Demystifying Insolvency… A Receiver’s perspective

The last year has seen a raft of retail CVAs and Administrations; Debenhams, Topshop, and Jessops to name a few. The current and projected distress in the market is heavily reported in the press and insolvency terminologies and acronyms are being thrown about the market as frequently as Boris’s press conferences. ‘LPA Receivership’ v ‘Fixed Charge Receivership (FCR)’; ‘CVA’, ’Administration’ and ‘Liquidation’ all methodologies to deal with insolvency positions but what do they actually mean and how do they differ?

Insolvency processes:

Receivers are either described as LPA and/or Fixed Charge Receivers. The two terms are generally used interchangeably although the Receiver is acting with different powers derived from different places – namely the Law of Property Act 1925 (LPA) and the Fixed Charge (FCR). A CVA is a Company Voluntary Arrangement which a company enters into to avoid an insolvency procedure by reaching a binding agreement with its creditors with minimal involvement from the courts. Administration is an insolvency process. Its purpose was created by the Insolvency Act 1986, but substantially refashioned by the Enterprise Act 2002 as a rescue remedy. Administrators are appointed by the Courts where a floating charge secures the company’s assets and there is a need to either trade the company or utilise powers provided to the Administrators under the Enterprise Act. Administrators are experts in appointments where there is value in the trading company. Liquidation is the winding up of a company by the disposal of the assets.

Why choose Receivers?

As Receivers at Allsop, we are appointed by high street banks, challenger banks, peer to peer lenders, bridging lenders, individuals… basically anyone who has a Fixed Charge over an asset. Lenders use FCR to execute a robust, cost effective and efficient recovery of a distressed loan. The Receivers’ powers are derived from the lenders’ charge documentation and the LPA. Lenders have long used FCRs, as an extremely effective, blunt instrument to recover loans which are secured by a Fixed Charge over an asset by solely dealing with the asset and leaving other liabilities with the borrower. A Fixed Charge Receivership offers lenders the ability to appoint specialist property and insolvency experts in the specific asset classes that are charged, thus securing a quick and informed exit.

The process:

Receivers are appointed under a deed that can be actioned with speed and ease without the need to apply to court. FCR appointments can generally be made as soon as the terms of the loan have been breached and a final demand has been made which allows lenders to protect their position in a timely manner and reduce the assets’ exposure to market uncertainty, a particularly prominent issue in today’s market. Once a Receiver is appointed they have a primary duty to the lender with the obligation to obtain best price for the asset they are appointed over. There is no need for court reporting or accounting to all creditors as there is in an Administration or Liquidation. In a Receivership, all rents received are available for distribution to the appointing lender. On the other hand in an Administration, the distribution of proceeds is detailed by the Enterprise Act 2002 and more recently the Finance Act 2020 and therefore there is rent dilution to preferential creditors. Furthermore business rates are payable as a cost of administration during the period which the company continues to occupy, however within an FCR the Rates liability lies with the borrower, maximising the realisations to the lender.

Changes to legislation:

We anticipate that reasons for choosing FCRs over Administrators where debt recovery is from real estate assets has become more compelling due to the change brought about by the Finance Act 2020, which replaces the former Enterprise Act 2002. The Finance Act has restored HMRC as a preferential creditor ahead of floating charges and unsecured claims. In practice, this means that if a company enters Administration, whilst the assets securing the floating charge remain protected, the monies secured by a floating charge will be paid after any monies due to HMRC and any other preferential creditors. This could significantly reduce the realisations available to a floating charge holder and increase the risk of a shortfall in recovering the debt. Therefore a borrower’s tax liabilities are now of much more importance to existing and new lenders, where they have taken security over a floating charge.

What next?

Looking ahead to 2021, the end of eviction moratoriums and the government’s furlough scheme indicates we are likely to see more insolvencies coming to the market. As FCRs we are here to steer lenders through the uncertain times ahead.