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Fixed charge receiverships - Advice for IPs

View profile for Malcolm Niekirk
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In his latest Coffee Break Briefing webinar, Frettens’ own Insolvency Guru Malcolm Niekirk gave a refresher on fixed charge receiverships.

Malcolm looked at what they are and when to use them.

This is the summary of that briefing.

If you'd like to watch the webinar back, you can do so below, if not, read on for our summary...

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What is a fixed charge receivership?

Fixed charge receivership is a form of security enforcement, where a mortgage lender appoints a third party (receiver) to take possession of the mortgaged assets.

The requirements for fixed charge receivership are as follows:

  • Borrower
  • Lender
  • A valuable asset owned by the borrower (usually land)
  • Security over that asset granted to the lender
  • Borrower in default
  • A receiver, qualified and willing to act

Receivership is for commercial loans only. It is not possible to appoint receivers over a borrower’s home.

Underlying concepts behind fixed charge receiverships

What does a receiver do?

  • The receiver will be selected and appointed by the lender
  • Receivership is largely unregulated
  • The receiver doesn’t have to be an insolvency practitioner
  • The receiver is appointed informally – (without involving the courts)
  • The receiver is the agent of the borrower (not the lender)

What does receivership agency mean?

  • The receivers make contracts in the name of the borrower, for example when selling mortgaged assets.
  • The lender is not responsible for what the receivers do, as a general rule
  • The agency ends upon the borrower becoming bankrupt or entering liquidation.  That doesn’t end the receivership.  It means the receiver acts as principal from that point onwards, not as the lender’s agent
  • Agency can end if the lender does not respect the receiver’s independence

The uses and alternatives to receiverships

What are receiverships used for?

Primarily, receiverships are used for security enforcement; as an alterative to the lender taking possession.

They can also be used to mediate between the borrower and lender, if there is a difficult relationship there. Having an ‘independent third party’ can help open new lines of dialogue and mediation.

Some other uses

Asset preservation – involves placing the asset in the hands of a receiver, as an independent third party, to ensure sensible decisions about it.

Dispute resolution – particularly useful for businesses with an internal power struggle and serious partnership disputes.

What are the advantages of receiverships?

  • The lender does not become ‘mortgagee in possession’, meaning that they will be insulated from legal liabilities that come with that title
  • Receivership sub-contracts a job that lenders don’t normally do. It can be useful to bring in outside expertise and resources, again insulating a lender from legal liability
  • It avoids using the courts – the appointment is informal – avoiding the time and expense that comes with court procedures.

What are the alternatives to fixed charge receiverships?

Administration – partnerships, companies and LLPs are able to go into administration as an alternative.

Liquidation – particularly if the property just needs to be secured and sold.

Repossession – it may be less expensive for the lender simply to take possession.

What are the types of receivership?

Broadly speaking, there are two types of receiverships:

Contractual receiverships

This is where lenders have appointed receivers.

Court appointed receiverships

This is where a party with an interest has asked the court to appoint a receiver.

As a court appointed receiver, its important that you get the order carefully drafted from the outset as the only powers that you will have are those given to you in that court order.

You also need to make sure that your remuneration is secure. Ensure that the court order makes provision for you to be paid acceptably on a frequent basis and that assets are kept under your control to draw fees from.

What are court appointed receiverships used for?

  • Business protection
    • Partnership disputes
    • Deadlocked companies
    • Incapacitated management
  • Enforcement
    • Security enforcement
      • With enhanced powers
    • Writs of sequestration
      • Confiscation of assets
      • A penalty for contempt of court

Lender appointed receivers (fixed charge receiverships)

The statutory powers here are extremely limited.  Ideally you’ll have additional contractual powers given to you by the mortgage deed.  Those can be extensive.

In the past, administrative receiverships were common – however, they’re now largely banned.

You need to ensure that you’re not accidentally appointed as an administrative receiver.  If you are, as your appointment will be invalid, and you will be a trespasser.  The company will be entitled to compensation for any damage that you have done to it.

LPA (Law of Property Act) receivers

Refers to those appointed with only the statutory powers conferred by the Law of Property Act 1925.

These statutory powers are very limited – there’s very little you can do as a pure LPA receiver.

Fixed charge receivers

These are LPA receivers appointed with additional powers, often extensive.

The appointment may also include assets that are caught by a floating charge, in addition to the fixed charge on the property. This is quite common.

It is also possible for a floating charge (for example, on debts) to be crystallized into a fixed charge. The lender can then appoint a receiver of those debts to take possession and collect them.

Administrative receivers

A receiver will be an administrative receiver when they are appointed under security that includes a floating charge, where all the charges together cover substantially the whole of the company’s undertaking.

Administrative receiverships are not normally permitted.

There is a risk of an accidental (invalid) administrative receivership where:

  • The primary security is a mortgage on land
  • The mortgage deed contains secondary floating charges
  • The company has no significant part of its assets outside the package of security

Synthetic administrative receivership

Overseas companies operating businesses in the UK can grant full security to their lenders, including a debenture which includes a qualifying floating charge.

Any receiver appointed under that full security will be broadly equivalent to an administrative receiver, with their powers, but won’t fall under the definition of an administrative receiver. Their appointment is therefore valid.

The appointment process – fixed charge receiverships

Stages to appointment:

Investigate and plan

Check the security to ensure the mortgage is valid, look at what security you’ve got other than that on the land, and look at additional powers and whether they’re adequate for the nature of your appointment.

Lender calls in the loan

This is the first stage in the appointment itself.

Make sure to review the terms of the lending, to ensure that the lender does have the right to call in the loan.

Wait for the borrower to fail to comply

Following the call for repayment, the lender must give the borrower the opportunity to pay the money that is demanded.

Legally, a bare minimum of one hour, whilst the banks are open, must be given. At least two hours is prudent.

Only when the borrower has failed to pay on demand can the appointment be made.

Lender executes appointment document

The lender can now appoint.  To do that it executes the appointment document and delivers it to the proposed receiver.

The receiver accepts it

The receiver has the choice of accepting it or not. Where the borrower is a company, then the receiver can only accept the appointment on the day that they receive it or before close of business on the next business day.

When they accept it, the appointment is backdated to the time and date that they received it.

It’s best practice to accept the appointment as soon as it is delivered to you and to liaise with the lender to ensure that it is delivered to you only when you are ready to accept.

What powers do receivers have?

Look at the charge document. Receivers can deal with the charged property only. If the lender doesn’t have security over it, it’s outside the receivership.

LPA receivers have very limited statutory powers. They can collect rent but have no power of sale.

The mortgage deed often gives fixed charge receivers more powers than the statutory minimum.

What powers does the mortgage deed give receivers?

Typically, the power to:

  • Take possession
  • Sell
  • Manage the property
  • Complete building work
  • Run the business

Running the business can be problematic. You may find that you need charges on fixed and current assets. Employment contracts are adopted after 14 days of your appointment.

What if the powers are insufficient?

There are ways of adding to your powers:

  • Asking the borrower for a deed of variation or an additional charge document
  • The lender can delegate its powers to its receiver
  • Seek a court appointment
  • Use a different procedure, such as administration.

Coffee Break Briefings

Thank you for reading this summary. You can watch back our previous briefings and read back previous summaries here.

To keep informed on upcoming Coffee Break Briefings, events and insolvency news you can sign up to our email list for free here.

Specialist Insolvency Solicitors

We hope you found the briefing useful. If you are an insolvency practitioner who would like to discuss the content of this article further, or instruct us, please do not hesitate to get in touch.

We offer a free initial appointment for all new clients. Call us on 01202 499255 for more details.

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