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Receivership

A creditor with a security interest over some of the companies assets can appoint a receiver to manage the company. In the event, the directors cease control of the company, and the receiver will run the business, for the benefit of the creditor that appointed him. This section deals with the impacts of a receivership on a company and its creditors. First, some terms:
The Grantor
Legal people love obscure words favourite is defalcation, which means stealing but sounds so much less offensive. For reasons that are not clear to us, when it comes to receiverships the legal people call the company who gives a security interest to someone else a Grantor, as in they have granted something. If a company allows a bank to take a security interest in company property then that company is called the Grantor.
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A Debenture is a loan backed up by some security over a company or its assets. The Debenture document will give the creditor rights in the event of a breach of the loan agreement. In some cases, the Debenture holder can take over the asset (as in a bank selling a house if the mortgage is unpaid), or it can appoint a receiver to run the Company.
receivership

Once appointed, the receiver must:

  • Give written notice to the grantor (debtor company)
  • Give public notice, in the NZ Gazette and relevant newspaper, detailing
  • Date of appointment
  • Receivers office address
  • Receivers full name
  • Brief description of the property in receivership

All documents from the company must make it clear that the company is in receivership. The receiver has the power to run the business in receivership, including hiring staff, managing property, selling assets, entering into contracts. The receiver can call up unpaid capital. In a receivership the directors’ powers are suspended sufficiently to allow the receiver to do his job. They do not cease to be directors, and can undertake some action in the name of the company. In reality, this is limited to legal action. The company in receivership, the grantor, must make all documents, bank details etc, available to the receiver.

A Liquidator acts in the interest of all creditors. A receiver only acts in the interest of the Debenture holder that appointed him. The receiver has a primary duty of care to the debenture holder who appointed him. However, the receiver also has a duty of care to the company and other creditors not to act in a negligent manner. If a receiver is negligent he risks being held liable by other creditors and by the company. The receiver has a statutory obligation to obtain the best price for the assets.

He cannot, therefore, sell the assets cheaply to recover just enough for the debenture holder at the expense of other creditors and the grantor. The receiver must, within two months, and again after every six months after his appointment, report on the progress of the receivership. These reports are to go to the grantor and the appointing debenture holder. If appointed by the Court, the court must also receive a copy of his reports. A receiver can be held personally liable for other costs of the company in receivership. In most circumstances the receiver will seek and indemnify him from the creditor from the appointing creditor firm before accepting a receivership. A receiver must also report any defalcations he becomes aware of during the receivership (and you thought you would never have need of that word).

The act does not refer to the 1994 Tax Administration act, so, if you the company has not been paying taxes, the receiver is obligated to report it. Fraudulent returns is considered proffering a document for pecuniary advantage and is covered by the Crimes Act, which is mentioned in the Act. Once a receiver has sold a property or asset, any security interests in that property that are subordinate to the security interests of the appointing creditor are vacated. If there is anything left over, this money will be paid out by the receiver according to the following:

  • Any person with a security interest registered in the PPSR
  • Any person with a security interest not registered in the PPSR
  • The Grantor

The ranking of priorities when it comes to paying out the surplus comes under the PPSR Legislation.

Once the Receiver has recovered funds from the sale of the secured asset, the receiver pays off any other securities, the company in receivership (the Grantor) and any other security interest in the asset ceases.

If the receiver is unable to sort out competing claims on any surplus, he can deposit the funds with the court and let a judge sort it out.