Not just a tool for the secured banks
On 3 Sepember 2018, Worrells issued the following very interesting article.
The days of the banks appointing receivers being almost a daily occurrence are firmly behind us. Current statistics show that those types of insolvency appointments are less than ten percent of all appointments annually. However, private receivership appointments are still occurring, both by court appointment and non-bank secured creditors.
A receiver’s primary duty is to the secured creditor that appointed them. Other than taking reasonable care to sell collateral for market value or the best price reasonably obtainable, unsecured creditors don’t get much of a ‘look into’ the receivership’s affairs (meetings or reports). The security interest that the secured creditor holds under the receivership can be either:
- a non-circulating security interest (e.g. a security interest in land, plant and equipment)
- a circulating security interest in assets that are used and disposed of during normal trading operations (e.g. a security interest in debtors, cash and stock).
Private receivership appointments can occur due to a deadlock between directors/shareholders over how to run an aspect of the business or a general disagreement between the parties involved, which may require one or multiple parties applying to the court to appoint a receiver to take control of the business and company assets. Alternatively, a secured creditor may appoint a receiver under their security agreement for non-performance (usually non-payment) to gain control over their secured property to protect their interests. This could be initiated by a related party, secured creditor or even as a result of Family Court proceedings where the parties cannot reach an agreement regarding the property pool’s division.
These types of receiverships are often used as a last resort but should be considered earlier to maximise any return to the secured creditor (or other relevant stakeholders), or to minimise the risk of assets being dissipated while a dispute is occurring or the business value is reducing.
For example, in a director/shareholder dispute, the value of the business, its assets, and any intellectual property can deteriorate during the dispute. Or in the example of a secured creditor, other creditors or related parties may be paid ahead of the secured creditor’s debt being satisfied, leaving less funds available to be directed to them through the receivership.
The critical need to act early, was demonstrated in a court appointed receivership where Worrells were engaged over a profitable business and market leader in the agriculture industry.
This sugar cane farm and mulching plant business operating in South East Queensland had deteriorated substantially during the 12 months prior to our appointment while the owners were in a management deadlock. The business were wholesalers to national retailers and had successfully dominated the mulching industry’s market share, which they lost during the dispute. Turnover and profits reduced substantially because of minor management issues. One of the owners (but by consent of the other owner) applied to court to appoint us as receivers to take control and protect the current value of the business until the management dispute could be resolved; however, much of the damage before our appointment was irreversible—despite being solvent.
In this case, and in many others, the company is not insolvent; nor does the court require it to be insolvent to appoint a receiver. However, timing is everything. If receivers are not appointed early enough, companies can quite quickly become insolvent due to the poor management. During our appointment we managed to ‘stop the bleeding’ so to speak, and salvage and protect the value of the business until an amicable resolution could be achieved. The business is still operating today, years after we resigned as receivers.
Another recent example of a private receivership appointment included a major shareholder (non-director) who was also the major secured creditor. This related party creditor was not involved in the business operations, however was concerned about the business’s deteriorating performance. Due to a lack of trust and co-operation from the director, the related party, secured creditor exercised their rights pursuant to the security held to appoint a receiver to protect the value of the business, the assets, and to identify what was going on within the business that could not be ascertained without a receiver taking such control.
As it turned out, the director was rapidly dissipating the assets and setting up another business in competition to the company we were appointed. By the secured creditor acting to appoint Worrells as receivers we could remove the director from any control over the assets and business of the company, report the director’s offences to the Australian Securities and Investments Commission, and protect the business’s value for the benefit of the related party, secured creditor.