Understanding Receivership

In a receivership, the level of control passed to the receiver is not to the same level as in liquidation (which is full control). The receiver will take over the powers of managing the business assets during the term of the receivership. The company directors still have a role although it’s very limited due to the powers held by the Receiver to deal with the secured assets.

The receiver is appointed by a secured lender to the company, frequently a bank. The receiver’s objective is to realise sufficient assets to repay the secured lender before he is released.

If after the receiver has realised the assets to repay the secured creditor who appointed him, and a trading business still remains, the company will come out of receivership. The powers of managing the business will be returned to the hands of the Directors and Shareholders. The company can continue to trade, but in many instances the company ceases to trade.

If the receiver is released, but there is no trading business remaining, a liquidator may be appointed by the shareholders or on the petition of a creditor.

Key Differences Between Receivership and Liquidation

• With Receivership the assets are realised for the benefit of the one secured creditor who made the appointment of a Receiver. Whereas in a Liquidation the assets are realised for the benefit of all creditors in order of priority. (Note: secured creditors, employees and IRD get their money before others).
• The Receiver can continue to trade the company whereas (usually) a liquidator can’t keep trading unless they decide to do so.
• In a Receivership the company directors still have a role although it’s very limited due to the powers held by the Receiver to deal with the secured assets.
• Under liquidation the liquidator has a statutory obligation to review the affairs of the business and events leading up to his appointment. This is not a requirement of a receiver.
• In liquidation, full management control is passed from Directors to the liquidator. In receivership the Directors still have a role, while in receivership, in a reduced capacity.

Receivership Key Facts

• Receivers can be appointed over companies, individuals, trusts and partnerships.
• The majority of receivers are appointed by a security holder (Bank and finance companies) but, the Court can also appoint a receiver.
• Receivers have obligations under legislation, but also from the security agreement.
• Unsecured creditors may also apply to have the company put into liquidation, despite being in receivership. It’s possible for a company to be in receivership and liquidation at the same time.
• A liquidator will not replace a receiver, (who will continue to control the assets,) but, a liquidator may act as a guardian or monitor for the unsecured creditor/s.

What Happens Under Receivership

• If the receiver has been appointed by a secured creditor, they will take possession of the assets over which the debtor company has granted the security and will attempt to repay the secured creditor by profitably managing the assets, selling them, or doing both.
• The Receivers’ aim is always to protect the interests of the secured creditor and ensure that debt is repaid as quickly as possible.