LPA Receivers and Fixed Charge Receivers

Given the state of the commercial property market and the fact that bank lending is under severe pressure it is no wonder that these types of insolvency procedures are getting more and more common.

They don’t generally get as much publicity as some other procedures as the notifications are somewhat different. The appointment of a receiver is an option typically available to lenders who have security over property assets. The receiver’s job is to realise the assets and use the proceeds to discharge the debt due to the mortgagee. A receiver of mortgaged property can typically be appointed either as an LPA receiver, pursuant to the Law of Property Act 1925, or a fixed-charge receiver pursuant to the terms of the mortgage document.

The circumstances in which an LPA receiver can be appointed are restricted under the Law of Property Act 1925. It is therefor common for a mortgage deed to grant the mortgagee the right to appoint a fixed-charge receiver in less restrictive circumstances, thus affording the receiver all of the powers of an LPA receiver with the additional powers expressly set out in the security document.

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The receiver’s primary function is to ensure payment of the debt owed to the mortgagee, usually by way of sale of the charged property and/or collection of rents. The process is not for the benefit of creditors generally.

Once appointed, a receiver acts as the agent of the mortgager and not of the appointing lender and the mortgager is solely responsible for the receiver’s acts or defaults unless the mortgage deed provides otherwise.

Appointing receivers will relieve the lender of the burden of managing and marketing the property and should avoid it becoming a mortgagee in possession”. The lender’s exposure to a claim by the borrower arising from the management and disposal of the property should therefore be reduced.

The Receiver has a duty to act in the best interests of the appointing lender, but residually for the borrower and other interested parties such as subsequent charge holders. The receiver is under a general duty to act in good faith and to exercise his power for proper purposes. His primary duty is to ensure, as far as possible, that interest on the secured debt and the debt itself are paid.

Administration

The administration procedure involves the appointment of an Administrator. An Administrator has extensive powers to manage the affairs, business and property of the company, with the aim of achieving one of the statutory objectives of administration set out in the Act:

  • to rescue the company as a going concern; or
  • (if the first objective is not achievable) to achieve a better result for
    the company’s creditors as a whole than would have been like on liquidation; or
  • (if the second objective is not achievable) to realise property in order
    to make a distribution to one or more secured or preferential creditors.

An Administrator is an officer of the court and acts as agent on behalf of the company. He has a duty to act in the best interests of the company’s creditors as a whole. This duty applies even in circumstances where the Administrator has been appointed by a particular creditor of the company.

An administrator may be appointed over a company in one of three ways:

  1. pursuant to a court order;
  2. by the company or its directors using the out-of-court appointment procedure;
  3. by a secured creditor who holds a  qualifying floating charge (“QFCH”).

Where the application/appointment is being made by another person, a QFCH will usually have the ability to influence the appointment by nominating an Administrator acceptable to them. (Unless made by a prior-ranking QFCH).

An Administrator must perform his functions with the aim of achieving one of the statutory objectives of administration mentioned above.

In pursuing the relevant statutory objective, an Administrator has a broad general power to do anything necessary or expedient for the management of the affairs, business and property of the company. This power is supplemented by a number of specific powers, such as a power to dispose of property, a power to bring or defend legal proceedings and a power to make distributions to secured and preferential creditors of the company. He is also able to make a distribution to unsecured creditors with leave of the court and can make any other payment which he thinks is likely to assist the achievement of the purpose of the administration.

Liquidation

Liquidation (or winding up) is a common type of corporate insolvency procedure. Liquidation is the formal winding up of a company’s affairs entailing the realisation of its assets and the distribution of the proceeds in a prescribed order of priority.

Liquidation may be either compulsory, when it is instituted by order of the court, or voluntary, when it is instituted by resolution of the shareholders. Voluntary liquidation is the more common of the two. An insolvent voluntary liquidation is known as a creditor’s voluntary liquidation because its conduct is primarily under the control of the creditors. A solvent voluntary liquidation is known as a ‘member’s voluntary liquidation’ because its conduct is primarily under the control of its members.

Compulsory Liquidation

Compulsory liquidation (or compulsory winding up) is instituted by an order made by the court, usually on the petition of a creditor, the company or a shareholder. There are a number of possible reasons for making a winding-up order.

The most common is because the company is insolvent. Insolvency is usually established by failure to comply with a statutory demand requiring payment within 21 days, or by execution against the company’s goods being returned unsatisfied. A winding-up petition may also be presented by the Secretary of State for Trade and Industry on the grounds of public interest.

In a compulsory liquidation the function of liquidator is in most cases initially performed by an official called the official receiver.In most compulsory liquidations, the official receiver becomes liquidator immediately on the making of the winding-up order. If there are assets an insolvency practitioner will usually be appointed to act as liquidator in place of the official receiver, either at a meeting of creditors convened for the purpose or directly by the Secretary of State for Trade and Industry.

Where a compulsory liquidation follows immediately on an administration the court may appoint the former Administrator to act as liquidator. In such cases, the official receiver does not become liquidator.

Creditors Voluntary Liquidation

Creditors voluntary liquidation (or CVL) is where the shareholders decide to put a company into liquidation because it is insolvent.

A CVL is then under the effective control of the creditors, who can appoint a liquidator of their choice and may be different from the shareholders choice. The CVL is the most common way for directors and shareholders to deal voluntarily with their companys insolvency. An Administrator may also subsequently act as liquidator in a creditors voluntary liquidation following the termination of the administration.

Members Voluntary Liquidation (solvent companies)

A solvent liquidation is known as a members voluntary liquidation (or MVL), in which a liquidator is appointed by the shareholders and the company’s assets are sufficient to settle all its debts with 12 months.

MVLs may be used for purposes of reorganisation, or in the case of owner-managed businesses to enable the shareholders to realise their interest in the company. Section 110 reconstructions are a complicated procedure which make use of MVLs and can be effective in tax planning.