What receivership means
Receivership is enforcement of security, not rescue of a business.
When a company defaults under a debenture, the secured creditor can appoint a receiver over the assets charged to them. The receiver takes control of those assets, realises them, and applies the proceeds to the debt owed to the appointing creditor.
The defining feature is whose interest the receiver serves. A receiver's primary duty is to the creditor who appointed them, subject to duties owed to the company and to other creditors in realising assets properly. That is different from an administrator, who acts for the creditors as a whole.
A receiver appointed only over assets is a receiver. A receiver empowered to carry on the business is a receiver and manager, and that distinction changes what they may do day to day.
How it is used
Appointment is usually made under the debenture itself, without a court application, once an event of default has occurred.
The receiver takes possession of the charged assets, and directors lose control of them. Where the appointment is over the whole undertaking, the practical effect is that the receiver runs the business or sells it.
The receiver's job is to realise value. That may mean selling the business as a going concern, which usually produces more than a break up, or selling assets individually where no buyer for the whole exists.
Proceeds are applied in order: the costs of the receivership, then preferential claims where the security is a floating charge, then the appointing creditor, and any surplus back to the company.
CAMA 2020 brought receivers under the regulated insolvency practitioner framework, so the person appointed must be qualified and licensed rather than simply nominated.
Key features
- Appointed by a secured creditor under a debenture, or by a court
- Takes control of the assets charged, displacing the directors over them
- Primary duty is to the appointing creditor, with duties owed in realising assets properly
- A receiver and manager may carry on the business, a receiver alone may not
- Proceeds are applied to costs, then preferential claims, then the appointing creditor
- Receivers must be qualified insolvency practitioners under CAMA 2020
How this works in Nigeria
Receivership has long been the standard Nigerian bank response to a defaulting corporate borrower, because it is quick, it does not require a court application where the debenture provides for it, and it puts the bank in control of the assets it lent against.
CAMA 2020 changed the surrounding landscape by introducing administration and company voluntary arrangements, which are rescue procedures rather than enforcement ones. A company facing default now has options it did not have, and the moratorium in administration can prevent enforcement while a rescue is attempted.
In practice that means the timing matters more than it used to. A company that engages early may be able to enter administration. A company that waits until the bank appoints a receiver has lost control of the outcome.
Directors should also understand what receivership does to them. They remain directors and their statutory duties continue, including filing obligations, but they no longer control the charged assets. Companies frequently drift into default at the CAC during a receivership, adding a compliance problem to a financial one.
Receivership vs administration vs liquidation
Three procedures that get spoken about together and serve different masters.
Receivership serves the secured creditor who appointed the receiver. The aim is to realise the charged assets and repay that creditor. Other creditors benefit only from any surplus.
Administration serves the creditors as a whole. An administrator aims to rescue the company as a going concern, or to achieve a better outcome for creditors than an immediate liquidation would, with a moratorium on claims while that is attempted.
Liquidation ends the company. A liquidator realises everything, distributes in the statutory order of priority, and the company is dissolved.
A business in trouble should be looking at administration before a creditor reaches for receivership, because the first is designed to save it and the second is designed to repay somebody else.
Limits and risks
Receivership is not designed to save a business, so a viable company can be broken up because that was the quickest route to repaying one creditor.
Unsecured creditors usually receive nothing from it. The receiver is not acting for them, and any surplus rarely exists.
The costs of the receivership come out of the realisations first, which reduces what reaches anybody.
And the announcement itself destroys value. Suppliers stop extending credit, customers look elsewhere and staff leave, so the business the receiver is trying to sell is worth less by the week.
Worth knowing
Read the events of default in your debenture before you need to. Nigerian facility documents often allow appointment on technical breaches such as a missed covenant or a late set of accounts, not only on missed payments, and directors who assume they are safe while payments are current are frequently wrong.
Questions people ask
What is receivership?
The process where a secured creditor appoints a receiver to take control of the assets charged to them and realise those assets to repay the debt. It is enforcement of security rather than a rescue procedure.
Who appoints a receiver?
Usually the secured creditor, under the powers in the debenture, once an event of default has occurred. A court can also appoint one. Under CAMA 2020 the person appointed must be a qualified insolvency practitioner.
What is the difference between a receiver and a receiver manager?
A receiver takes control of assets and realises them. A receiver and manager is additionally empowered to carry on the business, which changes what they can do day to day and often improves the sale price.
What is the difference between receivership and administration?
A receiver acts primarily for the creditor who appointed them. An administrator acts for the creditors as a whole and aims to rescue the company or achieve a better outcome than immediate liquidation, with a moratorium on claims.
Do directors lose control in a receivership?
They lose control of the assets covered by the appointment, and where that is the whole undertaking the practical effect is total. They remain directors with continuing statutory duties, including filings, which companies in receivership often neglect.
Do unsecured creditors get anything in a receivership?
Usually not. The receiver acts for the appointing secured creditor, and unsecured creditors benefit only from a surplus, which rarely exists after costs and preferential claims.