This remedy is purely equitable in origin. the receiver’s main function is to collect and preserve income, to protect property which is in danger, or on the other hand to enable a person obtain the benefits of his rights over a property, or to obtain payment of his debt, where the legal remedies are inadequate. He may be appointed in a variety of cases e.g. by the court as an interim measure of protecting property that is in dispute.
Outside the court where there is a statute that gives a particular entity the power to appoint a receiver. In the case of mortgages and charges you have the RLA and the ITPA granting the mortgagee or chargee the power to appoint receivers. The CBK Act gives authority to CBK to appoint a receiver where a commercial bank is floundering.
Appointment outside the court can be by contract. A mortgage or a charge as contracts provide for the power to appoint a receiver. A debenture is another document that will contain a power to appoint a receiver.
There are certain advantages that accrue from the appointment of a receiver.
1. The receiver is supposed to protect the property and safeguard the security of the creditors and debenture holders. He will determine who gets paid first.
2. Expert monitoring of the company’s management and trading activities. The trouble may be that the receiver may not have the expertise in the field of that company and it is up to him to hire the necessary experts.
3. he makes a rapid assessment of the company’s management and trading activities.
4. He sells the business or viable parts of it as a going concern and obtains a higher price that that which would be obtained in liquidation of the company.
- If a business is insolvent, there will be extra burdens, especially if there is no hope of recovery for that company.
- The staff that the receivers come in with may not have the expertise about the business that the company is involved in. it is absolutely important that if a receiver knows he does not have the expertise to get the necessary expertise to assist in management of the company.
- the reputation of the company in receivership suffers greatly. The suppliers do not want to deal with the company due to the negative publicity. This can hamper the efforts of the company to actually recover.
- Even when it is a going concern, the sale as a going concern will fetch a less amount than what the company would have received had it been a going concern before being put into receivership. When a property is sold via a public auction, the property ends up going for less than the market value. Nobody wants to buy the assets at their real market value.
A body corporate cannot be a receiver and neither can an undischarged bankrupt.
APPOINTMENT BY RECEIVER BY THE COURT
This provides for the situations where the courts will appoint a receiver, where the company is being wound up and the security is in jeopardy.
RECEIVER & MANAGER
STATUS OF A RECEIVER APPOINTED BY COURT
This receiver is not an agent of the company, he is not even an agent of the debenture holder, instead he is an agent of the bank. This receiver is an officer of the court and not an agent of any of the parties. If he makes any contracts he is personally liable but he will be indemnified by the assets of the company.
Since he is appointed by the court, he cannot sue or be sued without first going to the court. Novation, the rules is that the receiver is not liable for any acts or the company that existed before he became a receiver. however this receiver can be liable by novation – a special document where someone accepts to take on some certain responsibilities.
Newhart Developments v. Co-operative Commercial Bank  Q.B 814
The receiver’s remuneration is fixed by the court either by way of salary or an agreed percentage of his receipts. Receivers rank as unsecured creditors right down the list.
APPOINTMENT OF RECEIVER OUTSIDE COURT
Debenture Holder – There may be reference to a floating charge where some interest of a lender is identified by means of a floating charge but without isolating any particular goods but the minute the company goes into receivership the debenture crystallises. The debenture holder will appoint a receiver where there is a specific provision in the debenture that gives power for the appointment of receiver. The receiver has to notify the registrar of companies about his appointment so that the registrar can indicate this in the register. The receiver must notify the registrar to notify the entire world that anybody dealing with that company is deemed to have notice that the company is under receivership. A receiver appointed by a debenture holder, he becomes the agent of the debenture holders and the debenture holders are liable as principals to whatever contract the receiver gets into.
Since a receiver appointed out of court is a mere agent, he incurs no personal liability for acts properly done by him as a receiver. however, in the case of a receiver of the property of a company, the Companies Act provides that the receiver is to be personally liable on any contract entered into by him in the performance of his functions to the same extent as if he had been appointed by the court. The receiver is not personally liable on existing contracts unless he accepts them by novation. But he has duty to ensure that if the contracts are profitable, they are performed fully and profitably.
Where a receiver is appointed out of court, the employees are not automatically dismissed and their contracts remain intact and inoperative.
EFFECT OF APPOINTMENT
Floating charges crystallise and become fixed. The directors’ powers are suspended and the company cannot deal with the assets charged without the receiver’s consent. However this does not prevent a director from pursuing an action on behalf of the company if the debenture holder’s interests are not thereby threatened.
STATEMENT OF AFFAIRS
The company is supposed to submit the statement. Section 351 of the Companies Act provides that where a receiver or manager of all substantially all of the property of the company is appointed, he must give notice forthwith to the company.;
(i) Past and present officers of the company
(ii) Persons who have participated in the formation and management of the company at any time within one year of the receivers appointment
Once the receiver gets the statements, he is supposed to send them to the
(i) registrar and to the court, a copy of the statement together with the comments.
(ii) He is supposed to give the statement of affairs to the company and in addition he has to give his own comments derived from his own observation as an expert.
(iii) The statement also has to be given to the debenture holder.
The receiver has to forward to the registrar an abstract showing what he has received from the contracts that the company has undertaken. The receipts and the payments cover 12 months. At the end of one year, the receiver has two months to show what he has received, and what he has paid out. If he does not disclose within this period, it becomes a criminal offence. This is an ongoing thing, they are receipts that are made periodically and every time he receives from trading with the companies assets, where there are costs to do with valuation, where there are costs to do with advocates i.e. certain expenses association with realisation will have to be paid first. If the receiver has incurred a liability the money must be used to indemnify him.
Finally the principal and debts due under the debenture debt.
A receiver can exercise his freedom and to leave, he has to notify the registrar or seek directions to the court. The company if solvent will revert to the shareholders but it the company is still insolvent, he must inform the registrar to commence the winding up process. A receiver can also be removed by the court upon the application of an interested party.
He can also resign by giving notice to the court, the registrar and the debenture holders.
The essence of receivership is such that it can be compared with a very morbid situation as by the time a company goes under receivership, it has moved from walking freely and has gone into hospital and things have not worked, admitted but things have gotten worse, moved to HDU and on to ICU where it needs life support. The life support by a receiver of his team but if all fails, the company will be consigned to the morgue or be liquidated.
Essentially by the time the bankers appoint a receiver, they will have given the company many chances and debts will have been rescheduled and the company will have failed to honour its obligations.