What is the difference between administrative receivership and administration? Julie Hunter of Stephensons explains what an administrative receivership is and how it’s been effectively abolished since 2003.

What is administrative receiver?

An administrative receiver is an Insolvency Practitioner appointed over a company to take control of assets of the company for the benefit of a secured creditor with the right to make the appointment.

What is administrative receivership?

Administrative receivership is a remedy available only to a secured creditor of a limited company or a PLC, who has a floating charge over the company’s assets and a fixed or floating security over all, or substantially all, of those assets. The security is usually in the form of a debenture.

Administrative receivership enables a qualified floating charge holder owed monies by the company to appoint an administrative receiver, who must be a licensed Insolvency Practitioner, who then has power to manage and sell the company’s assets.

The appointment causes the floating charge to ‘crystallise’, meaning that the company can no longer deal with the property which is the subject of the floating charge.

It’s important to note that the appointment of an administrative receiver does not prevent any other creditor from taking enforcement action against the company, including petitioning for its winding up. Nor does it prevent a landlord from exercising contractual rights to forfeit leases without leave of the court.

Also, unless other commercial contracts made by the company provide otherwise, the appointment will not affect those contracts which will remain binding. This includes contracts of employment which the rules provide will not be affected unless they are incompatible with the administrative receiver’s powers.

How did the Enterprise Act 2002 affect administrative receivership?

Prior to the implementation of the Enterprise Act 2002, administrative receivership was the primary remedy for holders of security over substantially all of a company’s assets. However, the 2002 Act significantly reduced the right of a secured creditor to appoint an administrative receiver when it effectively abolished administrative receiverships.

There is now a general prohibition on such appointments, except in certain specific circumstances. The prohibition does not extend to floating charges granted before 15 September 2003 when the 2002 Act took effect. Secured creditors may now only appoint an administrative receiver if the floating charge was created before 15 September 2003 and/or if the creditor falls into one of the statutory exemption categories, which include:

• a capital market arrangement
• public/private partnerships
• utility projects
• urban regeneration projects
• project financing; arrangements with registered social landlords and those with protected railways or certain other specific companies

Unless the creditor falls within one of these statutory exemptions, section 72 of the Insolvency Act 1986 (IA 1986), as amended, prohibits a qualifying floating charge holder from appointing an administrative receiver. Instead, a charge holder can put a company into administration.

What is the difference between administrative receivership and administration?

An administrative receiver’s duties are owed primarily to its appointing secured creditor, whereas an administrator’s duties are owed to all the creditors.

A company in administration has the benefit of a statutory moratorium which will prevent a landlord from forfeiting a lease held by the company and will prevent the commencement or continuation of legal proceedings, including Insolvency Act petitions, without permission of the court.

An administrator would have the power to bring claims against third parties which the company had the right to bring, as these are considered assets of the company. These may include claims for Insolvency Act transgressions, for example preferences, transactions at an undervalue and actions against the directors for wrongful trading or fraudulent trading. An administrative receiver does not have these powers.

What does an administrative receiver do?

The administrative receiver’s duties and responsibilities are to the secured lender who appointed them and will have been set out in the security document creating the power of making the appointment. Their main aim is to recover enough funds to satisfy the secured debt.

Generally, they will be authorised to take custody of the company’s assets subject to the charge, sell them and/or may run the company’s business. Assets are sold piecemeal or as part of a sale as a going concern. This general duty is subject to the limitation that a receiver has a duty to manage the business with due diligence and take reasonable steps to carry on the business profitably and, where selling secured property, to obtain the true market value at the point of sale.

The administrative receiver effectively replaces the directors of the company and has all the powers conferred on them by the relevant security to manage the business and has specific powers under the Insolvency Act 1986. However, the appointment does not remove the directors of the company from office, terminate any service contract between the directors and the company or discharge them of their fiduciary duties to the company.

The powers conferred on the administrative receiver are deemed to include (except in so far as they are inconsistent with the provisions of the security) the powers specified in Schedule 1 to the Insolvency Act 1986 (section 42, IA 1986). These include the power to:

• collect in and sell property
• borrow money and grant security
• insure property and appoint agents

An administrative receiver is also entitled to establish subsidiary companies, transfer viable parts of the business to them and then sell them. In doing so, the administrative receiver acts as the agent of the company despite having a primary duty to the appointing charge holder.

Can an administrative receiver close a company?

The administrative receivership is complete when the floating charge holder has been paid in full or when the administrative receiver has sold all the property and distributed all the proceeds in the order prescribed by law. Although the primary duty of the receiver is to realise the security of the charge holder who appointed him, they are under a duty to pay preferential creditors off first (section 40, IA 1986).

Once the funds have been distributed, the receiver will then cease to act and send a summary of final receipts and payments to the company and the Registrar of Companies. At this stage it’s common for the company to be placed into liquidation, although this is not a power held by the receiver and will generally be done by the company’s directors. 

About the author

Julie Hunter is an associate solicitor specialising in commercial litigation at Stephensons.

See also

A guide to compulsory liquidation

A guide to creditors' voluntary liquidation (CVL)

A guide to members' voluntary liquidation (MVL)

What is the difference between wrongful trading and fraudulent trading?

Find out more

Insolvency Act 1986 (Legislation)

Enterprise Act 2002 (Legislation)

Image: Getty Images

Publication date: 13 January 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.