Using a receivership appointment as a means of negotiating with the lender.
Readers would be aware of the concept of a secured creditor appointing a receiver to take control of company assets to realise (sell) to pay the secured creditor the net sale proceeds in satisfaction of the debt owing.
Often the general security agreement between the lender (secured creditor) and the borrower (company) covers all of the company assets. This allows a receiver to take control over all company assets, including its business. The receiver can trade the business, sell stock, collect debtors, and even sell the business all for the secured creditor’s benefit. This obviously means that control of the assets and the business is taken away from the directors.
An alternative to a receiver appointment over all company assets is to limit it to specific assets or class of assets being taken and realised. This arrangement was successfully used in a recent receivership appointment handled by the Brisbane office. An example of specific assets might be shares that the company owns in another company that’s perceived to have some value, or some other asset not critical to the company’s trading business.
So why would you limit a receivership appointment to only one asset or one class of assets rather than all assets?
An appointment to all assets means effectively appointing the receiver to the business. A receiver operating a business is expensive, not only in respect to the receiver’s fees, but for the indemnity the receiver will want from the secured creditor (appointor) to act. Limiting the receivership to one asset/class of assets contains the receivership costs and may mean the receiver is not involved in the business trading as the existing directors retain control over the company's assets not subject to the receiver appointment.
The debt owed to the secured creditor may not be substantial and may not warrant a receiver appointed over all company assets. If the value of particular assets can be ascertained, the net sale proceeds from those specific assets (with reduced fees) might be sufficient to pay out the secured creditor.
Clearly the advantage for the directors is they could continue trading the business with the balance of the assets.
For those secured lenders with moderate debts who are concerned about appointing a receiver over all of the borrower’s assets due to its potential impact, and concerned about costs and indemnity requirements, certainly should consider nominating specific assets, particularly where the proceeds are assessed as likely to be sufficient to meet their debt.
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