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Administrative receivership

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Administrative receivership

In law, receivership is the situation in which an institution or enterprise is being held by a receiver, a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights," especially in cases where a company cannot meet its financial obligations or enters bankruptcy.[1] The receivership remedy is an equitable remedy that emerged in the English Chancery courts, where receivers were appointed to protect real property.[2] Receiverships are also a remedy of last resort in litigation involving the conduct of executive agencies that fail to comply with constitutional or statutory obligations to populations that rely on those agencies for their basic human rights.[2] Various types of receiver appointments exist:[1]

  1. a receiver appointed by a (government) regulator pursuant to a statute;
  2. a privately appointed receiver; and
  3. a court-appointed receiver.[1]

The receiver's powers "flow from the document(s) underlying his appointment – a statute, financing agreement, or court order.

Duties of a receiver

  • The receiver may run the company in order to maximize the value of the company’s assets, sell the company as a whole, or sell part of the company and close unprofitable divisions.
  • Secure the assets of the company and/or entity.
  • Realize the assets of the company and/or entity.
  • Manage the affairs of the company in order to resolved debts owing.

United States process

Several regulatory entities have been granted power by the Congress to place banking and financial institutions into receivership like the Office of the Comptroller of the Currency for failing nationally chartered commercial banks; the Office of Thrift Supervision for failing savings and loan associations (thrift institutions); and the Federal Housing Finance Agency (FHFA) for government-sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks. Most individual states also have granted receivership authority to their own bank regulatory agencies and insurance regulators.

The California Receivers Forum is a non-profit organization formed by interested receivers, attorneys, accountants and property managers, with support from the Los Angeles Superior Court, to address the needs and concerns of receivers, to facilitate communication between the receivership community and the courts, and to assist in raising the level of professionalism of receivers throughout the state. The California Receivers Forum has five local affiliates: Bay Area, Central California, LA/Orange County, Sacramento Valley and San Diego.

Court-appointed receivers are "the most powerful and independent of the judicially appointed managers."[3] Unlike special masters and monitors, "the receiver completely displaces the defendants: the receiver makes large and small decisions, spends the organization’s funds, and controls hiring and firing determinations."[3] Examples of court-appointed receivers include:

  • In the District of Columbia, the jail’s medical care facility "was placed under court-ordered receivership in August 1995, after the District was held in contempt for repeatedly failing to implement court orders... intended to ensure adequate medical services to jail inmates."[4] The receivership ended in September 2000.[5]
  • An insolvent fuel company is managed by a court-appointed receiver.[6]
  • A U.S. District Judge appointed a receiver for the multi-level marketing company Equinox International in August 1999.[7] As of 2007, the receiver was authorized to distribute settlement funds from the now-defunct company to approved claimants.[8]
  • After placing the California state prison health care system into receivership in June 2005,[3] a U.S. District Judge appointed a receiver for it in February 2006.[9] California Prison Health Care Services (under control of the California Prison Health Care Receivership) attempts "to bring medical care in California prisons up to constitutional standards."[10]
  • In February 2007, a judge in Florida appointed a receiver for companies owned by Lou Pearlman that defrauded investors.[11] The receiver later said about the companies "I don't see much in the way of hard assets that are worth anything or are not already fully encumbered [with debt]."[12]

United Kingdom process

Administrative receivership is a procedure in the United Kingdom[13] whereby a creditor can enforce security against a company's assets in an effort to obtain repayment of the secured debt. It used to be the most popular method of enforcement by secured creditors, but recent legislative reform in many jurisdictions has reduced its significance considerably in certain countries.[14]

Administrative receivership differs from simple receivership in that an administrative receiver is appointed over all of the assets and undertaking of the company. This means that an administrative receiver can normally only be appointed by the holder of a floating charge. Because of this unusual role, insolvency legislation usually grants wider powers to administrative receivers, but also controls the exercise of those powers to try to mitigate potential prejudice to unsecured creditors.

Characteristically an administrative receiver will be an accountant with considerable experience of insolvency matters.

History

The common law has long recognised the concept of a receiver. Following the development of the floating charge creditors were effectively able to take security over a company's entire business by means of a floating charge over the undertaking. Security documents generally contained very wide powers of appointment such that on default the creditor could take over the business immediately and without the input of any court. A receiver appointed to the entire business became known as a receiver and manager. The receiver and manager would typically have extensive powers over the business, including the power to sell it at a time and on terms that suited the appointing creditor.

The ability to appoint a receiver and manager was a very powerful remedy, but it came to be considered unsatisfactory that it was entirely a creature of the contract between the creditor and the borrower. There was no general ability on the part of the borrower or any other party to review the actions of the receiver (who would generally be acting on behalf of the borrower under the security document) or seek the supervision of the court. As a part of the general review of UK insolvency law that took place in the 1980s, beginning with the Cork Report and culminating in the Insolvency Act 1986, two major reforms were put forward. First, the receiver and manager was put on a statutory footing: a receiver appointed to all or substantially all of a company's property was now to be known as an administrative receiver and subject to some (albeit not too extensive) statutory responsibilities. Second, the "administration order" procedure was introduced, designed as an equivalent process to administrative receivership but one available to any company by order of the court, and not dependent upon a particular security arrangement.

The expectation of Parliament was that companies and creditors would utilise administration in preference to administrative receivership. Crucially, however, Parliament had conceded in the Insolvency Act that administrative receivership should have priority - that is, a secured creditor with a floating charge could defeat any attempt to commence an administration by appointing an administrative receiver. As a result administration was not as popular as had been envisaged, and secured creditors habitually appointed administrative receivers to enforce security rights. More drastic action was taken in the Enterprise Act 2002 - Parliament made changes to the administration regime in an effort to make it more attractive, but also barred the right to appoint administrative receivers in any security created after 15 September 2003 (subject to certain specific exceptions). Any attempt to do so takes effect as a power to appoint an administrator.

Present significance

Administrative receivership still forms part of modern insolvency practice. Companies that get into financial difficulty today may well have security packages that were created before 15 September 2003, a situation likely to remain common for some years. Enforcement is also a significant aspect of the situations where administrative receivership is still permitted - for example, the ability to take control of the entirety of the assets is important in structuring insolvency-remote special purpose companies that issue securities or operate infrastructure projects.

In common law jurisdictions outside of the United Kingdom, administrative receivership remains alive and well. A number of offshore jurisdictions market transaction structures to banks on the basis that they still retain the freedom to appoint administrative receivers in those jurisdictions.

Because of their unique role, insolvency legislation usually confers wide powers upon administrative receivers under applicable insolvency law[15] (which will usually be concurrent with powers granted under the security document).

However, the corollary is that administrative receivers are usually required under applicable legislation to file reports in relation to the period of their receivership.[16]

Ireland process

Similarly to the United Kingdom process, methods for receiver appointment in Ireland are:

See also

External links

  • Resolutions Handbook of the Federal Deposit Insurance Corporation
  • California Receivers Forum

References

de:Insolvenzverwalter

fr:Redressement judiciaire

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