The rise of the Fixed Charge Receiver
A Fixed Charge Receiver usually appears on the insolvency of an owner of real property or other valuable secured assets. The Receiver will usually have powers to realise assets and collect rent.
A Fixed Charge Receiver is appointed on foot of the relevant loan facility. If a facility is repayable on demand, subsequent to a letter of demand being served to the borrower, a Receiver can be appointed by an appointment document if the debt is not repaid. Where a loan facility is repayable at the end of a fixed term (a “term facility”) then demand can only be made when default has arisen or the term matured. Appointment is effective from time of signature of an acceptance by or on behalf of the receiver. An invitation from the borrower might also be obtained from the lender to appoint a receiver.
Where no specific power to appoint a receiver is found in the mortgage document, an additional right exists under legislation (which is preserved under the 2009 law reforms). The act provides a mortgagee with a statutory power to appoint a receiver over the income of a mortgaged property, provided the mortgage is made by a deed.
In the absence of terms to the contrary in the facility documents, appointment is commonly made 24 hours or less after demand. If demand is served outside of business hours the borrower must have an opportunity to implement the “mechanics of payment” – such time factors must be considered an appointment document is fully executed.
Floating Charges– any floating charge element of the borrower’s security must be excluded from the appointment. Appointment in this instance can render the appointment as one of an administrative receiver, and for such an appointment the receiver must be a licensed insolvency practitioner. There are limited exceptions to this rule i.e. where the floating charge is an important part of the realisation strategy. A common example would include furniture in a property - the Fixed Charge Receiver will not get title to it.
Priorities– if there are additional mortgages or charges secured by the property over which the receiver is appointed then the terms of any deed of priorities or intercreditor agreement must be considered and complied with.
To prevent exposure in future claims for damages for defect in appointment, the Receiver will usually take legal advice on the validity of his appointment. The enforceability of the loan and security documents will be reviewed, as well as the procedure for appointment and any other matter which could affect the validity of the appointment.
A receiver’s powers are usually set out in the security under which the receiver is appointed. They will generally include a power to sell and a power to rent. Advice should be taken in each case. Particular care should be taken when the receiver wishes to carry on business, pursue or compromise litigation, mortgage property or commit the borrower to new obligations.
Duties and Liabilities
In general the Receiver must act in good faith, take reasonable precautions and to exercise due diligence in the sales process. Alongside owing a principal legal duty to the lender, the Receiver will also owe duties to the borrower, any guarantor of the debt, any other secured lenders and other interested parties. The receiver must take reasonable steps to operate profitably and must be active in the protection and preservation of the property and may be challenged if his is not the case.
A receiver does not have to immediately release the assets. It will ultimately be the decision of the receiver whether to rent/trade the properties involved rather than sell them. He is not compelled to follow any particular course.
The receiver’s primary duty is to ensure the debt is serviced and interest paid and to help steer about a situation where the debt itself can be repaid.
Employees
The receiver will be personally liable for employment contracts adopted. However, if the business is sold as a going concern, these liabilities will be transferred to the buyer.
When does Receivership end?
A receiver may be removed or replaced by his appointer at any time, and may resign. Once the debt has been paid in full, the receiver’s authority to act ceases. The receiver can be removed from office by court order or by administrator.
While the use of a receiver is relatively inexpensive and simple, it is imperative that specialist advice is received to ensure all parties have assessed the validity of the receiver’s appointment and the scope.
For further information please contact John Bollard by phone (01) 6794165 or email: john@donaghys.ie