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Chapter 8 - Secured creditors

This chapter is from Insolvency and Restructuring Manual (Bloomsbury Professional), which is a comprehensive guide to corporate insolvency and restructuring. It is intended to provide an introduction to the subject and to serve as an aide memoire for more experienced practitioners. The book takes the reader through the various formal insolvency processes and examines the differences between them. It reviews and explains a wide range of associated topics, including antecedent transactions, the position of directors, the rights of creditors and cross-border issues. It also deals with the wider issues involved in the restructuring of a troubled company's debts.

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Simon Beale

Chapter 8 Secured creditors

Table of Contents

8.1 INTRODUCTION

Chapter 2 considered the circumstances in which a creditor will hold security and the priority status which such a secured creditor will enjoy on a liquidation or administration. This chapter considers the ability of a secured creditor to enforce its security in more detail. For the purposes of this chapter, a secured creditor will be taken to mean a creditor holding either a mortgage or a charge.

This chapter will focus to a large extent on receivership, and will expand on the overview of this process given in Chapter 1. In addition it discusses briefly the ways in which the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003 No 3226) might improve a secured creditor's position in certain circumstances.

8.2 HOW MIGHT A SECURED CREDITOR ENFORCE ITS SECURITY?

8.2.1 What are the remedies available?

8.2.1.1 Overview

A security document granted by the company by way of a deed will typically give the secured creditor four main remedies. These are:

  • a power to take possession of the secured property;

  • a power of sale;

  • a right of foreclosure, subject to an order of the court; or

  • a power to appoint a receiver to manage and/or sell the secured property.

8.2.1.2 Power to take possession

If a secured creditor takes possession, he becomes accountable to the company for what he might have received, but for his own negligence or wilful default (White v City of London Brewery Co (1889) 42 ChD 237). A mortgagee in possession of land may also now risk liability for environmental damage and clean-up costs. A mortgagee might well therefore choose to take possession directly only as a precursor to the exercise of a power of sale.

8.2.1.3 Power of sale

A secured creditor has no obligation to exercise his power of sale. However, should he choose to do so, he is obliged to exercise this power in good faith for the sole purpose of recovering his debt. Perhaps more significantly, he will also have a duty to obtain the best price reasonably obtainable on the sale. The court reviewed the duties of a secured creditor exercising its power of sale directly in Silven Properties Ltd v Royal Bank of Scotland plc [2004] 4 All ER 484 and noted the similarity to the duties of a receiver selling property (see Section 8.7.2).

8.2.1.4 Right to foreclosure

Foreclosure is a process whereby the secured creditor takes outright ownership of the secured property in satisfaction of the debt. However, it requires an order of the court. The court is only likely to make such an order if the debt exceeds the value of the secured property. In addition, before the court makes a final order it will usually give the company six months to repay the debt and redeem the security. Once the final order has been made, the creditor will no longer be able to sue either the company or any guarantor in respect of any unpaid balance of the debt.

8.2.1.5 Power to appoint a receiver (or administrator)

Given the duties of, and other disadvantages to, the secured creditor in exercising the powers described above, a secured creditor is in practice most likely to appoint a receiver (or conceivably an administrator if they are entitled to do so) rather than to exercise any of his other remedies. This is because, as discussed further in Section 8.5, a receiver will normally remain independent of the secured creditor and the secured creditor will not therefore be liable for the receiver's defaults.

8.2.2 Can the secured creditor buy the secured property himself?

As discussed in Section 8.2.1.4, the secured creditor is entitled to acquire outright ownership of the secured property by foreclosure, but this process is generally unattractive. A secured creditor is not entitled to sell the secured asset to himself, or to another person which is simply his trustee or nominee. Similarly, it cannot appoint a receiver or administrator to achieve the same result. However, this is easily surmountable, since the law does not prevent the secured creditor from selling to another legal entity of which he is a shareholder (Farrar v Farrars Ltd (1888) 40 ChD 395).

As a result, it is not unusual for a secured creditor to form a new subsidiary to act as buyer. Where some of the secured property consists of floating charge assets, the buyer may still need to pay sufficient cash to the company to cover preferential debts and any prescribed part. However, the bulk of the consideration for the sale is likely to be the release of the company from the secured debt (this is often termed a 'credit bid').

The secured creditor, or any receiver (or administrator) must of course still comply with their other duties on any such sale. Where the secured creditor holds a large beneficial interest in the buyer, the onus may shift onto him to show that they have done so (Tse Kwong Lam v Wong Chit Sen [1971] Ch 949). However, from the secured creditor's perspective, the independence of a receiver is a particular advantage here. If a receiver is found to have failed to obtain the best price reasonably obtainable, they may well be ordered to compensate the company out of their own resources. However, it is highly unlikely, in the absence of bad faith, that the sale will be set aside or, provided the secured creditor has allowed the receiver to retain their independence, that the secured creditor will be required to contribute to any shortfall in the purchase price.

8.3 APPOINTING A RECEIVER OR ADMINISTRATOR

8.3.1 What are the secured creditor's options?

The secured creditor will need to decide whether he wishes to appoint an administrative receiver, a non-administrative receiver or an administrator. Table 8.1 compares the main advantages of receivership with those of administration from the secured creditor's perspective.

Table 8.1 – Receivership vs administration

Advantages of receivership

A receiver owes his primary duty to his appointor. An administrator owes duties to the creditors generally, and the creditors are able to exercise greater control over the process.

A non-administrative receiver need not be a qualified insolvency practitioner (a secured creditor could, for example, appoint a surveyor as a receiver of a freehold property).

The administration expense regime is less favourable. In particular, both capital gains tax (on the realisation of an asset) and non-domestic business rates (where the company occupies the property) will be expenses of an administration.

The costs of receivership generally are likely to be lower, particularly if enforcement only requires a receiver to be appointed over a single secured asset.

Administration will not be available unless the company's COMI is in the UK (see Chapter 11).

Advantages of administration

Administration offers a moratorium.

The appointment of an administrator is likely to be required to sell the business (unless the secured creditor is able to appoint an administrative receiver).

Administration is likely to be the better-recognised process internationally if the company has assets in other jurisdictions, provided the company's COMI is in the UK (see Chapter 11).

8.3.1.1 Administrative receivers

Under s 29 IA 1986, an administrative receiver is defined as a receiver or manager:

  • of the whole (or substantially the whole) of the company's property;

  • appointed by or on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and one or more other securities.

(It also includes a person who would be such a receiver or manager but for the appointment of some other person as non-administrative receiver of part of a company's property.) An administrative receiver must be a qualified insolvency practitioner (s 230 IA 1986).

The exact meaning of 'substantially the whole' has never been clarified by the English courts, and secured creditors therefore need to form their own view in this regard. However, it is clear that the security must contain a floating charge if does, a receiver appointed under this security can still be an administrative receiver notwithstanding that the vast majority of the company's assets are in practice fixed charge assets (see Re Croftbell [1990] BCC 781). Conversely, however, a receiver appointed under a fixed charge only will not be an administrative receiver, even if the asset over which he is appointed is the sole asset of the company (Meadrealm Ltd v Transcontinental Golf Construction (1991) unreported, but noted by Marks in (1993) 6 Insolvency Intelligence 41).

In many cases a secured creditor will be unable to appoint an administrative receiver, for the reasons explained in Section 8.3.2.

8.3.1.2 Non-administrative receivers

The restrictions which prevent the secured creditor appointing an administrative receiver do not prevent him appointing a receiver over fixed charge assets only, or possibly over a more limited range of fixed and floating charge assets. Such a receiver might be appointed to manage and/or sell a freehold property or the company's shareholding in a subsidiary, for example. Unlike an administrative receiver, they need not be a qualified insolvency practitioner. In addition, they will have fewer other duties than will an administrative receiver or an administrator. However, it is unlikely that they could be appointed over sufficient assets to allow them to sell the company's entire business.

8.3.1.3 Administrators

Alternatively, a secured creditor who is a qualifying floating charge holder (or 'QFCH') may appoint an administrator if he wishes to enforce over all of the assets of the company, for example to promote a sale of the company's business. The proposed administrator will need to be satisfied that he will be able to fulfil the purpose of administration which is a concern a receiver does not have, although in practice this should seldom pose a difficulty. The meaning of the term 'QFCH' and the route by which a QFCH may appoint an administrator are discussed in Chapter 4. This chapter will therefore discuss considerations involved in appointing an administrator only where they parallel those involved in appointing a receiver.

8.3.1.4 Court-appointed receivers

The court also has the power to appoint a receiver of a company's assets. It seems unlikely, however, that a secured creditor would wish to apply to the court where he already has the power to appoint a receiver out of court under the terms of his security. A secured creditor is likely only to seek the assistance of the court where his security is in some way inadequate. Historically secured creditors have sought such an appointment where, for example, they were concerned that their security was in jeopardy but the right to appoint had not yet arisen. Further discussion of court-appointed receivers is beyond the scope of this book.

8.3.2 Can the secured creditor appoint an administrative receiver?

8.3.2.1 What limitations apply to the ability to appoint an administrative receiver?

Under 72A IA 1986, a secured creditor will only be able to appoint an administrative receiver if:

  • his security was taken prior to 15 September 2003; or

  • one of the exceptions set out in ss 72B–72GA IA 1986 (usually referred to as the 'City Exceptions') applies.

8.3.2.2 What are the City Exceptions?

Table 8.2 lists the existing City Exceptions. They apply to specific financing structures or borrowers where the continued availability of administrative receivership as a remedy is thought to be necessary to ensure that that lending will continue to be available on the favourable terms associated with those particular structures.

The exceptions contained in ss 72C–72E are worth discussing further here, as they may be capable of more general application. They allow the secured creditor to appoint an administrative receiver in respect of a project company for certain specified types of project where the project includes step-in rights. For these purposes:

  • a company is a 'project company' if it holds property for the purpose of the project or has sole or principal responsibility under an agreement for carrying out all or part of the project or is one of a number of companies which together carry out the project or provides finance to enable the project to be carried out. A holding company of such a company will also fall within the definition. However, a company will not be a project company if it also performs other functions not related to the project (para 7 Sch 2A IA 1986); and

  • a project has 'step-in rights' if a person who provides finance to a project has a conditional entitlement under an agreement to assume sole or principal responsibility for carrying out all or part of the project or to make arrangements for the carrying out of all or part of the project (para 6 Sch 2A IA 1986).

The project finance exception in s 72E IA 1986 was considered in Cabvision Ltd v Feetum [2006] BCC 340, where the court gave its views on the meaning of a 'project' and the question of when a company might be 'expected to incur' a debt of at least £50 million. The court also made it clear in this case that a contractual right to appoint an administrative receiver was not itself a step-in right.

Table 8.2 – The 'City Exceptions'

A secured creditor remains entitled to appoint an administrative receiver in the following circumstances:

1. Capital market arrangements (s 72B IA 1986)

Pursuant to an agreement which is, or forms part of, a 'capital market arrangement' (as defined in para 1 Sch 2A IA 1986) where a party incurs (or is expected to incur) a debt of at least £50 million and the arrangement which involves the issue of a capital market investment (as defined in para 2 Sch 2A IA 1986).

2. Public-private partnerships, utilities or urban regeneration (ss 72C, 72D, 72DA IA 1986)

In respect of a project company of one of the following types of project where the project includes step-in rights:

a 'public-private partnership project', ie a project where resources are provided partly by one or more public bodies and partly by one or more private persons or which is designed wholly or mainly for the purpose of assisting a public body in discharging a function;

a 'utility project', ie a project designed wholly or mainly for the purpose of a regulated business. Regulated businesses are providers of public services, and include gas, electricity and water suppliers, sewerage undertakers, railway operators and postal businesses;

an 'urban regeneration project', ie a project designed wholly or mainly to develop land which, at the commencement of the project, is wholly or partly in a 'designated disadvantaged area' (outside Northern Ireland) (see s 92 Finance Act 2001).

3. Project finance (s 72E IA 1986)

In respect of a project company that incurs (or is expected to incur) a debt of at least £50 million for the purposes of carrying out the project where the project includes step-in rights.

4. Financial market contracts (s 72G IA 1986)

In respect of a company that has granted:

a market charge as per s 173 CA 1989; or

a system charge as per the Financial Markets and Insolvency Regulations 1996 (SI 1996/1469); or

a collateral security charge as per the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979).

5. Registered social landlord (s 72G IA 1986)

In respect of a company registered as a social landlord for the purposes of Part I Housing Act 1996 (generally speaking, a housing association).

6. Protected railway and other companies (s 72GA IA 1986)

In respect of:

a water or sewerage company holding an appointment under Chapter I Part II Water Industry Act 1991; or

a protected railway company as per s 59 of the Railways Act 1993 (as extended by the Channel Tunnel Rail Link Act 1996); or

a company licensed to provide air traffic services as per s 26 Transport Act 2000.

8.3.3 What is the appointment process?

8.3.3.1 When can the secured creditor appoint a receiver?

Before a secured creditor can appoint a receiver, this right must have arisen under its security. (A secured creditor seeking to appoint an administrator by the out-of-court route must similarly be able to state that its security has become enforceable – see Chapter 4). There must therefore be some breach of the terms of a loan or security document by the company.

Once the right to appoint has arisen, however, the secured creditor is entitled to have regard first and foremost to his own interests in determining when or whether to appoint. In Shamji v Johnson Matthey Bankers Ltd [1991] BCLC 36, the court made it clear that, if the power to appoint a receiver were granted to the mortgagee by the security documents in completely unqualified terms, a decision by the mortgagee to exercise the power could not be challenged except perhaps on the grounds of bad faith.

8.3.3.2 Making demand on the company

Sometimes a security document will state that it is enforceable if specific defaults have occurred without the need for the secured creditor to take any further action. However, normal practice is nonetheless to make demand, even if this is not expressly required as a precursor to enforcement. The courts may regard an enforcement without any form of advance notice to the company as oppressive, as this gives the company no prior opportunity to repay the debt and redeem the security.

Once he has made demand, the secured creditor needs only to give the company the time it would reasonably require to move funds 'from some convenient place' to make payment. There is no need to give the company time to negotiate a deal to produce the money if the company does not already have the funds available. This is sometimes known as the mechanics of payment test. The time required may be no longer than one hour provided the demand is made during banking hours (Cripps (Pharmaceuticals) Ltd v Wickenden [1973] 1 WLR 944). If the company has already made it clear that it does not have the funds available there is no need to give the company any further time at all (Sheppard & Cooper Ltd v TSB Bank Plc (No 2) [1996] BCC 965).

If the company clearly has insufficient funds available, a mistake in the amount demanded (even if this means that the sum demanded is too large) or a failure to specify an exact sum which the company must pay will not normally invalidate the demand (Bank of Baroda v Panessar [1987] Ch 335). If there is any doubt as to the correct amount when putting together the demand, however, the secured creditor would probably still be wise to omit any items likely to be disputed. The real function of the demand is to enable the secured creditor to enforce. Excluding disputed items from the sum demanded will not prevent the secured creditor recovering them during the enforcement process, particularly if he expressly reserves his rights in this regard.

In practice, many lenders wish to avoid a 'hostile' appointment if possible and prefer the company to invite them to appoint a receiver (or for the company or its directors themselves to appoint an administrator of the lender's choice out of court). Even if the directors are reluctant to make such an invitation, they may well be advised that they have little option but to do so if they have received a demand which the company cannot meet. In these circumstances the company will clearly be cash-flow insolvent, and were the directors to ignore the demand and attempt to trade on they are likely to be at increasing risk personally (as outlined in Chapter 6).

8.3.3.3 Making the appointment

Assuming the company has not made payment, or otherwise remedied the stated breach, the secured creditor can appoint. To do so, he sends a written notice of appointment to the person, or persons, whom it intends to appoint as receiver(s). The appointment:

  • Need not be by deed (unless the security document so requires). However, it is common practice for it to take this form (Phoenix Properties Ltd v Wimpole Street Nominees Ltd [1992] BCLC 737).

  • Should state the property over which the receiver(s) are to be appointed and should indicate the powers which they are entitled to exercise. Often it will simply provide that they are entitled to exercise all of the powers conferred upon receivers by the security document and otherwise by law.

  • Should state, if more than one person is to be appointed as receiver, which of their powers can be exercised by any one of them individually (see s 231(2) IA 1986 in the case of administrative receivers).

  • Should comply with any other requirements stipulated in the security document regarding the appointment of receivers.

In order to be effective, the appointment must be accepted by each receiver (or on his behalf by a person authorised by him) before the end of the next business day after that on which he receives the appointment. It may be orally accepted, but an oral acceptance must be confirmed in writing within seven days. The acceptance or confirmation must state the date and time of receipt of the instrument of appointment and the date and time of acceptance. Provided these requirements are complied with, the appointment takes effect from the time when the instrument of appointment was received (s 33(1) IA 1986 and r 3.1 IR 1986).

8.3.4 What are the consequences of an invalid appointment?

The directors of the company retain the power to challenge the appointment of a receiver (see Chapter 6). A challenge is, however, most likely to come from a liquidator because if the security can successfully be attacked on one of the grounds set out in Chapter 5 there will be more assets available for the unsecured creditors.

If the security under which the receiver was appointed is invalid or there was a defect in his appointment, or indeed if he otherwise acts outside of the powers vested in him, the receiver may be personally liable to the company in trespass or conversion. His liability in this respect could potentially be serious. However, the courts have held that an invalidly-appointed receiver can commit the tort of conversion only in respect of chattels and not choses in action, and that he will not have committed the tort of wrongful interference with the performance of the company's contracts (OBG Ltd v Allan [2008] 1 AC 1).

Under s 232 IA 1986, an administrative receiver's appointment is valid notwithstanding any defect in his appointment, nomination or qualifications. Where s 232 applies it will protect the administrative receiver as well as any party dealing with him. However, there is a distinction between an appointment in which there is some defect and a case where there is no appointment at all, for example because the security document was invalid. In the second case s 232 will not apply (OBG Ltd v Allan).

The receiver will therefore need to check the validity of the security prior to his appointment. A newly-appointed receiver will therefore normally seek formal advice on the validity of his appointment. A receiver may also seek an indemnity from his appointor to cover any losses he may suffer, whether as a result of a defect in his appointment or otherwise. This is a matter for negotiation. It is unlikely that a major bank will give such an indemnity, but it is more common in other cases. Under s 34 IA 1986, the court may also order the appointor to indemnify the receiver against any liability which arises solely as a result of the invalidity of his appointment.

8.4 WHAT IS THE STATUS OF A RECEIVER?

8.4.1 The receiver's status as agent

An administrative receiver is deemed to be the agent of the company unless and until the company goes into liquidation (s 44(1)(a) IA 1986). A non-administrative receiver is also deemed to be the company's agent (s 109(2) LPA 1925). However, the security document will in any case almost always expressly state that the receiver is the company's agent.

This is an unusual type of agency in that the receiver still owes his primary duty to the secured creditor who appointed him rather than to the company (see Section 8.7). The company is unable to give the receiver instructions or to dismiss him. However, because the receiver is the agent of the company , it is the company (rather than the appointor) who is liable for the receiver's acts. Furthermore, it is the receiver himself rather than his appointor who will be responsible for any breach of duty by the receiver.

The receiver's special status will be lost if his appointor behaves in a way which constitutes the receiver its own agent (American Express International Banking Corp v Hurley [1985] 3 All ER 564). The appointor would then be liable for the receiver's actions. A well-advised secured creditor will therefore allow the receiver to retain his independence by avoiding giving him direct instructions or liaising with him so closely that his independence might be called into question.

8.4.2 Entry into contracts

A receiver will be personally liable on any new contract entered into by him in the performance of his functions, except in so far as the contract provides otherwise. Should he incur personal liability, the receiver will be entitled to an indemnity out of the assets of the company (s 37 and s 44 IA 1986 in the case of non-administrative and administrative receivers, respectively). However, in practice, any receiver will aim to make it expressly clear that he is contracting as the company's agent without personal liability.

8.4.3 The effect of liquidation

A company will frequently be placed into liquidation at some point after a receiver has been appointed. Liquidation will not bring the receiver's appointment to an end – the two processes operate in parallel, as the receiver is appointed over particular property of the company, rather than to the company itself (see Chapter 2). However, the receiver's status as the company's agent will terminate when a liquidator is appointed.

This will not prevent the receiver continuing to exercise all of his powers in relation to the property over which he is appointed. He may still, among other things, begin or continue proceedings in the company's name to recover property which is subject to his appointor's security (see Gough's Garages Ltd v Pugsley [1930] 1 KB 615). It does mean, however, that he will no longer be able to commit the company to any new liabilities (see Gosling v Gaskell [1897] AC 575). So as to continue to preserve his appointor's independence, the receiver would normally enter into any further contracts as principal in his own right rather than as agent of the appointor. He will remain entitled to an indemnity out of the assets over which he has been appointed under ss 37 and 44 IA 1986.

In practice, however, a receiver will be concerned that the company's assets might conceivably be insufficient to satisfy any such indemnity. He may therefore ask for an additional indemnity from his appointor where the company enters into liquidation even where he did not obtain an indemnity at the start of the receivership.

8.5 WHAT ARE THE OTHER CONSEQUENCES OF RECEIVERSHIP?

8.5.1 What is the effect on other insolvency proceedings?

The appointment of an administrative receiver will prevent any person appointing an administrator out of court (paras 17 and 25 Sch B1 IA 1986). The court will also have no jurisdiction to make an administration order without the consent of the administrative receiver's appointor and in the absence of circumstances which might render the security suspect (para 39 Sch B1 IA 1986, and see Chesterton International Group plc v Deka Immobilien Inv GmbH [2005] BPIR 1103).

Otherwise, however, receivership should not prevent an administration or a liquidation being commenced or continued. The fact that a non-administrative receiver has already been appointed over some of the company's assets will not prevent the appointment of an administrator, and indeed the administrator can require such a receiver to vacate office. Similarly, as already noted the appointment of a receiver (of any kind) will not prevent the company from being placed into liquidation.

8.5.2 What is the effect on the directors?

The role of the directors once a receiver has been appointed is discussed in Chapter 6. If a non-administrative receiver is appointed only over certain assets of the company, the directors will need to continue to manage its remaining assets.

8.5.3 What is the effect on existing contracts?

The appointment of a receiver does not terminate the contracts of a company. The terms of the contract itself may of course provide that the contract automatically comes to an end on the appointment of a receiver or, more normally, that the other party has the opportunity to terminate. Alternatively, the receiver may indicate that the company is no longer able to perform its obligations under the contract, and the resulting breach will give the other party the ability to terminate and/or to pursue other remedies. Should a receiver decide to continue an existing contract, this does not mean that he will become personally liable for pre- or oven post-receivership liabilities under that contract, or that such liabilities will be receivership expenses – they will simply be unsecured liabilities of the company. In practice, a receiver will always make this expressly clear to the other party. The position is usefully analysed by the court in Powdrill v Watson [1995] 2 AC 394. Special rules apply to employment contracts (see Chapter 9).

Damages are likely to be of limited use against an insolvent company. The other party may alternatively seek injunctive relief against the receiver. The courts have been disinclined to grant such relief in general (see, for example, Airlines Airspares v Handley Page [1970] Ch 193). The other party may, however, still obtain specific performance of a contract under which it has already acquired an equitable interest in land (Freevale Ltd v Metrostore Holdings Ltd [1984] Ch 199). The court has also required a receiver to honour the terms of an existing contract rather than obtain an additional 'ransom' payment for continuing to supply goods (Land Rover Group Ltd v UPF (UK) Ltd [2003] 2 BCLC 222).

8.5.4 What is the effect on the company's documentation?

Where a receiver or manager has been appointed, every invoice, order for goods or services, business letter or order form (whether in hard copy, electronic or any other form) issued and all of the company's websites must contain a statement to this effect. The receiver or manager or any officer of the company commits an offence if they knowingly and willingly authorise or permit a breach of this requirement (s 39 IA 1986).

8.6 HOW ARE THE CREDITORS INFORMED AND INVOLVED?

8.6.1 Overview

A non-administrative receiver has few obligations to keep creditors informed. He need do little more than to ensure that the secured creditor file notice of his appointment (see Section 8.6.2) and then send periodic receipts and payments accounts to the Registrar of Companies (see Section 8.6.6). An administrative receiver has more extensive obligations in this regard, and the majority of this section will therefore relate just to administrative receivers.

8.6.2 Notices

A secured creditor appointing any type of receiver must give notice of the appointment to the Registrar of Companies within seven days (s 405 CA 1985, due shortly to be replaced by s 871 CA 2006 which has equivalent effect), although in practice the receiver will often carry out this task on their behalf.

An administrative receiver must send notice of his appointment to the company immediately and to all creditors of the company of whose addresses he is aware within 28 days after his appointment (unless the court directs otherwise). He must also advertise his appointment in the London Gazette and an appropriate newspaper (s 46(1) IA 1986 and r 3.2 IR 1986).

8.6.3 Statement of affairs

Immediately following his appointment, an administrative receiver must require one or more 'relevant persons' to provide a statement of affairs (s 47 IA 1986). This is discussed further in Chapter 6. If he thinks it would prejudice the course of the receivership for the whole or part of the statement of affairs to be disclosed he may apply to court for an order for limited disclosure.

8.6.4 Administrative receiver's report

The administrative receiver must then prepare a report giving details of the events leading up to his appointment, how property has been (or is proposed to be) disposed of and how the business has been carried on. It must stipulate the amounts payable to the secured creditors who appointed him and to preferential creditors and the amount (if any) likely to be available for the payment of other creditors. It must also include a summary of the directors' statement of affairs and the administrative receiver's comments on this. It need not, however, include any information the disclosure of which would seriously prejudice the carrying out of the administrative receiver's functions.

The administrative receiver must send the report to the Registrar of Companies, the trustees for the secured creditors and the individual secured creditors (so far as he is aware of their addresses) within three months after his appointment (or such longer period as the court allows). Within the same time period, he must also either send a copy of the report to the unsecured creditors (so far as he is aware of their addresses) or publish an address to which unsecured creditors can apply for copies of the report (s 48 IA 1986 and r 3.8 IR 1986).

8.6.5 Meeting of creditors

The administrative receiver must (unless the court directs otherwise) call a meeting of the unsecured creditors on not less than 14 days' notice to consider the report (s 48(2) IA 1986). In practice, the main function of any meeting will simply be to supply information to the unsecured creditors. Among other things, the unsecured creditors may decide at this meeting to establish a creditors' committee. Any such committee will consist of three to five creditors and has a statutory duty to help the administrative receiver. This committee may require the administrative receiver to attend on it and furnish details to it as requested on seven days' notice (s 49 IA 1986 and rr 3.16 and 3.18 IR 1986).

8.6.6 Receivership accounts

A non-administrative receiver must send receipts and payments accounts to the Registrar of Companies covering the 12-month period commencing on the date he was appointed and every subsequent period of six months. When he ceases to act he must also send accounts covering the remaining period of the receivership, together with a cumulative account. Each set of accounts must be submitted within one month of the end of the period covered, unless the registrar agrees otherwise (s 38 IA 1986).

An administrative receiver has similar obligations, save that he is only obliged to provide accounts for every 12-month period and when he ceases to act he has two months to submit the final accounts. He must also send copies of the accounts to each member of any creditors' committee (r 3.23 IR 1986).

8.7 DUTIES OF THE RECEIVER

8.7.1 To whom are the receiver's duties owed?

A receiver's primary duty is owed to his appointor, and is to bring about a situation where the debt due to his appointor can be repaid. However, the receiver will also owe a secondary duty to any other parties who have an interest in the secured property or its equity of redemption. Such other parties might include the company itself, a lower ranking secured creditor, the principal borrower or a guarantor of the secured debt. The receiver will not owe a separate duty to individual unsecured creditors or shareholders, as they have no direct interest in the secured property (Medforth v Blake [1999] BCC 771).

8.7.2 What are the receiver's secondary duties?

In many respects, a receiver's secondary duties will parallel those owed by the secured creditor itself to these same parties (see Silven Properties Ltd v Royal Bank of Scotland plc [2004] 4 All ER 484). One key difference, however, is that whereas the secured creditor has no duty to take possession of the secured property or to exercise any of its other powers, once a receiver is appointed he must take possession and take certain other actions in order to fulfil his functions. His secondary duties will therefore be wider in some respects than the duties of the secured creditor itself.

8.7.2.1 Duty to act in good faith

The receiver has a duty towards other interested parties to exercise his powers in good faith, regardless of any competing interests of the secured creditor. A breach of this duty requires some dishonesty, improper motive or other actual element of bad faith. Mere negligence will not suffice here. However, complete indifference to the interests of the other parties or deliberately shutting his eyes to the consequences of his actions may constitute bad faith (Medforth v Blake).

It was also emphasised in Medforth v Blake that the receiver's duties to the other interested parties were not necessarily confined to the duty of good faith. The extent and scope of any additional duty will depend on the facts of each case, but a number of clear principles do exist, as set out below.

8.7.2.2 Duties in relation to a sale

Provided he acts in good faith, the receiver can give priority to his appointor's interests in determining when to sell. As was made clear in the Silven Properties case, he has no obligation to wait for the market to improve, or to incur time and expense in trying to enhance the value of the property prior to a sale (such as by seeking planning permission).

If the receiver does decide to sell however, he will have a duty to seek the best price reasonably obtainable at the time of the sale. This normally means that, unless there is a need for an urgent sale (eg because goods over which he is appointed are perishable), he must fairly and properly expose the property to the market or sell at a price based on previous exposure to the market. He should not omit to mention key information to interested parties which could affect price, and should respond to enquiries from interested parties appropriately.

8.7.2.3 Duties in relation to a business

The receiver also owes a duty to manage the property over which he is appointed with due diligence. In Medforth v Blake it was made clear that whilst due diligence does not oblige the receiver to continue to carry on a business of the company, if the receiver does carry on the business due diligence requires him to take reasonable steps to try to do so profitably. In Medforth itself, the receivers failed in this duty by not taking advantage of substantial discounts which were available.

8.7.2.4 Duties in managing property generally

Although he may not be obliged to sell the secured property immediately or to trade any business, the duty to manage with due diligence means that the receiver cannot simply remain passive. He must exercise his powers to preserve and protect the property over which he has been appointed. For example, a receiver who failed to trigger a rent review clause in a lease was in breach of this duty (Knight v Lawrence [1991] BCC 411).

8.7.3 Additional duties of an administrative receiver

Like a liquidator in a compulsory liquidation, an administrative receiver is an officer of the court. He also has a specific duty to pay preferential creditors (s 40 IA 1986), as discussed further in Chapter 2.

8.8 POWERS OF A RECEIVER

8.8.1 Where are a receiver's powers found?

Assuming that his powers are not limited by the terms of his appointment, the receiver will have:

  • the powers conferred upon him by law; and

  • any additional powers conferred upon him under the terms of the security document under which he is appointed.

Under s 42 IA 1986, an administrative receiver is already given the very wide powers set out in Sch 1 IA 1986 (see Table 4.4 in Chapter 4). A non-administrative receiver is only given very limited powers by the Law of Property Act 1925. However, these limited powers will not be discussed further in this book, since normal practice now is for the security document expressly to confer powers equivalent to those in Sch 1 IA 1986 on all receivers.

Any receiver is given the power to apply to court for directions (s 35 IA 1986).

8.8.2 What is the receiver's status when selling property?

Normally, the receiver sells property as agent in the name of the company. As such he cannot transfer any better right that the company itself has. In order for the buyer to acquire the property free of the security under which the receiver was appointed, his appointor will need to enter into a deed of release. Similarly, a deed of release will also be required from any other person holding security over the property (Re Real Meat Co [1996] BCC 254).

If the holder of a prior or equal-ranking security refuses to give a release, an administrative receiver has the power to apply to court (see Section 8.8.3.1). Additionally, a secured creditor is able to overreach lower-ranking security by exercising its own power of sale and will appoint the receiver as its own agent just for the purposes of the sale, the lower-ranking security holder's rights then attach to any surplus sale proceeds.

If the buyer is connected to one or more of the directors of the company, s 190 CA 2006, which seeks to limit a director's ability to sell a company's property to himself, will continue to apply. (Section 193 CA 2006 disapplies s 190 CA 2006 where an administrator or liquidator has been appointed, but makes no reference to a receiver – see Demite Ltd v Protec Health Ltd [1998] BCC 638.) The sale may therefore still require the approval of the company's shareholders if the value of the property being sold exceeds 10% of the company's net assets value and is more than £5,000 or if its value exceeds £100,000. Where shareholder approval is not forthcoming, however, directors will typically seek to circumvent the operation of this section by resigning from the company's board prior to the sale.

8.8.3 What additional powers does an administrative receiver have?

8.8.3.1 Power to dispose of charged property

An administrative receiver may apply to the court for an order to dispose of a property free of any security which is prior or equal-ranking to that of their appointor. The court may make such an order if it thinks that disposal of the property in question (with or without other property) would be likely to promote a more advantageous realisation of the company's assets than would otherwise be affected. In addition, any order is subject to the condition that:

  • the net proceeds of the disposal; and

  • where those proceeds are less than such amount as may be determined by the court to be the net amount which would be realised on the sale of the property in the open market by a willing vendor, such sums as may be required to make good the deficiency

be applied towards discharging the sums secured by the security (s 43 IA 1986).

8.8.3.2 Specific powers of investigation

The administrative receiver has the same powers of investigation under ss 234 and 236 IA 1986 as a liquidator (see Chapter 3). He will also be assisted by the directors' and employees' duty to co-operate with an insolvency officeholder under s 235 IA 1986 (see Chapter 6).

8.9 ENDING THE RECEIVERSHIP

The receivership is complete when the receiver's appointor has been paid in full or when the receiver has sold all the property over which he was appointed and distributed all the proceeds to his own appointor and to any other persons to whom he is required to pay monies in priority to his appointor (see Chapter 2). Instead, he will have no responsibility to make any distribution to ordinary unsecured creditors. He will hand any surplus proceeds to a lower-ranking secured creditor if there is one. In the absence of any lower-ranking secured creditor, he will hand them over to any liquidator, or if the company remains outside of liquidation, to the company itself. Once he has done so, his appointment comes to an end.

Besides filing his final accounts (see Section 8.6.6), the only further formality required will be to notify the Registrar of Companies that he has ceased to act (s 405(2) CA 1985 due shortly to be replaced by s 871 CA 2006 which has equivalent effect). Administrative receivers are required to give this notice to the Registrar within 14 days (s 45(4) IA 1986).

8.9.1 Financial Collateral Arrangements (No 2) Regulations 2003

8.9.1.1 To what do these Regulations apply?

The Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226) were introduced to implement an EC Directive whose goals were to simplify the process of taking financial collateral throughout the EU by, among other things, setting out minimum criteria for the creation, perfection and enforcement of security in 'financial collateral'.

Many of the transactions falling within the ambit of these Regulations are specialised and beyond the scope to this book. However, the Regulations are drafted more widely than the Directive itself and so may improve a secured creditor's position even where he holds more commonplace types of security over cash or shares. In R (on the application of Cukurova Finance International Ltd) v HM Treasury [2008] EWHC 2567 (Admin), the claimant argued that HM Treasury's decision to extend the Regulations beyond the scope of the Directive was inappropriate, but the court was not sufficiently impressed by this argument to grant the claimant the extension of time it needed to bring judicial review proceedings to challenge the Regulations.

The Regulations apply to financial collateral arrangements between non-natural persons (including companies) which were entered into on or after 26 December 2003. These include an arrangement where a security interest is taken over financial collateral which is in the possession or under the control of the collateral-taker.

The regulations define:

  • financial collateral as cash or financial instruments, including shares in companies and equivalent securities. (HM Treasury has stated that the Regulations do not apply to non-financial collateral such as commercial property, plant and machinery or book debts); and

  • a security interest to include a mortgage, fixed charge, pledge, lien or floating charge, although in the latter case the collateral must still be delivered, transferred, held, or registered in a manner to be in the control or possession of the collateral-taker.

8.9.2 What advantages do the Regulations confer?

8.9.2.1 Enforcement

Where a financial collateral arrangement creates a security interest, certain provisions of the IA 1986 will not apply to the enforcement of that security (reg 8 of the Regulations). As a result where the company is in administration:

  • the secured creditor is able to enforce its security without requiring the consent of an administrator or the permission of the court;

  • the administrator has no ability to deal with the collateral under paras 70 and 71 Sch B1 IA 1986 (which would normally allow him to deal with charged property); and

  • the administrator cannot require a receiver appointed over the collateral to vacate office.

The secured creditor will not be able to appropriate collateral unless the documents contain wording allowing him to do so, but most security documents should now contain such wording. Furthermore, where the financial collateral arrangement creates a legal or equitable mortgage on terms which give the secured creditor the right to appropriate the financial collateral, he may exercise this power in accordance with the terms of the arrangement without first seeking a foreclosure order (reg 17 of the Regulations).

8.9.2.2 Avoidance provisions

In addition, certain other provisions of the legislation are disapplied in relation to financial collateral arrangements (reg 10 of the Regulations). As a result, among other things:

  • the prescribed part will not apply to any charge created or arising under a financial collateral arrangement;

  • a floating charge created or otherwise arising under a financial collateral arrangement cannot be avoided under s 245 IA 1986.

8.9.2.3 Creation and perfection of security

Finally, certain requirements for the creation and perfection of security are disapplied (reg 4 of the Regulations). As such:

  • a financial collateral arrangement need only be in writing, and there is no signature requirement; and

  • a failure to register the security interest under s 395 CA 1985 (shortly to be superseded by s 860 CA 2006) will not invalidate it.

In practice, creditors are usually advised to continue to create, register and otherwise perfect that security as if the Regulations had not been introduced. However, they may provide a useful fallback if one of the normal requirements, such a registration, is overlooked.

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