The Receiverships Act was introduced as part of the 1993 company law reform package. Much of the reform contained in the Receiverships Act reflected the significant case law that arose from the major receiverships which followed the 1987 stock market crash. Since the introduction of the Receiverships Act, New Zealand’s robust economic progress has meant that many lawyers and business people have a poor understanding of modern receiverships. However, as New Zealand finance companies have relentlessly collapsed, those that dealt with finance companies, whether as debenture holders, borrowers or contractual counter parties (and their lawyers) have had to deal with receivers and receivership law. The failure to understand the key principles of receiverships law has resulted in difficult negotiations, unnecessary conflict and higher legal costs for all parties.
Receivers’ position as agent of the company in receivership
A secured creditor holding security over all the assets of the company typically appoints receivers. However, a receiver can also be appointed over an individual asset. The key is that the company must grant to the secured creditor the right to appoint a receiver over its assets. Unless the security agreement contains this right of appointment, then a secured creditor cannot appoint a receiver. Neither the shareholders nor directors of a company can themselves appoint a receiver; however, directors may request that the secured creditor appoint a receiver.
When the Personal Property Securities Act 1999 (PPSA) was introduced, many security agreements and terms of trade were amended to allow creditors to appoint a receiver over a specific individual asset. This amendment allowed creditors the option of appointing a receiver in order to avoid the uncertainties contained in the enforcement provisions of the PPSA.
While the secured creditor appoints the receiver, the receiver is not the agent of the secured creditor. Instead, the receiver is the agent of the company and acts in the name of the company. The directors of the company remain in office, but their powers are largely suspended. Only the receivers have the power to manage the company and deal with its assets. Where the directors owed duties to the company, the receivers act primarily in the best interests of the secured creditor that appointed them.
This distinction between the receivers’ agency and their duties is important and often misunderstood. The receivers are the agent of the company, not the agent of the secured creditor that appointed them. At law, the receivers are appointed by the secured creditor, act at all times in the name of the company as the agent of the company, but exercise their powers in the best interests of the appointing secured creditor.
Limitation of receivers’ personal liability
Receiverships are often contentious. Often relationships between the secured creditor and the directors and shareholders of the company in receivership will have broken down irretrievably. The secured creditor may also be enforcing personal guarantees. Directors and shareholders regularly have strong views as to the company’s value. In most cases, those expectations of value are not achieved by a receivership sale. Routinely, aggrieved parties threaten to sue the receivers for failing to obtain what they believe is the value of their business.
Receivers are personally and individually appointed. Accordingly, the receiver is personally liable for the conduct of the receivership and for any liabilities incurred by the company in receivership. In this contentious environment, understandably, receivers have not been prepared to risk their own homes or other assets and have sought to limit any personal liability arising from the receivership to the assets of the company in receivership.
Accordingly, in every communication or contract, receivers will include a clause completely limiting recourse to the assets of the receivership and providing that under no circumstances will there be any recourse to the personal assets of the receivers. These clauses are the first thing that receivers look for when presented with a contract. They are market standard, non-negotiable and lawyers attempting to negotiate carve-outs are not just wasting their clients’ time and money, but damage the willingness of the receivers to deal with their clients.
The distinction between pre-receivership and post-receivership debts
Receivers are appointed over all the assets of the company in respect of which the secured creditor has security. Receivers then realise those "secured assets" for the benefit of the secured creditor. As the secured assets are usually all of the assets of the company, the receivers’ appointment leaves the company’s unsecured creditors without any real assets to claim against.
As a matter of law, the company remains indebted to each of its unsecured creditors notwithstanding the receivers’ appointment. However, the assets of the company will not be available to meet the debt claims of unsecured creditors. Effectively, unsecured creditors are left with what is often a worthless claim against the company.
The receivers have no liability for these pre-receivership unsecured claims. Yet in many cases the receivers will need to continue to deal with these unsecured creditors, either to maintain the business as a going concern or in the course of realising the secured assets. Where the receivers contract with unsecured creditors or otherwise incur liability, then those costs or liabilities are receivership expenses and will be paid in priority to the secured creditors’ debt.
Often creditors try to leverage their position by refusing to provide services or goods to the receiver unless the receiver pays them their pre-receivership debt. The law reluctantly allowed a receiver to make “salvage” payments in these circumstances, but the Receiverships Act specifically provides that suppliers of essential services (essentially utilities) may not refuse to provide services in order to extract payment for their pre-receivership debt. Receivers are even more unlikely to make salvage payments in light of the recent amendment to the preferential transaction provisions of the Companies Act which now provides that a liquidator may challenge as preferential a salvage payment made by a receiver. If successful, the recipient of the salvage payment will be required to repay that amount to the liquidator.
Sale of assets by receivers
Receivers sell assets on the basis that:
- the assets are "as is, where is”
- the buyer assumes all risk.
Receivers will not provide representations and warranties. Any issues that the buyer has will be dealt with on the price alone. The reason for this approach is that the receivers simply “do not know what they do not know”. The receivers will have stepped in to a distressed business and are selling the assets on that basis. Often distressed businesses will have been poorly managed and record keeping may have been haphazard. Accordingly, the receivers cannot vouch for the accuracy of past financial information and/or the completeness of corporate records.
Many corporate lawyers acting for a purchaser of assets from receivers will often request all of the representations, warranties, undertakings and non-compete provisions which are usually contained in a “willing buyer, willing seller” corporate sale and purchase agreement. In response, the receivers repeat their “no warranties – issues go to price” mantra. The result is that an extraordinary length of time is often spent attempting to resolve issues on which receivers simply will not move.
Receiverships law and the conduct of modern receiverships are underpinned by a series of fundamental principles. These principles can seem counter-intuitive and quite foreign for lawyers and business people who do not habitually deal with receivers or companies that are in a position justifying or requiring the appointment of receivers. As the economic cycle revolves, more and more business people and their lawyers will encounter receivers. Typically these encounters occur in a stressful environment where decisions must be made in real time. In these circumstances, business people and their lawyers will find that an appreciation of the key fundamentals of receiverships law will be invaluable.