Receivership

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In law, receivership is a situation in which an institution or enterprise is held by a receiver—a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights"—especially in cases where a company cannot meet its financial obligations and is said to be insolvent. [1] The receivership remedy is an equitable remedy that emerged in the English chancery courts, where receivers were appointed to protect real property. [2] Receiverships are also a remedy of last resort in litigation involving the conduct of executive agencies that fail to comply with constitutional or statutory obligations to populations that rely on those agencies for their basic human rights.

Contents

Receiverships can be broadly divided into two types:

Receiverships relating to insolvency are subdivided into two further categories: administrative/equity receivership, where the receiver is appointed wide management powers over all or most of the property of a business, and other receiverships (sometimes misleadingly called fixed charge receiverships) where the receiver has limited control over specific property, with no broader powers beyond managing or selling the individual asset.

Receivers are appointed in different ways: [1]

The receiver's powers "flow from the document(s) underlying his appointment"—i.e., a statute, financing agreement, or court order.

Duties of a receiver

The receiver may:

United States process

Several regulatory entities have been granted power by the Congress to place banking and financial institutions into receivership like the Office of the Comptroller of the Currency for failing nationally chartered commercial banks; the Office of Thrift Supervision for failing savings and loan associations (thrift institutions); and the Federal Housing Finance Agency (FHFA) for government-sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac, and the 11 Federal Home Loan Banks. Most individual states also have granted receivership authority to their own bank regulatory agencies and insurance regulators. State Insurance Departments are accredited by the National Association of Insurance Commissioners (NAIC)—which states, "State law should set forth a receivership scheme for the administration, by the insurance commissioner, of insurance companies found to be insolvent as set forth in the NAIC’s Insurer Receivership Model Act." [5]

Some organizations have come into existence on the state level to alter the proceedings. An example is the California Receivers Forum, which is a non-profit organization "formed by interested receivers, attorneys, accountants, and property managers, with support from the Los Angeles Superior Court, to address the needs and concerns of receivers, to facilitate communication between the receivership community and the courts, and to assist in raising the level of professionalism of receivers..." [6] [7] The California Receivers Forum reports five local affiliates in the state: Bay Area, Central California, LA/Orange County, Sacramento Valley and San Diego. [6]

Court-appointed receivers are "the most powerful and independent of the judicially appointed managers." [8] Unlike special masters and monitors, "the receiver completely displaces the defendants: the receiver makes large and small decisions, spends the organization’s funds, and controls hiring and firing determinations." [8] Examples of court-appointed receivers include:

Administrative receivership

Administrative receivership is a procedure in the United Kingdom [18] and certain other common law jurisdictions whereby a creditor can enforce security against a company's assets in an effort to obtain repayment of the secured debt. It used to be the most popular method of enforcement by secured creditors, but recent legislative reform in many jurisdictions has reduced its significance considerably in certain countries. [19]

Administrative receivership differs from simple receivership in that an administrative receiver is appointed over all of the assets and undertaking of the company. This means that an administrative receiver can normally only be appointed by the holder of a floating charge. Because of this unusual role, insolvency legislation usually grants wider powers to administrative receivers, but also controls the exercise of those powers to try to mitigate potential prejudice to unsecured creditors.

Typically, an administrative receiver is an accountant with considerable experience of insolvency matters.

History

The common law has long recognised the concept of a receiver. Following the development of the floating charge creditors were effectively able to take security over a company's entire business by means of a floating charge over the undertaking. Security documents generally contained very wide powers of appointment such that on default the creditor could take over the business immediately and without the input of any court. A receiver appointed to the entire business became known as a receiver and manager. The receiver and manager would typically have extensive powers over the business, including the power to sell it at a time and on terms that suited the appointing creditor.

The ability to appoint a receiver and manager was a very powerful remedy, but it came to be considered unsatisfactory in that it was entirely a creature of the contract between the creditor and the borrower. There was no general ability on the part of the borrower or any other party to review the actions of the receiver (who would generally be acting on behalf of the borrower under the security document) or seek the supervision of the court. A general review of UK insolvency law in the 1980s began with the Cork Report and culminated in the Insolvency Act 1986. It put forward two major reforms. First, it put the receiver and manager on a statutory footing: a receiver appointed to all or substantially all of a company's property was now an administrative receiver and subject to some statutory responsibilities. Second, it introduced an "administration order" as an equivalent process to administrative receivership—but available to any company by court order independent of any particular security arrangement.

Parliament expected that companies and creditors would use administration in preference to administrative receivership. Crucially, however, Parliament had conceded in the Insolvency Act that administrative receivership should have priority that is, a secured creditor with a floating charge could defeat any attempt to commence an administration by appointing an administrative receiver. As a result, administration was not as popular as lawmakers had envisaged, and secured creditors habitually appointed administrative receivers to enforce security rights. Parliament took more drastic action in the Enterprise Act 2002. They changed the administration regime to make it more attractive, but also barred the right to appoint administrative receivers in any security created after 15 September 2003 (subject to certain specific exceptions). Any attempt to do so takes effect as a power to appoint an administrator.

Present significance

Administrative receivership still forms part of modern insolvency practice. Companies that get into financial difficulty today may well have security packages that were created before 15 September 2003, a situation likely to remain common for some years. Enforcement is also a significant aspect of the situations where administrative receivership is still permitted for example, the ability to take control of the entirety of the assets is important in structuring insolvency-remote special purpose companies that issue securities or operate infrastructure projects.

In common law jurisdictions outside of the United Kingdom, administrative receivership remains alive and well. A number of offshore jurisdictions market transaction structures to banks on the basis that they still retain the freedom to appoint administrative receivers in those jurisdictions.

Because of their unique role, insolvency legislation usually confers wide powers upon administrative receivers under applicable insolvency law (which is usually concurrent with powers granted under the security document). [20]

However, the corollary is that administrative receivers are usually required under applicable legislation to file reports in relation to the period of their receivership. [21]

Ireland process

Similarly to the United Kingdom process, methods for receiver appointment in Ireland are:

See also

Related Research Articles

Liquidation Winding-up of a company

Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.

Insolvency State of being unable to pay ones debts

In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

A floating charge is a security interest over a fund of changing assets of a company or other legal person. Unlike a fixed charge, which is created over ascertained and definite property, a floating charge is created over property of an ambulatory and shifting nature, such as receivables and stock.

Security interest Legal right between a debtor and creditor over the debtors property (collateral)

In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property which enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations. One of the most common examples of a security interest is a mortgage: a person borrows money from the bank to buy a house, and they grant a mortgage over the house so that if they default in repaying the loan, the bank can sell the house and apply the proceeds to the outstanding loan.

An officer of the Insolvency Service of the United Kingdom, an official receiver (OR) is an officer of the court to which they are attached. The OR is answerable to the courts for carrying out the courts' orders and for fulfilling their duties under law. They also act on directions, instructions and guidance from the service's Inspector General or, less often, from the Secretary of State for Business, Energy and Industrial Strategy.

<i>Bankruptcy and Insolvency Act</i>

The Bankruptcy and Insolvency Act (the Act) is one of the statutes that regulates the law on bankruptcy and insolvency in Canada. It governs bankruptcies, consumer and commercial proposals, and receiverships in Canada.

As a legal concept, administration is a procedure under the insolvency laws of a number of common law jurisdictions, similar to bankruptcy in the United States. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – in the United Kingdom colloquially called being "under administration" – is an alternative to liquidation or may be a precursor to it. Administration is commenced by an administration order.

United Kingdom insolvency law Law in the United Kingdom of Great Britain and Northern Ireland

United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. "Insolvency" means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is "liquidated", so that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the Insolvency Regulation (EC) 1346/2000 and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.

Commercial insolvency in Canada

Commercial insolvency in Canada has options and procedures that are distinct from those available in consumer insolvency proceedings. It is governed by the following statutes:

Re Atlantic Computer Systems plc [1990] EWCA Civ 20 is a UK insolvency law case concerning the administration procedure when a company is unable to repay its debts.

<i>Downsview Nominees Ltd v First City Corp Ltd</i>

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Administration in United Kingdom law is the main kind of procedure in UK insolvency law when a company is unable to pay its debts. The management of the company is usually replaced by an insolvency practitioner whose statutory duty is to rescue the company, save the business, or get the best result possible. It is the equivalent of Chapter 11, Title 11, United States Code, although with significant differences. While creditors with a security interest over all a company's assets could control the procedure previously through receivership, the Enterprise Act 2002 made administration the main procedure.

<i>Buchler v Talbot</i>

Buchler v Talbot[2004] UKHL 9 is a UK insolvency law case, concerning the priority of claims in a liquidation. Under English law at the time the expenses of liquidation took priority over the preferred creditors, and the preferred creditors took priority over the claims of the holder of a floating charge. However, a crystallised floating charge theoretically took priority over the liquidation expenses. Accordingly the courts had to try and reconcile the apparent triangular conflict between priorities.

British Virgin Islands company law

The British Virgin Islands company law is the law that governs businesses registered in the British Virgin Islands. It is primarily codified through the BVI Business Companies Act, 2004, and to a lesser extent by the Insolvency Act, 2003 and by the Securities and Investment Business Act, 2010. The British Virgin Islands has approximately 30 registered companies per head of population, which is likely the highest ratio of any country in the world. Annual company registration fees provide a significant part of Government revenue in the British Virgin Islands, which accounts for the comparative lack of other taxation. This might explain why company law forms a much more prominent part of the law of the British Virgin Islands when compared to countries of similar size.

British Virgin Islands bankruptcy law

British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003, and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.

Cayman Islands bankruptcy law

Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:

Anguillan bankruptcy law regulates the position of individuals and companies who are unable to meet their financial obligations.

Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals. Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:

Provisional liquidation is a process which exists as part of the corporate insolvency laws of a number of common law jurisdictions whereby after the lodging of a petition for the winding-up of a company by the court, but before the court hears and determines the petition, the court may appoint a liquidator on a "provisional" basis. Unlike a conventional liquidator, a provisional liquidator does not assess claims against the company or try to distribute the company's assets to creditors, as the power to realise the assets comes after the court orders a liquidation.

Hong Kong insolvency law Financial regulation in Hong Kong

Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.

References

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  5. "Accreditation booklet-4/95" (PDF). Naic.org. Retrieved 10 September 2016.
  6. 1 2 "California Receivers Forum". California Receivers Forum. Retrieved 3 June 2019.
  7. Mannes, Tanya (5 August 2010). "Douglas Wilson Cos. getting into small-business receiver market". San Diego Union Tribune. Retrieved 3 June 2019.
  8. 1 2 3 Bradley, Catherine Megan. Old Remedies Are New Again: Deliberate Indifference and the Receivership in Plata v. Schwarzenegger. 62 N.Y.U. Ann. Surv. Am. L. 703 (2007).
  9. Ekstrand, Laurie E. District of Columbia Receivership: Selected Issues Related to Medical Services at the D.C. Jail. United States General Accounting Office, 30 June 2000. Testimony GAO/T-GGD-00-173.
  10. District of Columbia Jail: Medical Services Generally Met Requirements and Costs Decreased, but Oversight Is Incomplete. United States General Accounting Office, June 2004. Report GAO-04-750.
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  12. Geer, Carri. Court-appointed receiver to retain control of Equinox Corp. for now. Las Vegas Review-Journal, 18 August 1999.
  13. Page of Robb Evans, Receiver of Equinox International Corp.. Retrieved 10 November 2007.
  14. Moore, Solomon. Using Muscle to Improve Health Care for Prisoners. The New York Times, 27 August 2007.
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  16. Huntley, Helen. Regulators call Pearlman savings plan a fraud. St. Petersburg Times, 3 February 2007.
  17. Lieberman, David. Missing music king loses his throne. USA Today, 10 April 2007.
  18. See sections 29(2) and 251 of the Insolvency Act 1986 and Article 5(1) of the Insolvency (Northern Ireland) Order 1989 for the definition of administrative receiver under the laws, respectively, of England and Wales, Scotland and Northern Ireland
  19. Particularly in the United Kingdom subsequent to the passing of the Enterprise Act 2002
  20. For example, see Schedule 1 to the Insolvency Act 1986 in the United Kingdom
  21. For example, see section 48 of the Insolvency Act 1986, requiring that reports be filed at Companies House within three months of the end of the receivership
  22. "The Court Service of Ireland, Rules and Fees, Order: 50,6.(1)". Courts.ie. 19 May 2003. Retrieved 16 August 2013.