What is a Receivership?
Most commonly, receiverships commence when a secured creditor appoints a receiver to a company in cases where the company owes funds but fails to pay on time, or the company is in another kind of default to the secured creditor. The Court can also appoint a receiver in certain circumstances but this does not occur as often in practice.
Once appointed, a receiver may take possession of, manage, and sell some or all of the company’s assets.
Appointment of a Receiver
A secured creditor’s right to appoint a receiver is purely contractual; it will depend on the wording of the security agreement. It should be noted, however, that in practice most security agreements include the power to appoint a receiver. Likewise, the receiver’s powers are not only set out within legislation but also under an underlying contract allowing the receiver to be appointed in the first place.
Most of these security agreements require that a formal demand of any outstanding debt is made before an event of default that triggers the right to appoint a receiver occurs.
It is important to review these documents once a company shows signs of financial distress and enforcement options are considered. At Norling Law, our experts are experienced in dealing with receiverships and offer a FREE 30-minute Legal Consultation where they can discuss the issues and add strategic value.
Status of Receivership
The appointment of a receiver does not change the legal status of the company; the company is still the same legal entity as it was prior to the receivership. Generally, the legal rights of the company in receivership are not limited by a receivership. The company can still commence or continue legal proceedings and its contractual and property rights are generally unaffected.
Some contracts with third parties, however, expressly provide for termination of the contract if one of the contracting parties is placed into receivership. Subsequently, it is important to review all contracts to see if they are potentially affected by a receivership of either of the contracting parties.
Powers of a Receiver
The security agreement itself is usually the fundamental source of the receiver’s powers. However, these powers are also supplemented by the provisions of s 14(2) of the Receiverships Act 1993 (“the Act”). These statutory powers are subject to the deed or agreement or the order of the court by or under which the appointment was made.
It is advised that all powers that are intended to be granted to a receiver are expressly included in the security agreement, as some powers, such as the power of sale, are not expressly included under the Act.
Likewise, it is advised that powers that are not intended to be granted to a receiver are expressly excluded in the security agreement if they have been statutorily included under s 14(2) of the Act.
Examples of powers usually granted to a receiver are:
- Power to collect and sell the debtor company’s assets;
- Power to operate the debtor company’s business;
- Power to restructure the debtor company’s affairs;
- Power to borrow for the purpose of the receivership;
- Power to execute all necessary documents on behalf of the debtor company;
- Power to commence and conduct legal proceedings in the name of the debtor company;
- Power to apply to Court for directions in relation to any matter arising in connection with the performance of the functions of a receiver; and
- Power to take remuneration and indemnity.
The basic function of a receiver is to take control of the assets in receivership and to generate cash through profitable trading, or more commonly, the sale of all or some of the assets and pay the proceeds to the appointing creditor.
Duties of a Receiver
The receiver must exercise his or her powers in a manner he or she believes, on reasonable grounds, to be in the best interests of the appointing creditor (s 18(2) of the Act). Although a receiver must exercise his or her powers in good faith and for a proper purpose (s 18(1) of the Act), a receiver may not always act in the best interests of the company or other creditors, to the extent that s 18(3) of the Act applies. Subsequently, this means that a receiver’s primary duty is to the appointing creditor, and a subservient secondary duty is to have reasonable regard to the interests of the debtor company and its other creditors.
Receivers also have reporting obligations that they must abide by. Not later than 2 months after the appointment, a receiver 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 may be prescribed.
The report must also include details of:
- The events leading up to the appointment of the receiver so far as the receiver is aware of them; and
- Property disposed of and any proposals for the disposal of property in receivership; and
- Amounts owing, as at the date of appointment, to any person in whose interests the receiver was 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 paragraph (c) or paragraph (d).
The grantor and any person whose interests the receivers were appointed are entitled to receive the report. Furthermore, any 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.
Receivers must also, no later than 2 months after each period of 6 months after their appointment, or the date on which the receivership ends, prepare a 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 to.
This 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 of the date of the report for payment to creditors.
Receiverships are notoriously contentious; in every receivership, there are emotional and frustrated parties. It can be an arduous process to navigate for all parties involved. Whether you are a creditor wanting to enforce a security agreement to appoint a receiver, a receiver managing the assets of a company, or a director of a debtor company, Norling Law can assist you to ensure that a commonly stressful, contentious process is made smoother.
Our expert receivership lawyers assist clients to navigate this process throughout New Zealand. There are many pitfalls if implemented incorrectly.
Please refer to our People for more information on who we are, our experience, and how we can help you.
Our office is located on the North Shore in Auckland, New Zealand, or can have the consultation by phone.