What Is the Difference between Administration and Receivership?October 29, 2019
For some of the world’s biggest airlines and holiday providers, everything has been a bit ‘up in the air’ recently...
...that is, everything but the planes themselves.
XL Airways France, Thomas Cook, Aigle Azur and now Slovenia-based Adria Airways have had to slam on the air brakes as their profits took a nose-dive and debts sky-rocketed.
XL Airways was the first to fall last month, entering into administration on the 12th of September; each of these airlines has now entered liquidation. The same is not true for the French subsidiary, Thomas Cook France, which on 1 October 2019 entered into receivership.
Administration and receivership are both potential options for a business in acute financial distress. However, they often have very different outcomes. Legislators recognised this, and in 2002 introduced a bundle of reforms which made receivership much less common in the UK, in an effort to promote attempts to rescue failing businesses.
As a result, there was just one receiver appointed in 2018.
But what are the differences between administration and receivership? And should you still be concerned about your business going into receivership? This article will consider what receivership is, including the benefits and drawbacks for creditors, directors and the company as a whole.
What is receivership?
Receivership is a formal insolvency procedure.
If a company is struggling financially, creditors may appoint a receiver to wind up the company. The creditor will want to do anything it can to recover the money due to them and this is one of the most effective ways for them to do so.
The rules and procedures governing corporate insolvency are outlined in the Insolvency Act 1986 for England, Wales and Scotland. However, there are some key differences between Scotland and the rest of the UK.
There are two main types of receivership in England and Wales, namely administrative receivership and fixed charge or Law of Property Act (LPA) receivership. In the former, a receiver is appointed by a creditor who holds a floating charge over the company’s assets. A fixed charge receiver is appointed where the creditor holds a fixed charge over the company. This is a physical asset, usually the land or property that the business is using.
Though the receiver may decide that it is in the best interest of the creditor to keep the company in operation, they will usually liquidate the assets of the company covered by the floating charge or attempt to sell the property under the fixed charge in order to pay back the lender. This will often make it impossible for the business to continue to operate.
In Scotland, there is no Law of Property Act (LPA) receivership or administrative receivership, only 'receivership'.
What is a receiver?
In Scotland, a receiver is a licensed Insolvency Practitioner appointed by a floating charge holder, often a bank, to recover any debt that they are owed. The receiver only has a duty to the appointing creditor, even if there are multiple creditors.
A receiver will seek to realise and secure assets and manage the affairs of the company to pay off debts. They can also attempt to maximise profits and asset value, and either terminate operations or sell all or part of the company.
Unlike an administrator, a receiver will never be appointed by the directors of the company. The opinion of company directors is also not typically sought by the receiver.
When can a company enter into receivership?
In Scotland, when a company breaches the terms of its loan agreement with a floating charge holder, that creditor may appoint a receiver to recover the money it is owed.
As a result of the Enterprise Act 2002, a company can only enter into receivership if it has a secured debt of £750 or more, on a debenture created before 15th September 2003.
In Scotland, a floating charge holder may appoint a receiver under section 51 of the Insolvency Act 1986 after any of the following:
- 21 days have passed since a demand for payment of the whole or any part of the principal sum secured by the charge was made without any payment.
- 2 months have passed in which interest due and payable under the charge has been in arrears.
- A resolution has been passed to wind up the company.
- A receiver has been appointed by another floating charge holder.
What is the difference between receivership and administration
The main difference between receivership and company administration is that the administrator has a duty to all secured creditors. Receivership, on the other hand, is usually focused on realising the assets of the company for the benefit of the appointing floating charge holder.
Because receivership works heavily in favour of the appointing floating charge holder, many believe it led to excessive liquidations, particularly at the height of the recession in the early 1990s, as the secured creditors lacked the incentive to favour ‘going concern’ outcomes. It was suggested that this led to precipitate behaviour from lenders, causing businesses to fail unneccessarily. Receivers, it was argued, had no incentive to pursue a going concern strategy if the break-up value of the assets was enough to cover the debt owed to the appointing creditor and the receiver’s fees.
Administration is favoured because it typically delivers higher returns on company assets to all investors and attempts to save jobs where possible, while receivership often signals the end for a business.
Because of the negative public image associated with receivership, banks will generally appoint administrators even if it is still possible to appoint a receiver. This way, they can avoid any negative press from the loss of jobs when they take the company apart to repay the debt.
The Enterprise Act 2002 introduced changes so that creditors may only appoint receivers in relation to floating charges created and registered before 15 September 2003. If the floating charge was issued after this date, only the administration process may be used.
What is the difference between a receiver and an administrator?
As we’ve already discussed, a receiver has plenary powers to manage the debtor company and but owes fiduciary duties almost exclusively to the holder of the floating charge. It has been argued that this led to perverse incentives, with receivers having no reason to pursue a going concern outcome.
In contrast, an administrator is governed by a hierarchy of objectives:
- to rescue the company as a going concern;
- failing that, to achieve a higher return for the creditors as a whole than in liquidation;
- and failing that, to realise collateral for the benefit of secured and preferential creditors.
Unlike a receiver, an administrator is statutorily obliged to attempt to achieve a value maximising “rescue” of the business if possible.
The administrator must also:
- act in the interests of the company’s creditors as a whole
- perform his functions “as quickly and efficiently as is reasonably practicable”.
What are the advantages and disadvantages of a receivership?
From the perspective of the company, there are few benefits offered by receivership. The business is unlikely to be rescued and the company’s assets are likely to be sold on at a heavily reduced price to recover as much of the debt as possible.
The company directors are likely to lose their employment and will be investigated. Any unsecured creditors are unlikely to get their money back.
The floating charge holder is the biggest beneficiary of a receivership, as this limits their exposure and allows them to recoup their money quickly and efficiently.
However, if company directors are not found guilty of misconduct, a receivership can also be a quick solution. It mitigates the risk of wrongful trading and allows them to walk away.
What are the advantages and disadvantages of administration?
Since the introduction of the Enterprise Act 2002, the administration process has been streamlined, making it quicker and cheaper. New powers were introduced so that either a floating charge holder or the company and its directors could initiate administration proceedings without the need for an application to be made to the court. This reduced the costs of preparing for and attending a court hearing which was necessary under the old law. A one-year time limit was also imposed on the administration procedure, to ensure that a business was not allowed to remain in administration indefinitely.
When a company enters administration, the administrator is legally obliged to act in the best interests of all creditors. This doesn’t necessarily spell the end for the insolvent company.
When a company enters into administration, a moratorium is granted. This will usually last for a period of 8 weeks and will freeze all legal actions against the company.
During the moratorium, the administrator is able to draft a plan of action. They may determine that sufficient cash can be raised to satisfy the creditors and keep the company in operation. This may be achievable with invoice factoring, a pre-pack administration sale or a company voluntary arrangement (CVA).
Is your company at risk of receivership?
Although the legislation introduced in 2002 has made receivership much less common, it is important to be aware if a floating charge holder is still able to appoint a receiver to recover debt from your business.
While receivership does not terminate the power of the directors in relation to the company, they will no longer have a say over charged assets. This means that the trajectory of the company will ultimately be decided by the receiver. As a result, the directors will usually need to place the company into liquidation afterwards.
If a secured creditor with a floating charge is threatening to appoint a receiver against your business you should not waste any time. By speaking with a licensed insolvency practitioner about your options and any possible outcomes as early as possible, you may still be able to avoid receivership. Attempting to negotiate or postpone receivership without professional assistance can often make the situation worse.
If your company has been unable to meet its financial obligations and you’re concerned about the possibility of entering receivership, or you’d like to discuss other options such as administration, get in touch with 180 Advisory Solutions today for a free initial consultation.