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@ It is increasingly common for lenders, when looking to appoint receivers (it is usual practice for two receivers to be appointed) over land in England and Wales under their security, to find that borrowers are already, or become, subject to a formal insolvency process. In the case of an individual borrower that might be a voluntary arrangement or bankruptcy. In the case of a corporate borrower it might be a voluntary arrangement, liquidation or administration. It is ...
It is increasingly common for lenders, when looking to appoint receivers (it is usual practice for two receivers to be appointed) over land in England and Wales under their security, to find that borrowers are already, or become, subject to a formal insolvency process. In the case of an individual borrower that might be a voluntary arrangement or bankruptcy. In the case of a corporate borrower it might be a voluntary arrangement, liquidation or administration. It is important that both lenders and their receivers understand the effect of these other insolvency processes upon the lender’s ability to appoint and, if receivers are appointed, their status and powers. Voluntary Arrangement If a personal or corporate borrower is subject to a voluntary arrangement, a lender will ordinarily remain entitled to appoint receivers. A voluntary arrangement will not affect the rights of a secured lender unless it agrees otherwise. Nevertheless, a lender should take care when responding to a proposal for a voluntary arrangement so as not to inadvertently agree to a proposal which might have the effect of compromising its security and its right to appoint receivers. Bankruptcy/Liquidation Neither an individual borrower’s bankruptcy nor a corporate borrower’s liquidation will prevent a lender from appointing receivers under its security. However, bankruptcy or liquidation will terminate the receivers’ status as agents of the borrower, which derives from the Law of Property Act 1925 and, usually, also under the security pursuant to which they are appointed. That status gives them the ability to act in the name of the borrower and, as long as they act within their powers, affords them a degree of protection from personal liability. As a result of termination of that agency, the receivers will be acting either as principals (and so personally liable for their acts) or as agents of the lender (if, for example, the lender is dictating the receivers’ actions). Lenders should be wary of allowing themselves to become the receivers’ principal, and thereby exposing themselves to liability for their actions. Nevertheless, the receivers will retain their right to custody and control of the property, and any power of attorney conferred on them by the security (for example, to execute documents in the name of the borrower) will be unaffected. Administration When a corporate borrower goes into administration, a statutory moratorium prevents enforcement by secured lenders of their security without the permission of the administrators or the court. This applies to a lender looking to appoint receivers. When considering whether to give permission for an appointment of receivers, the administrators and the court will balance the interests of the lender looking to appoint against those of other creditors. If receivers have already been appointed by a lender over property of a corporate borrower, then administrators subsequently appointed may require those receivers to resign. If a lender is given permission to appoint receivers by administrators or the court then, although the issue has yet to be determined by the courts, a sensible approach would seem to be for the receivers to proceed on the basis that, as with the case in liquidation, their status as agents of the borrower will be terminated, and the same considerations will apply. In summary, and prior to an appointment of receivers over property in England and Wales, a lender should carry out appropriate checks on their borrower. Those should include, if the borrower is an individual, a bankruptcy search with the land charges department and, if the borrower is a corporate entity, a winding up search. Any solicitors instructed to review security ahead of a proposed appointment should carry out such checks, and report their results to the lender, as a matter of course. Mark Tempest Partner Matthew Arnold & Baldwin LLP 28 November 2013 Mark is an insolvency specialist, and has particular expertise in and extensive experience of LPA and fixed charge receiverships. Mark’s clients include lenders, receivers and insolvency practitioners. Matthew Arnold & Baldwin LLP is a leading regional firm with 29 Partners and offices in London and Watford. Core services are Banking and Finance, Litigation and Dispute Resolution, Corporate and Commercial, Real Estate and Private Client.