What is a receivership?

A receivership is a type of insolvency proceeding that provides a creditor, holding a registered security interest over particular assets, to appoint a receiver (or receiver and manager) to take control of those assets, realise those assets or to protect the rights of the creditor entitled to those assets. Where a business is involved, ypically, a receiver and manager usually trade the business with a view to selling it and maximising the return to the secured creditor.

Details of the creditor’s security interest are registered on the Personal Properties Security Register (PPSR).

What is the objective of a receivership?

The procedure exists to protect the interests of the secured creditor. A receiver (receiver and manager) is appointed when the assets are under threat, particularly because of the risk of insolvency.

What is the process of a receivership?

A receiver will administer the property subject to the registered security instrument and if empowered will also manage the business/assets. The receivership will continue until the purpose of the receivership is fulfilled; often when the assets subject to the registered general security interest have been realised and the secured party has been paid in full or as far as possible.

How is a receivership initiated?

The method of appointment is dependent on the general law and the terms of the instrument appointing the receiver.

If an event of default has occurred, there may be a requirement under the registered security instrument that the secured party issue a notice of default before an appointment can be made. If there is a requirement, the demand must provide the debtor a reasonable period in which to pay the sum demanded.

When is a receivership appropriate?

A receivership is appropriate in the following circumstances:

• where the secured property, business and/or assets are in jeopardy and need to be preserved
• where the company is going, or has gone, into voluntary administration or liquidation and the secured property, business and/or assets are considered at risk
• where there is a business subject to the security needing to be operated

What are the effects of a receivership?

The effects of receivership can be as follows:

• a validly appointed receiver will ordinarily supersede the authority and management powers of directors and officers
• directors continue to be obliged to carry out their statutory directed duties and continue to owe duties to the company in receivership
• the directors will have control of assets falling outside of the registered security instrument under which the receiver is appointed
• employment contracts are not automatically terminated by the appointment of a receiver

What are the roles and powers of a receiver?

The primary role of the receiver (receiver and manager) is to preserve and realise the assets for a secured creditor usually when those assets are under threat and are due to the insolvency of the company or as a result of a dispute.

The receiver’s powers, duties and obligations are determined by the registered security instrument and the Corporations Act.

The receiver and manager must take all reasonable care in exercising a power of sale. The receiver must ensure that all care is taken to sell the assets for market value or the best price that is reasonably attainable.

What is the priority of repayment?

The first priority is to repay the secured party. This is achieved from non-circulating assets. The costs of the receivership and employee entitlements are afforded priority of repayment from circulating assets, with any surplus being repaid to the secured party. Any surplus funds from circulating and non-circulating assets, after full repayment of the secured party is returned to the company.

What happens when a receivership ends?

A receivership ends when the receiver has collected and sold all assets to make a repayment to the secured creditor, pursuant to their registered security interest, and has completed all their receivership duties. A receiver resigns or is discharged by the secured creditor, and unless an external administrator has been appointed, full control of the company and any remaining assets goes back to the directors.

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What is a mortgagee in possession?

A mortgagee in possession (MIP) may be appointed when the secured creditor takes possession of real estate (property) or other assets subject to the security instrument following a default in relation to the loan agreement.

The MIP may appoint an agent to act on its behalf.

What is the role of an agent for the MIP?

The role of the agent is to:

• take control of the property
• realise the property
• account to the mortgagee for the net proceeds

When is this type of appointment appropriate?

This type of appointment is appropriate when:

• there are relatively few assets subject to the security instrument
• there is no business to operate

What are the advantages of this type of appointment?

There are two key advantages to this type of appointment, outlined below:

• the mortgagee is in control of the realisation of the property or other assets subject to the security instrument
• the cost of the procedure can be relatively inexpensive as the mortgagee in possession is able to control the appointment

How is an appointment initiated?

An appointment is initiated when:

• the owner of the property is in default
• a notice has been issued to the owner to rectify the default and the owner has failed to rectify the default
• notice is given at the end of the default period that the mortgagee will take possession of the property or assets

What is the priority of repayment?

The net proceeds from the sale of the property or assets will be applied in reduction of the applicable loan account and/or mortgage facility. Any surplus would be available for the owner of the property or assets.