Fixed charge (or LPA) receiverships are increasingly popular when it comes to enforcement of security over property, particularly when it involves defaulting property developer borrowers. So, what is the difference between that and administration; and what are the pros and cons of each.
Pros and cons in brief
Administrators have a duty to all creditors of the borrower and are governed by a set priority of objectives. They are:
(a) to rescue the company as a going concern
(b) failing that, to achieve a better return for creditors as a
whole than liquidation
or (c) failing that, to achieve a better return for secured and
preferential creditors than liquidation.
Failing any of those, then the company should move to liquidation. Consequently, administrators have reporting obligations that receivers don't have.
In contrast a receiver's primary purpose and duty is to ensure their appointing lender is paid. They have no duty to other creditors. However, receivers don't have the investigatory powers that administrators have, and have no power to investigate or make claims against the directors or third parties who received assets at an undervalue or preferential creditor payments (or similar). If there is any surplus remaining after the lender has been repaid by the receiver (and after payment of the receiver's costs and expenses) then it is returned to the borrower, not distributed to creditors generally by the receiver.
During receivership the borrower remains under the general control of its directors; the receivers only take control of the asset(s) over which they are appointed. If administrators are appointed the control and powers of the directors are suspended – the administrators take general control of the borrower and all its assets, and have power to investigate and make claims against the directors and pursue transactions at an undervalue and preference claims etc.
However, during receivership the borrower won't benefit from the moratorium on action against it that triggers during administration, meaning that it is still open to proceedings and / or winding up petitions against it.
The appointment of a receiver process takes place by way of executing and serving a written notice of appointment (usually a deed of appointment) on the receiver(s) by the security holder, without court involvement. It can take place within a matter of hours. Appointment of administrators involves the swearing of a notice of appointment and filing of it at Court. The appointment of administrators can still take place fairly swiftly but is a bit more involved.
If an administrator is appointed after a receiver, the receiver must vacate office if the administrator requires him to.
What's the upshot?
Receivership can be (but is not always) quicker and less expensive. The flip side of that is that receivers have less wide raging powers over and control of the borrower's assets. A receiver's powers are generally limited to those powers granted to it in the charge document and / or under the Law of Property Act; whereas administrators have a broader range of powers and discretion as to when to use (and not to use) them.
Which is best in any scenario will depend on the assets in question and what (if any) other matters, transactions and claims need investigating; and whether preservation of the borrower's assets secured to the lender will benefit from the moratorium on legal action that administration triggers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
