Until the implementation of the EA 2002, debentures generally provided lenders with a quick and (compared with administration) cheaper method of enforcement, through the appointment of an administrative receiver (‘AR’). Technically, the appointment of an AR is not an insolvency procedure but a procedure to enable a secured creditor to enforce its security by the realisation of the assets secured by the debenture.
The EA 2002 effectively abolished administrative receiverships in respect of QFCs created on or after the Relevant Date, except in respect of floating charges created as part of some special transactions. More importantly for present purposes, pre-Relevant Date QFCHs retain the right to appoint an AR; this is due to what are known as the grand-fathering provisions in the EA 2002.
For this reason, the following paragraphs apply only to pre-Relevant Date QFCs and QFCs created on or after the Relevant Date for the special transactions referred to in the preceding paragraph.
Because the AR owes his duty only to his appointor, QFCHs which took their security before the Relevant Date are in a better position than later QFCHs. Most tried to retain that security when refinancing the debt secured by a pre-Relevant Date QFC, rather than release the security and replace it with new security.
However, as the rescue culture engendered by the EA 2002 has taken hold and as lenders have become comfortable with the administration procedure, banks have become much less inclined to appoint an AR even if they have the right to do so and are much more likely in this situation to appoint (or encourage the directors to appoint) an administrator. Accordingly, administration has for some years now replaced administrative receivership as the main means of enforcing a fixed and floating charge, regardless of when the charge was created.
An administrative receiver cannot be appointed if a pre-insolvency moratorium subsists or if the company is in administration.
Appointment of administrative receivers
The holder of a floating charge created before the Relevant Date can appoint an AR without much formality, provided that in essence the floating charge meets the criteria of a QFC and its terms confer on the QFCH the right to do so. The appointment can be made very quickly (usually within a few hours on a business day) either (i) following the occurrence of an event of default under the terms of the relevant loan agreement and the charge holder accelerates the loan and makes demand for immediate repayment and the debtor does not satisfy the demand, or (ii) where the loan is repayable on demand (such as an overdraft), following the charge holder making demand for repayment and again, the debtor does not satisfy the demand.
Powers of administrative receivers
- All the express powers are set out in the debenture (the security documentation incorporating the floating and fixed charges); and
- Unless expressly excluded, the AR also has extensive powers set out in Schedule 1 to the IA 1986 (these are the same powers that are granted to an administrator).
The AR’s most important power is to take possession of, get in and sell the assets of the company and repay the debenture holder. There is no moratorium whilst the AR is doing so, thus any creditor can seek to exercise its rights and remedies e.g. to petition to wind up.
The administrative receiver’s role and duties
- The AR is required to be a licensed insolvency practitioner.
- Although nominally the agent of the company, the AR owes his primary duty to his appointor, and generally owes only a limited duty to the company and other creditors. The company as principal is not able to give instructions to the AR.
- The AR is both a receiver and a manager (you will recall that fixed charge receivers are receivers only and are not normally entitled to manage a company’s business). The AR’s role is to take possession of the assets secured by the charge under which he is appointed. Usually the assets are sold (preferably on a going concern basis), with the AR and his staff in the meantime running the business with the assistance of existing workforce (and perhaps the existing management).
- The order of priority for payments on the realisation of assets by the AR is essentially the same as on winding up.;