Common problems with receivership (part one)

Introduction

Receivership is a key remedy for secured lenders, particularly, though not exclusively, in relation to property. It is a largely contractual process, grounded in the underlying loan and security documents and supported by only a limited statutory or regulatory framework. As a result, defects in the documentation, or failures to follow the prescribed procedures, can undermine the entire process, with serious implications for lenders, receivers and asset purchasers alike.

In this two-part series, we explore some common pitfalls and the remedies available.

Problem 1: Appointment includes floating charge

• A receivership appointment over “the whole (or substantially the whole) of a company's property appointed by or on behalf of the holders of any…charge which, as created, was a floating charge” will be an administrative receivership.

• Since 2003 these are prohibited, subject to very limited exceptions.

• The problem can arise in debentures containing what are intended to be “qualifying floating charges” over the whole business but also in mini floating charges over chattels on site in legal charges.

• So, outside of the statutory exceptions, the appointment must exclude the floating charge from appointment or risk invalidity.

Problem 2: Not clear what is owed

• Bespoke lending terms, sharia compliant facilities, or complex interest calculations may lead to lack of clarity.

• If the lender receives more than they are entitled to, they may be subject to a claim.

• Over demand creates uncertainty. While it may be arguable that the borrower suffered no loss if they could not have met a demand for the correct amount, or that a demand need not state the figure, these arguments may be raised by resistant debtor (or guarantors) and are best avoided.

• We recommend early review and rectify (if necessary, through power of attorney).

Problem 3: Borrower or related party unexpectedly in possession of residential property

Issue 1: Can you get possession?

• Is there power in the mortgage? And power to enforce through courts?

• And if there is, can you persuade the courts to exercise discretion under Administration of Justice Act 1970 s36?

• Preferable for mortgagor and not receiver to bring action (although now confirmed that receiver may bring action despite being agent of mortgagor - Menon v Pask [2019]).

Issue 2: Does the occupier have overriding rights?

• Title subject to “The rights of every person in actual occupation of the land” (s70(1)(g) LRA 1925).

• This could be the borrower, UBO or a family member.

• May need to sell as mortgagee to use overreaching rights in s104 LPA 1925

• That is essentially, a (1) loan to an individual or trustee; (2) secured on land in EEA; and (3) at least 40% intended to be used as a dwelling

• Arranging, advising, administering, entering; or agreeing to above are regulated activities.

• If in breach, the loan may be illegal and unenforceable

Problem 4: Not all of the property is in the charge

• Issues can arise if the property is not properly inspected on lending, or there are additions to the property (which may be unauthorised).

• There may be an equitable charge on after acquired property in the security and it may be possible to perfect this through unilateral notice on title, supplementary charge, possibly including use of any power of attorney in the security.

• If receivers are already appointed when the issue arises, may need supplementary receivership appointment, or to sell as mortgagee alongside receivership sale of main title

Problem 5: The borrower is an overseas entity

• Charge on which we are advising would usually have choice of English law and for land, there is a presumption of “lex situs” applying English law.

• However, for overseas corporation, issues can arise at the time of the security grant (good standing of chargor; due execution of documents; capacity to grant documents; registration or duty).

• Issues can arise again at enforcement (good standing; effect of insolvency/dissolution; registration of enforcement).

• And even after receivers are appointed can their transactions be attacked by foreign court?

• Some protection against change through foreign re-organisation in Rule in Gibbs (Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux [1890]) - an English law governed obligation may only be validly discharged or amended under English law.

We hope you found this useful. If you’d like to learn more, please contact Jeremy Whiteson or another member of our insolvency and restructuring team.

This note is a brief comment on the issues raised, reflecting the legal position at its date, and is not intended to constitute legal advice. The circumstances of each case will be different and readers are advised to take specific advice on issues of concern to them.