What is Receivership in Business?
PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.
Receivership is a unique way that a business may be wound down, in that it is usually initiated by an outside party. Here’s everything you need to know about receivership.
Administrative receivership occurs when a business is unable to pay back a creditor, known as a charge holder, from which they received a secured loan, with the creditor gaining security over a business’s assets. They have the right to do this under the Property Act 1925, and will usually assess other options, such as requesting a new business plan or asking for increased security from the business, before beginning a receivership process.
The creditor may then appoint an individual, known as a receiver, who then ‘receives’ the business’s assets and oversees the liquidation process so the creditor can begin to recover their money or reduce their exposure. They may sell a portion or all of the business’s assets, sell the business itself, or allow the business to continue to trade.
The Insolvency Act 1986 provides further limitations on the business, helping to prevent malpractice during the winding up procedure.
The business does not need to be insolvent for a receiver to be appointed, only that it has defaulted on the loan in question.
What is voluntary receivership?
Voluntary receivership is when a business’s owner or shareholders decide to liquidate their business of their own accord. This requires the business to be solvent, meaning it has enough assets that can be liquidated to cover its debts. The business will appoint its own receiver and will usually involve its creditors in the liquidation process.
Receivership vs liquidation
Receivership differs from liquidation in that it is usually initiated by an outside party, the creditor, and is concerned with recovering debt owed. Liquidation is when a business is wound up by its owners or shareholder, with the intention of settling debts and then distributing remaining funds among said owners or shareholders. This process doesn’t require appointing an administrative receiver and can be undertaken by a business unilaterally.
Contact our Dispute Resolution Team to learn more about our receivership solicitor services and how we may be able to help.