to execute any document, bring or defend any proceedings or do any other act or thing in the name of and on behalf of the company;
  • to draw, accept, make and endorse a bill of exchange or promissory note;
  •  to use a seal of the company;
  • to engage or discharge employees on behalf of the company;
  • to appoint a solicitor, accountant or other professionally qualified person to assist the receiver;
  • to appoint an agent to do any business that the receiver is unable to do, or that it is unreasonable to expect the receiver to do, in person;
  • where a debt or liability is owed to the company, to prove the debt or liability in bankruptcy, insolvency or winding up and, in connection therewith, to receive dividends and to assent to a proposal for a composition or a scheme of arrangement;
  • if the receiver was appointed under an instrument that created a charge on uncalled share capital of the company to make a call in the name of the company for the payment of money unpaid on the company’s shares, or on giving a proper indemnity to a liquidator of the company, to make a call in the liquidator’s name for the payment of money unpaid on the company’s shares;
  • to enforce payment of any call that is due and unpaid, whether the receiver made the calls or otherwise;
  • to make or defend an application for the winding up of the company;
  • to refer to arbitration or mediation, any question affecting the company.
  • to bring legal proceedings, to borrow money, to carry on the business of the company, to engage or discharge employees of the company.

The receiver may apply to the court for directions about the exercise of the additional statutory powers.


Receiver’s Duties I

An application can be made to the High Court by a receiver for a declaration as to his rights in any circumstances or in relation to any aspect of the performance of his functions. The application can be made by a receiver, liquidator or shareholder.

The receiver’s primary duties are owed to the debenture holder. A receiver is not obliged to carry on the company’s business at the debenture holder’s expense. The receiver does not generally have duties to lower ranking security holders, guarantors or unsecured creditors. However, but he must not act recklessly or unnecessarily damage their interests.

Receivers are usually authorised to take possession of the secured assets and protect them. Where the company or its directors have wrongfully disposed of company assets, the receiver may take legal action to recover them from third parties. A receiver may take protective legal action to prevent the assets being removed from the country or to prevent persons who are alleged to hold assets, removing them from the country or reducing their assets below a certain level.


Receiver’s Duties II

If a company is being wound up, a receiver (as well as the liquidator) may take action against directors and other former controllers of the company for fraudulent or reckless trading. Likewise, the receiver may take action against directors and other persons who have run the company, for wrongdoing and breach of duty.  The receiver has the power to compromise claims.

The receiver has equivalent obligations to a liquidator with regard to having directors and secretaries restricted. Where it appears to a receiver that offences have been committed, this must be reported to the Director of Public Prosecutions.

Receivers are liable for the proper performance of their obligations. He must perform his obligations in the same manner as an equivalent competent professional. The terms of liability will depend primarily on the appointment. The indemnity may protect them.


Trading and Management

The receiver will often have the power to manage the business of the company pending realisation of its assets. He may, but need not, necessarily exercise these powers. Trading may or may not be the better option in terms of ultimately realising the secured assets. It is the receiver’s responsibility to determine whether it will trade or not.  If the debenture holder instructs the receiver to trade, it may become liable for the receiver’s acts.

The receiver has a statutory obligation to the preferential creditors to ensure their priority is not undermined.  If assets are available, they ought not to be unnecessarily dissipated by trading. This is unlike the position in the UK where the equivalent insolvency officer (an administrator) has duties to try to save the company. The receiver’s primary function is not to save the business or continue trading. On the contrary, the receiver’s primary purpose is to realise the security. Provided he acts in good faith, he is entitled to close the business.

Where a receiver trades, he will likely have to incur personal liability on his contracts.  The receiver is entitled to be indemnified from the company’s assets.  He may also be indemnified by the debenture holders. A receiver, who carries out pre-receivership contracts does not necessarily become personally liable. However, he will not be permitted to enforce a contract if he is not prepared to cause the company to undertake its obligations under it. He cannot obtain the benefit of a contract while denying liability.


Realisation of Assets

The duty of a receiver in selling assets is similar to that of a fixed charge receiver.  A company receiver has a statutory duty to obtain the best price reasonably available at the time of sale.

Selling as mortgagee in possession overrides lower ranking security holders and gives the purchaser title free from them.

The Supreme Court has decided that a mortgagee (and by analogy a debenture holder) is to act as a reasonable man would in relation to his property. It is entitled to look after his own interests. The receiver does have some duty to later mortgagees and guarantors. This is because guarantors may have to pay less if a greater amount is realised.

The receiver has no obligation to spend money on repairs to render it more marketable or to apply for planning permission.  He has a free hand in choosing the timing of the sale. He may turn the security into monies when he wishes. He need only take reasonable care to obtain the best price in the circumstances. He does not have an unconditional obligation to obtain the best price. A receiver should at least obtain a valuation and take appropriate advice.

A hive down is a transfer of business assets to a new “clean” company controlled by a company in receivership.  The company is then sold to an outsider at a better price than would be available for the sale of the property itself. The purchasers may be outsiders or may be management.  All assets and tax losses are transferred to the new company, but the debts will not be transferred.


Entitlement to Proceeds I

The order of priority of payment of the proceeds of sale of the floating charge assets is usually as follows;

  • costs of preserving and realising the assets;
  • the receiver’s remuneration and costs of receivership;
  • preferential debts;
  • monies secured on the floating charge;
  • lower ranking security holders;
  • the company.

A receiver has a statutory duty to pay preferential creditors in priority to the debenture holder in the distribution of the floating charge assets. The preferential debts include one year’s arrears of

  • company income taxes;
  • value-added tax;
  • employer’s PRSI

Entitlement to Proceeds II

PAYE and PRSI deducted from employees and not yet paid to Revenue enjoy super preference and are effectively held in trust for the Revenue

The following are also preferential debts

  • Local Authority Rates during the 12 months prior to winding;
  • wages and salaries in the four months to liquidation to a certain maximum per claimant;
  • accrued holiday, sick pay pension contributions;
  • unfair dismissal rights,
  • awards for damages for work injuries;

Monies advanced by lenders to pay preferential debts enjoy corresponding priority.


Fixed Charge on Receivables

Because of the disadvantages of a floating charge, some mortgage debentures attempt to create fixed charges on book debts. This is because accounts receivable frequently comprise one of the most valuable assets. See our chapter on non-property security in relation to the difficulties of creating such a fixed charge on debts.

Some attempts to create fixed charges fail because the borrower is allowed control over the bank account. If the borrower can deal with the account without the lender’s consent, it is likely to be labeled a floating charge and treated accordingly. The Revenue is entitled to claim priority over a charge over book debts for certain taxes owed. If the charge had been notified to Revenue within a certain period, the Revenue priority is reduced.


References and Sources

Irish Texts

Breslin Banking law + Supplement     3rd Ed  2013

Mortgages Law & Practice     Maddox 2nd Ed            2017

NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan

Money Laundering & Anti-Terrorist Financing Act 2010

Financial & Emergency Provision Legislation Annotated      2011

Shelley & McGrath     National Asset Management Agency Act Annotated 2011

Dodd & Carroll            Law Relating to NAMA 2012  0

Ashe & Reid    Anti-Money Laundering: Risks, Governance & Compliance             2013

Johnston & Ors           Arthur Cox Banking Law Handbook               2007

Dr Mary Donnelly  The Law of Credit and Security, 2nd Ed, 2015

UK Texts

A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)

Veil (Ed) European capital markets law (Hart Publishing 2013)

IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)

E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)

Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).

MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)

McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)

G McCormack Secured credit under English and American law (CUP Cambridge 2004)

L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)

D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)

Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018

E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011

Andrew Haynes The Law Relating to International Banking  Bloomsbury Professional 2009

Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012

Charles Proctor The Law and Practice of International Banking 2nd Ed  2015

Sheelagh McCracken The Banker’s Remedy of Set-Off   2010 Bloomsbury Professional

Louise Gullifer, Jennifer Payne Banking & Financial Law 2018

Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed  2006 5th Ed 2019

Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed  Sweet & Maxwell 2017

Timothy N Parsons  Lingard’s Bank Security Documents 6th Ed 2015