RESOURCES

Secured Creditors & Receivership

Many financial institutions prefer to grant credit facilities to companies where a company can provide collateral/security. Where the facility is collateralised by assets of the company, the financial institution becomes a secured creditor which places them in priority to unsecured creditors, in the event the company becomes insolvent or bankrupt. While many creditors focus on perfecting their security, what is equally as important is the ability to enforce the security should the need arise. This Article will focus on the enforcement of security and the appointment of a receiver.

The Companies Act, Security Interests in Personal Property Act, the Insolvency Act and the security agreement(s) are all important documents in understanding how a receiver may be appointed and the powers, duties and obligations of the various parties i.e. the indebted company, the secured creditor and the receiver.

Appointment & Powers of the Receiver
A secured creditor has the right to appoint a receiver where a company defaults under the security agreement. The security agreement may give the secured creditor this power and if no such power is stated then a receiver may be appointed by the court on application by the creditor. Interestingly, a person appointed as receiver, even though appointed by the creditor, is an agent of the company and the company is responsible for his acts and omissions and remuneration. Only a trustee licensed pursuant to the Insolvency Act can be appointed as a receiver. It is important to note that the appointment of a receiver does not affect the legal existence of the company as the directors continue to hold that position, albeit with limited powers.

Once appointed the receiver is to give notice to the company as well as the Office of the Supervisor of Insolvency of his appointment. If the company is already in bankruptcy, notice should be given to the bankruptcy trustee. The notice is to indicate if the receiver was appointed by court order or pursuant to a security agreement. If the plan of receivership (i.e. how the security will be realised) has already been determined, the plan should also be stated in the notice. The receiver shall also publish in a local daily newspaper the notice of his appointment. Any document on which the company’s name appears is to contain a statement that a receiver has been appointed, for example, court documents would reflect the company as a party to the claim as “Company Limited (In Receivership)”.

The powers of a receiver generally include the power: (i) to enter upon and to take possession of the property subject of the security, (ii) to sell or otherwise dispose of the property subject of the security, (iii) to call up any uncalled capital of the company with all powers conferred by the constitutive documents of the company in relation to calls, (iv) to appoint or dismiss officers, agents and employees, and (v) to perform, rescind, vary, or enter into any contracts of the company.

Duties of the Receiver
A receiver is to act honestly and in good faith and is to deal with any property of the company in his possession or control in a commercially reasonable manner.

The receiver has a statutory duty to (i) prepare interim reports relating to the receivership and provide copies of those reports to the company, the Office of the Supervisor of Insolvency and other affected persons and (ii) after completing the receivership prepare a final report and statement of accounts relating to the receivership and provide a copy to of the Companies Office of Jamaica, the Office of the Supervisor of Insolvency, the company and other affected persons. The reports are to include statements of receipts and disbursements, tasks performed, and actions taken by the receiver, and where applicable a bill of costs in respect of legal fees incurred by the receiver.

The main objective of the receiver is to enforce the security to satisfy the debt(s) owed to the secured creditor. Therefore, the Insolvency Act provides that the receiver may receive the income from property of the company, pay any liability connected with the property and realise the security interest of the secured creditor. Unless a receiver is appointed a receiver-manager, the receiver shall not carry on business of the company for more than 14 days after being appointed.

Secured Creditor Obligations
A secured creditor should ensure that prior to enforcing any security on all or substantially all of the property of the company, even where such enforcement is being done pursuant to the terms of its security agreement, it has given a Notice of Intention to Enforce Security pursuant to the Insolvency Act to the company. There are exceptions to the requirement to give such a notice, including where there is already a receiver or where a secured creditor was successful in its application for a stay to be lifted as a result of a notice of intention or proposal being filed by the company (another area that requires its own article to discuss).

After giving the notice, the secured creditor is to wait until 10 days has elapsed after sending the notice before enforcing its security, unless the company consents to an earlier enforcement. It is crucial that all parties involved understand the steps and requirements to be taken to having security given/granted enforced.

While this Article focuses on the right of a secured creditor to appoint a receiver, unsecured creditors may also have a receiver appointed by filing an application in court for a receiving order.

Appointment of a receiver by a secured creditor is usually as a last resort. If you are the company in distress you are focused on salvaging the company and its operations. If you are a secured creditor you are focused on recouping the debt. Whether you are the company, a creditor or the receiver, receivership is a sensitive topic to discuss and handle and it is always in the best interest of all parties involved to obtain legal advice.

Shaniel May Brown is an Associate at Myers, Fletcher & Gordon and is a member of the firm’s Commercial Department. Shaniel may be contacted via shaniel.maybrown@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.

This article is for general information purposes only and does not constitute legal advice.

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