Receivership Effect

Crystallisation I

When a floating charge is enforced, it “crystallises” on all the assets within its scope. The wording of the floating charge is typically in very broad terms and charges each class of assets. The borrower is 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 purports to be automatic, on the occurrence of an event of default. In other cases, the appointment of a receiver crystallises the charge on the assets. The wording of the mortgage debenture determines the position.


Crystallisation II

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 to a distinct business. This will depend on the scope of the assets within the debenture.

The directors may continue to exercise whatever remaining functions that are consistent with the appointment of the receiver.  If the receivership it is limited to a particular property, it may not affect the management of the company generally.  Where, however, the debenture provides powers of management and covers all the substantial part of the company’s assets, the appointment of a receiver under it is likely to displace the directors.

The continuance of litigation is a matter for the receiver. He may be entitled to sue in the company’s name. Defendants can usually require security for costs where there is an insolvency risk.

Where the litigation affects the secured assets,  the receiver may be able to ’intervene in reliance on the chargeholders’ proprietary rights.


Assets Captured

The receivership covers the assets within the scope of the security document.  The receiver has no better title to the secured assets than that which the company had itself.  Therefore, if the company’s assets are subject to retention of title, lease, and hire purchase arrangements, they are taken as such and may be subject to rights of termination and retaking under those agreements. If the receiver does not cause the company to pay the relevant rent or obligation, the arrangement in relation to the asset is likely to be terminated in accordance with its terms, even if the appointment is not a ground of termination in itself.

Where suppliers have successfully retained title to goods sold on credit, they will not be available to the charge holder.  Registration is not required in respect of a reservation of title in itself.  This is because title never passes so that no charge is created.

There are limits on the extent to which title may be retained to goods manufactured from materials to which title is retained. Where the clauses go further than retaining the title and purport to apply to new, processed or converted goods, they are likely to characterised an equitable charge over the future goods, and so require registration. The original goods have lost their identity.


Existing Contracts I

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

Third parties retain their rights against the company in receivership.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.


Existing Contracts II

Unlike the position with liquidators, receivers do not have a statutory power to disclaim contracts.  The receiver is not personally liable on an existing contract unless he has personally adopted or novated the contract.

In practice, a receiver may be able to frustrate performance by the company of its contracts and in this sense, disclaim them.  When the receiver does not perform an existing contract, the other party to the contract will have a claim against the company for damages.

The receiver may cause the company to breach the contract, leaving the counterparty as an unsecured creditor. This may facilitate a “hive down” arrangement, by which the receiver transfers secured assets to a new “clean” company,  formed for the purpose of the sale of the newly formed company without liabilities.


Employment Contracts

The commencement of receivership will not necessarily terminate employment contracts. A contract made before receivership can only be enforced against the company. The receiver is not personally liable.

The appointment of a receiver may operate as an effective dismissal of the management, as their role may be displaced wholly or to a significant extent. In practice, a receiver will commonly cause employees to be laid off or dismissed on the grounds of redundancy.

Depending on the terms of the debenture, the receiver may have the power to 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.

A receiver who continues employment contracts does not automatically become personally liable unless the contract is terminated and re-commenced. Where employees are made redundant or where the companies simply cannot pay salaries, their contract may end.

Arrears of remuneration and other sums due to employees are preferential debts They enjoy priority over the floating charge proceeds to a defined extent.


Leases

A receiver is not personally liable for pre-appointment rent arrears. He is not usually liable for rent accruing after the appointment. Merely managing the company’s assets as a receiver is consistent with the company remaining in possession. The receiver is not in possession and has no rental liability. If the lender assumes control and management of the property as mortgagee in possession, he may be liable for rent and indeed rates.

A landlord may forfeit the lease and retake possession on the basis of unpaid rent or breach of conditions. A court order may be required.The appointment of a receiver may be a ground for forfeiture in itself.

In practice, the receiver may need to pay the lease rent and comply with its obligations in order to secure the continued availability of the premises, which may be necessary to allow the company to trade.

Under the default statutory provisions, head rents are to be paid from sub-rents received by a conveyancing act receiver.

A landlord can exercise the right of distress. This is the ancient right of a landlord to seize assets on the property in satisfaction of rent. It may be unconstitutional.


Legal Proceedings

The receiver may take legal proceedings to recover the secured assets. There is a statutory power to take proceedings against directors and others who are impeding the receiver, for example, by removing or reducing assets.

The receiver may be authorised to sue in the company’s own name and on its behalf.  Even if not specifically given this power, he may be entitled to sue in respect of proceedings issued and to defend proceedings in respect of the receivership assets.

Under the 2014 Act, the receiver has a statutory power

  • 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 have authority to transfer trading assets into a new company which he incorporates and controls.  In that instance, it is the company that trades and not the receiver.  Tax reliefs exist to facilitate a reorganisation of this nature.  The new company is immunised from the debt of the old company and the risk of direct liquidation.


New Contracts

The receiver will typically have wide specific powers in the debenture to act on behalf of the company. He may also have a general authority to act on the company’s behalf. He may be appointed an agent of the company under the debenture deed, with the benefit of a power of attorney for all purposes.

These wide and general powers may enable the receiver to deal with the company’s affairs in so far as they relate to the secured assets. Where all or most assets are charged, then he may in effect have the power to manage all of the company’s affairs.

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

Unless the contract provides otherwise, the receiver and company are personally liable on contracts made after the receiver is appointed. The company is liable because the debenture will typically deem the receiver to be the company’s agent and not an agent of the appointing party.

The Companies Act provides that the receiver is presumptively personally liable. While the receiver is the company’s agent, he can specify that he contracts only for the company and that he shall not be personally liable.


Enforcement by Others I

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 by third parties cannot take place against the debenture holder’s assets.

Unsecured creditors may enforce their claims against floating charge assets before crystallisation, which usually occurs on the commencement of receivership. Where the execution of a judgment is completed before the crystallisation of a floating charge, the executing creditor may generally take the proceeds of execution over the assets, which are the subject of an uncrystallised charge.

Uncompleted enforcement cannot be continued after the floating charge crystallises. There are different rule applicable to execution against particular asset classes, which determine when execution is completed.


Enforcement by Others II

Once a receiver has been appointed over floating charge assets, they are no longer available for seizure by the sheriff in order to enforce judgments against the company. Execution is not completed until sale, so that prior to that point in time, they may be reclaimed by the receiver on behalf of the floating charge holder.

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 over the receivable debts, they cannot be enforced against by garnishee orders or attached by a receiver by equitable execution.


Liquidation

The appointment of a receiver does not prevent a creditor petitioning to have the company wound up. The court has the discretion to refuse a winding up order and may do so, where there are no uncharged assets.

A company may be wound up, notwithstanding the appointment of a receiver.  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. This cannot curtail the secured creditors’ rights in respect of the secured assets.

After commencement of liquidation, the receiver’s appointment as agent for the company terminates or is severely curtailed. This has certain consequences in relation to his powers. He no longer has a general power to act on behalf of the company.

The receiver’s powers which depend on his being an agent of the company are no longer available after the commencement of liquidation.  After, the appointment of a liquidator, the receiver can rely on his surviving powers under the debenture deed and at law. Any contract made by the receiver becomes binding only on him personally and not the company.

He may take legal action to recover assets within the scope of the debenture charge, on the basis of the chargeholder’s proprietary rights. The powers in the debenture may enable this to continue to trade, although is often difficult in practice.


References and Sources

Primary References

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)  Ch. 21   Courtney

Keane on Company Law 5th Ed. (2016) Ch. 22 Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Gore-Browne on Companies

Palmer’s Company Law