Appointment of Receivers
Receivers can be appointed over companies, individuals, trusts and partnerships.
The majority of receivers are appointed by a debenture holder pursuant to a contractual right contained in a security agreement. The Court can also appoint a receiver.
Receivers have obligations under legislation but also the security agreement. Receivers must not act beyond their powers specifically granted under these documents.
Most security agreements require that an appointment of a receiver is made in writing. Further, most require that formal demand is made before an event of default occurs that may result in an appointment of a receiver.
The appointment of a receiver takes effect when the appointment documents are delivered to the receiver by the debenture holder or agent and the receiver overtly or tacitly accepts the position.
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Status of Receiver
If the receiver has been appointed by a secured creditor, he or she will take possession of the assets over which the debtor company has granted the security and will attempt to repay the secured creditor either by profitably managing the assets or by selling them, or by doing both.
A receiver may also in some cases:
Bring legal proceedings;
Manage the business;
Demand and recover, by action or otherwise, income of the property in receivership;
Issue receipts for income recovered;
Manage the property in receivership;
Insure the property in receivership;
Repair and maintain the property in receivership;
Inspect at any reasonable time books or documents that relate to the property in receivership and that are in the possession or under the control of the grantor;
Exercise, on behalf of the grantor, a right to inspect books or documents that relate to the property in receivership and that are in the possession or under the control of a person other than the grantor;
In a case where the receiver is appointed in respect of all or substantially all of the assets and undertaking of a grantor that is a body corporate, change the registered office or address for service of the body corporate.
Effect of Receivership
The appointment of a receiver does not change the legal status of a company; the company is the same legal entity as it was prior to receivership.
The debtor company can commence or continue legal proceedings and its contractual and property rights are generally unaffected.
A receivership does not have the effect of automatically terminating any contracts the debtor company is a party to, unless a particular contract expressly provides otherwise.
Impact of Receivership on Directors
The company’s directors remain in office but, in the usual case where all or most of the company’s assets are in receivership and the receiver is managing the whole of the company’s affairs, the directors are left with very little in the way of residual power.
Generally, directors have the right to access to the company’s records.
They also have the right to arrange for the company to refinance its indebtedness so as to pay off the appointing creditor and terminate the receivership.
Directors may (at their cost) challenge the validity of the receivership.
But, in general, directors are left in the awkward position of having some of the obligations of directors (such as the filing of accounts and annual returns) without having access to the resources to meet those obligations. Some directors resign as a result.
And once the receivership has been completed, the debtor company’s assets will be returned to the control of the board of directors unless a liquidator or another receiver has been appointed.
Impact of Receivership on other Creditors
The appointment of a receiver by a secured creditor does not impose any sort of moratorium on other creditors.
Another secured creditor may take steps to enforce its security interest but whether the other secured creditor will be entitled to take possession of its collateral from the receiver will depend on the relative priorities of the security interests of the creditor that appointed the receiver and the other secured creditor.
Unsecured creditors may commence or continue legal proceedings against a company in receivership.
Unsecured creditors may also apply to have the company put into liquidation. Although a liquidator will not displace a receiver, who will continue to control the assets in receivership, a liquidator may act as a watchdog for the unsecured creditors and will have greater powers to investigate antecedent transactions than a receiver.
Ability to restrain powers of Receivers
In some cases, it can become necessary to restrain the powers of a receiver that has been validly appointed.
This occurred for example when receivers who were appointed pursuant to a GSA granted to the shareholders.
Restrain Secured Creditor from appointing a Receiver
The Court may restrain the powers of receivers in appropriate circumstances. The Courts have expressed a willingness to grant injunctive relief to restrain powers of receivers pending determination between the grantor and secured creditors.
Although not correct, some debenture holders act unreasonably and/or inappropriately in the use of their security. In Greenfield Global Ltd v MKAH Ltd the debenture holder made a number of threats to appoint a receiver over all the assets of various companies and individuals unless certain sums were paid.
The grantors’ position was that they had already extinguished their indebtedness. The parties were unable to agree to an array of proposed informal resolutions and the debenture holder’s position was to pay or be placed into receivership. Unsurprisingly, the grantors applied for a declaration as to the amount owed and injunctive relief restraining the secured powers of the debenture holder pending resolution of the substantive quantum. The Court made without notice orders to restrain the powers of the debenture holder. The Court also awarded costs as against the debenture holder on the basis of the unreasonable conduct which rendered the application necessary. It is quite plain that the Court is willing to provide without notice injunctive relief to prevent the damage that is inevitable from the appointment of a receiver.
Reporting Obligations of Receivers
No later than 2 months after the receivers’ appointment, the receivers must prepare a report on the state of affairs with respect to the property in receivership including:
Particulars of the assets comprising the property in receivership; and
Particulars of the debts and liabilities to be satisfied from the property in receivership; and
The names and addresses of the creditors with an interest in the property in receivership; and
Particulars of any encumbrance over the property in receivership held by any creditor including the date on which it was created; and
Particulars of any default by the grantor in making relevant information available; and
Such other information as may be prescribed.
The report must also include details of:
The events leading up to the appointment of the receivers, so far as the receivers are aware of them; and
Property disposed of and any proposals for the disposal of the property in receivership; and
Amounts owing, as at the date of appointment, to any person in whose interests the receivers were appointed; and
Amounts owing, as at the date of appointment, to creditors of the grantor having preferential claims; and
Amounts likely to be available for payment to creditors other than those referred to in paragraphs (c) or (d) of this subsection.
The grantor and any person whose interests the receivers were appointed in is entitled to receive the report.
Further, a creditor, director or surety of the grantor, or any person with an interest in any of the property in receivership, may request a copy of the report.
No later than 2 months after each period of 6 months after the appointment of receivers or the date on which the receivership ends, a receiver must prepare a further report summarising the state of affairs with respect to the property in receivership, including all amounts received and paid during the period that the report relates.
The report must include details of:
Property disposed of since the date of any previous report and any proposals for the disposal of property in receivership; and
Amounts owing, as at the date of the report, to any person in whose interests the receiver was appointed; and
Amounts owing, as at the date of the report, to creditors of the grantor having preferential claims; and
Amounts likely to be available as at the date of the report for payment to creditors.
More Information on Receiverships
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