R3 Guide to Administrative Receiverships

When a company breaches the terms of its borrowing from a creditor with a floating charge over substantially all of the company's assets, that creditor may appoint an administrative receiver (who must be a licensed insolvency practitioner) to recover the money it is owed. Many companies give such a charge to banks as security for their borrowing.

Administrative receivership is often referred to simply as 'receivership'.

"When a company breaches the terms of its borrowing from a creditor with a floating charge, that creditor may appoint an administrative receiver"

What can an administrative receiver do?

An administrative receiver has extensive powers to deal with the charged assets. The administrative receiver effectively takes over management of the company's business from the board of directors and can have it continue to trade prior to selling the business and assets.

"The Receiver effectively takes over management of the company's business from the board of directors and can trade-on or sell the business and assets."

Does the administrative receiver pay trade creditors the money they are owed?

No. The administrative receiver does not make payments to unsecured creditors in respect of the money owed to them prior to appointment. An administrative receivers' main function is to recover sufficient funds to pay the costs of the receivership, the preferential creditors and the charge holder. (Preferential creditors are a special category of unsecured creditor. They include certain debts due to employees, the Inland Revenue, HM Customs & Excise and the Redundancy Payments Service.) If the company has more assets than are required to make these payments, the surplus is normally passed to a liquidator, who deals with creditors' claims.

Six months after writing off a debt in your accounts, you can claim VAT bad debt relief from HM Customs & Excise for the VAT you have paid.

If you believe that you own something in the company's possession, you should contact the administrative receiver as soon as possible with full proof of ownership and be prepared to identify what you are claiming. The receiver will examine your claim carefully before deciding whether to release the goods in question, pay you for them or otherwise.

"An administrative receiver is not personally liable where he has disclosed that he is acting as agent for the company and expressly excluded any personal liability."

Is the administrative receiver bound by contracts made by the company prior to the appointment?

Generally, the administrative receiver is not bound by pre-receivership contracts and may choose not to have the company perform them. The other party will then have a claim for breach of contract, which will rank as an unsecured claim. Special provisions apply to employment contracts.

"A company can be in administrative receivership and liquidation at the same time. This is more likely once it becomes clear that there are sufficient assets to allow the liquidator to make a distribution to creditors."

As an unsecured creditor, what information am I entitled to?

The administrative receiver normally notifies all known creditors of the appointment within 28 days. A meeting of unsecured creditors is held within three months of the appointment, unless the company goes into liquidation earlier or the court otherwise directs. The administrative receiver gives a report to the meeting on the events leading to the appointment, the carrying on of the business, disposals of assets, what is owed to the various classes of creditor and how much, if anything, is likely to be available to unsecured creditors. A copy of the report is normally sent to all known creditors.

Can the unsecured creditors form a creditors' committee?

Yes. A creditors' committee may be appointed at the meeting of creditors and must consist of at least three and no more than five members.

The creditors' committee may receive reports from the administrative receiver and may meet periodically.

Creditors' committee members are not paid, but will receive their reasonable travelling expenses as a cost of the receivership.

Does the appointment of an administrative receiver prevent a creditor taking legal action against the company?

No. Creditors may continue or begin any legal action against the company, including petitioning for its liquidation, whilst the company is in administrative receivership.

If you are considering this, you should think carefully whether you would benefit from doing so. For example, success in most actions would result in an unsecured claim against the company, which might prove valueless unless there were to be a substantial return to unsecured creditors. Petitioning for the company's liquidation is unlikely to speed up distributions to creditors and may hinder business or asset sales and reduce the amount available for unsecured creditors.

Does administrative receivership automatically end when the company goes into liquidation?

No. A company can be in administrative receivership and liquidation at the same time. This is more likely once it becomes clear that there are sufficient assets to allow the liquidator to make a distribution to creditors.

"The administrative receivership is complete when the floating charge holder had been paid in full or when the administrative receiver has sold all the assets and distributed the proceeds."

When is the administrative receivership complete?

The administrative receivership is complete when the floating charge holder has been paid in full or when the administrative receiver has sold all the assets and distributed the proceeds. He will then cease to act and send a summary of his final receipts and payments to the company, the registrar of companies and the creditors' committee.

How is the administrative receiver's fee determined?

The floating charge holder agrees the administrative receiver's fee. A liquidator, if one is appointed, will review the administrative receiver's fee and could apply to the court to challenge it.

What should do if I am dissatisfied with the administrative receiver's handling of the case?

You should first contact the administrative receiver to try to resolve the problem. If you are still not satisfied, you should bring the matter to the attention of the liquidator, if there is one. If you think that the administrative receiver is guilty of professional misconduct, you should contact his recognised professional body (see below).

R3 is a centre of excellence representing all those who work with under-performing businesses in the UK. R3 does not license or discipline insolvency practitioners; this is the responsibility of the practitioner's recognised professional body. The RPB's are:

• The Association of Chartered Certified Accountants
• The Institute of Chartered Accountants in England and Wales
• The Institute of Chartered Accountants in Ireland
• The Institute of Chartered Accountants in Scotland
• The Insolvency Practitioners Association
• The Law Society
• The Law Society of Northern Ireland (for Northern Ireland only)
• The Law Society of Scotland

Contact Purnells Licenced Insolvency Practitioners for a FREE INITIAL MEETING and advice.