The appointment of a receiver may be challenged, for example, for lack of qualification or for absence of an underlying fault.
The powers of a receiver will be set out in the agreement with the debtor company and residual powers are contained in s14 of the Receiverships Act. Usually the powers of a receiver of assets are ‘powers as an absolute owner’.
A receiver has certain duties set out in the Receiverships Act which are:
· to act in good faith and for a proper purpose;
· to fulfil its primary duty to act in the best interests of the person appointing the receiver;
and
· subject to the primary duty above, to have reasonable regard to interests of the grantor,
persons claiming an interest in the property and unsecured creditors;
· to obtain the best possible price on sale (this is a similar duty imposed on a mortgagee
in possession); and
· to pay preferential claims in respect of the asset (essentially employees and the IRD
and any prior ranking security).
Under s26 a creditor of the grantor can get a copy of the receiver’s report which is required to be prepared within 2 months after appointment and sets out details of the assets and liabilities of the grantor.
A creditor can apply to the Court to appoint a liquidator concurrently with a receivership. Under s287 of the Companies Act the appointment of a receiver is a ground for appointing a liquidator. The benefit of appointing a liquidator would include that the liquidator has a duty to all creditors and also that the directors’ powers cease to be able to be exercised. The receiver may also not act as agent for the grantor without the approval of the liquidator or the Court.
Unless there is a specific right in a particular contract, the appointment of a receiver does not terminate the debtor company’s contracts.
A receiver may, however, abandon pre-receivership contractual obligations and subject to having acted in good faith is not liable. Essentially the creditor has a claim against the company which ranks as an unsecured creditor and in many cases is worthless. A creditor may apply to the Court for specific performance of a contract. A receiver is personally liable on post-receivership contracts unless they expressly exclude liability.
A receiver has no obligation to pay unsecured creditors. The receiver’s role ends when the receiver has paid out the secured party and preferential creditors. Any surplus is then paid to the company for the directors to deal with or for a liquidator to take control. If there is a subsequent secured creditor then the receiver will pay the surplus to that creditor.
If a liquidator is appointed, then creditors may set off claims against them, under s310 of the Companies Act.
The appointment of a receiver does not stop a creditor from seeking to appoint a liquidator. Appointing a liquidator does not displace all the receiver’s powers and does not ordinarily displace the receiver in the control and custody of the Company’s assets. The liquidator does act as an independent monitor of the receiver, and once the receivers is finished, remaining assets are under the control of the liquidator, not the directors.
A creditor might appoint a liquidator if:
· it is likely there may be a surplus of assets for distribution;
· the creditor wishes to rely on the set-off rights in liquidation;
· the creditor believes there may be a claim against the directors which a liquidator
may pursue;
· a creditor is concerned about the way in which the directors of the debtor will exercise
their powers;
· a receiver can act as agent of a company only with the consent of the liquidator or
the Court.
Under s253 of the Companies Act the liquidator is empowered to continue to trade only to the extent necessary to realise the assets. If a liquidator is appointed to the Company the receiver ability to continue to trade is limited.
