Often, when talking about businesses in trouble the terms of receivership and administration appear to be used interchangeably, but is there any difference and what should a company in difficulty bear in mind?
Administration is a formal procedure where an insolvency practitioner is appointed to control a business as a whole. They will be appointed by a court, the company’s creditors or its directors. The administrator will be charged with achieving the best outcome for all of the creditors of the business.
At this time the administrator is in control of everything and can choose to sell off parts or the whole of the business, enter into a pre-pack or liquidate the company. Once an administration order is granted the business is protected from further creditor action for around 8 weeks or so.
Receivership however is generally asset based. This means that a creditor will appoint a receiver to take control of the asset but obtain value for the creditor with a charge alongside any preferential creditors. This is typically when an agreement has been entered into, such as a loan which allows the creditor a charge on an asset or group of assets in the case of default.
The receiver does have one significant difference from an administrator, he is only concerned with realising the cash to pay for the administration and pay back the company’s indebtedness to the creditor he has been appointed by. This means that the receiver has no interest in the value returned to unsecured creditors and this is a point that any large unsecured creditor may need to bear in mind if they hear of the prospect of receivership for one of their debtors.
Receivership will happen when a company defaults on a loan or agreement it has in place with a creditor. This can be as simple as not paying monthly payments due or going over an agreed overdraft limit without permission and making little or no attempt to pay the facility down.
Some loan agreements have rules, called ‘covenants’ that the company must abide by. These will include things like maintaining a liquid capital ratio, a maximum creditor balance or others related to turnover and profitability. The firm is usually expected to report on these, either monthly or quarterly and if the company breaches these then legal action can naturally follow.
The assets can be named, specific items such as a building or large items of plant or often, especially in the case of a loan or overdraft can be a ‘floating charge’. This means that the creditor has a charge on either all assets or on a particular pool.
Sometimes the agreement will include a clause that will allow express appointment meaning that receivership can be effected very quickly indeed and from the directors’ standpoint without enough warning.
In some cases receivership is survivable, especially if the assets that are affected are not vital to the company’s operations. However there will be an inevitable downgrading of the firms credit score and of course once word gets out it would certainly affect the firm’s reputation.
The distress sale of assets is rarely advantageous and typically the transaction is at a knock down price to get cash in the door quickly. Remember that the receivers’ interest is purely to return value to the bank that appointed them. It’s important also to be aware that the bank at this point will be concerned with reducing its exposure to the debt and they will not be interested in saving jobs or the firm in any shape unless it has a better than reasonable chance of survival and paying back the totality of the debt.
It is more likely though that the assets that the creditor has taken a charge on are going to be central to the life to the business, after all it makes them more valuable but also puts more onus on the firm to pay bills when due. In this case once the assets are seized then administration and liquidation will not be far behind.
When a creditor begins to threaten receivership then it is important to act quickly. Simply hoping that this will go away is a poor choice. The directors must immediately look to whether cash can be raised to avert the action or alternatively take advice on voluntary administration. Doing this gives the best chance for a good outcome for the firm.