Common problems with receivership (part two)

Introduction

This is the second instalment of our two-part series on receivership. As with part one, it looks at receivership as a largely contractual process, driven by the underlying loan and security documents and supported by only limited statute or regulation.

In this instalment, we explore further problems we commonly encounter in practice, reinforcing that receivership is not always as straightforward as it may appear. When issues arise, the consequences can be serious for lenders, receivers and buyers of assets alike. However, with careful planning, robust documentation and the right approach, many of these risks can be identified early and successfully managed.

Problem 6: The borrower is dissolved or liquidated

• A receiver is deemed to be an agent of the mortgagor (as a result of s109 LPA 1925 - and often also expressly stated in security document).
• Agency terminates on winding up order (Gaskell v Gosling [1897) or resolution to wind up (Thomas v Todd [1928]).
• Agency also terminates on company dissolution when the company ceases to exist and equity vests in Crown (under principle of bona vacantia).
• The receiver then continues as principal, or as agent of chargor (depending on terms of security).
• The receiver continues to have power to deal with charged assets but cannot incur liabilities in the name of the company. This leaves the receiver with greater exposure to personal liability.

Problem 7: Security wasn’t registered at Companies House

• Where a company creates a charge over its property and fails to deliver to the registrar of companies the documents required by Companies Act 2006.
• The charge is void (so far as any security on the company's property or undertaking is conferred by it) against:
  
  (a) a liquidator of the company;
  (b) an administrator of the company; and
  (c) a creditor of the company
  (s859H CA 06).

• Registration is no longer required for security over English assets by foreign companies (Slavenberg registration). But it is required by foreign law loans over English assets.

Solution:

• Retake security;
• court order for late registration;
• if a share charge or charge over debts may not need registration under Financial Collateral Arrangements (no 2) Regulations 2003; or
• if company not in liquidation and there are no other secured creditors it may be possible to give priority to the unregistered charge on principle of Re Ehrman [1906].

Problem 8: The lender will not accept a reasonable offer

• The borrower has a contractual right to redeem in accordance with security and an equitable right to redeem beyond that.
• This right cannot be excluded by contract (the principle was recently recognised in Re Industrial North West [2020]).
• Terms which inhibit redemption may be unenforceable as a “clog” or “fetter” on the equity E.g. requirement in a brewer’s mortgage of a pub to continue to buy beer from lender after repayment of debt).
• If the borrower offers to repay the loan at a level is below the debt amount, the lender can refuse but the lender risks a claim for breach of fiduciary duties if the refusal worsens the position for other stakeholders. That is not an easy claim to bring but may also be used to defend a debt enforcement claim (especially on guarantee enforcement).

Problem 9: The value is in a trading business

• Examples are hotels, nursing homes and sports clubs, where lenders often take fixed charge security and appoints receivers to enforce. The lender may fail to realise full value without an ability to sell the trading business with the land.
• To sell a trading business, the lender will need security over trade assets which is likely to be a floating charge if the assets are stock or another class of assets which will change from time to time.
• But to appoint a receiver over floating charge assets risks creating an administrative receivership which is invalid (this was discussed in part one of this series). Essentially, outside of limited exceptions, an appointment under a floating charge over the whole or substantially the whole of a business is prohibited.
• As a result, the lender may need to appoint administrators to sell the entire business.

Problem 10: The borrower has multiple SPVs

• Property investors will often have portfolio spread across numerous SPV companies.
• As properties are acquired, the lender will take security over each property they fund.
• At the time of enforcement there may be “equity” in some and “losses” in others.
• Without cross guarantees, the lender may be unable to maximise benefit of surplus and make losses on less valuable properties.
• If the lender chooses to enforce over assets which have the effect of squeezing out other lenders, there may be recourse under principle of marshalling.
• It may be possible to address this in priorities agreements and security.

We hope you found this useful. If you’d like to learn more, please contact Jeremy Whiteson or other 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.