Simon Engelsman and Benjamin Tobin explain the role of the fixed-charge receiver in saving businesses

The Enterprise Act 2002 came into force this summer, and it threatens to reform corporate insolvency more radically than the Insolvency Acts of 1986 and 2000.

The emphasis being now on rescue and remedy, rather than the proprietary interests of secured creditors.

Specifically, part 10 of the 2002 Act transforms the existing regime for corporate insolvency as, with two exceptions, the right to appoint a receiver will disappear for floating charges after July with a probable increase in the number of administrations.

The two exceptions are capital market arrangements (section 72B) and public-private partnership projects (section 72C).

Therefore, it is time for lenders and landlords to rethink their strategies in default scenarios.

Much has been changed, though curiously no legislative changes have been made to the right to appoint the Law of Property Act 1925 receiver.

It is instructive to revisit this traditional, but sparingly used, remedy to assess whether and how it can be used in the context of the hands-on approach that will almost certainly be required henceforth.

Fixed-charge receivers

In recent years, the judiciary has been preoccupied with receivers' duties, particularly in relation to the power of sale (see Raja v Austin Gray [2002] EWHC 1607 (QB), [2002] 43 EG 210).

However, it is worth recalling the constituent elements of the remedy that has been available for nearly a century.

- The receiver is appointed by a lender of a mortgage or fixed charge to act as a receiver or manager of the property charged to secure to the lender the payment of the interest out of the rents and profits (section 101 of the Law of Property Act 1925).

- The powers are limited by statute (section 109 of the Law of Property Act), but are commonly varied or extended.

Invariably, an express power of sale is reserved to the lender.

- The receiver is the agent of the mortgagor, even though his primary duty is to realise the property of the mortgagor for the benefit of the mortgagee.

Consequently, he has been described as sitting on a razor blade between two opposing views.

- The formalities of appointment are relatively simple - the receiver requires no professional qualification, although he is usually an insolvency practitioner or chartered surveyor.

Furthermore, the appointment is effective immediately the deed of appointment is handed to him.

Since 2000, many receivers have joined the joint registration scheme of the Insolvency Practitioners Association and the Royal Institution of Chartered Surveyors (RICS).

- The receiver can invoke additional and/or dual remedies in the name of the lender in the event of tenant insolvency.

For example, he can forfeit by action or peaceably re-enter.

He can initiate a rent review, negotiate a new lease, and can complete or even undertake a development.

Why use a fixed-charge receiver? The formalities are simple, the time taken to appoint is short, and, because the receiver has a split loyalty with a duty of care to the borrower, he can often achieve a degree of co-operation that might not be initially expected.

If there is work necessary to enhance the property before it can be let or sold, such as completing development work, clearance, achieving a letting or dealing with problems, the surveyor is the one best placed to get things moving.

Also, because the receiver is the one actually dealing with the problem, there is no need to instruct an insolvency practitioner who will then need to sub-instruct a surveyor to advise on the property assets.

And, the fixed-charge receiver only deals with the assets covered by the specific charge.

This can allow the business to continue to function, but more importantly, where the asset is relatively small, it is harder for the costs to overtake the realisation value, since everyone can see how costs are mounting.

The future

There is much speculation among practitioners as to the likely impact of the restriction on the ability of floating-charge holders to appoint an administrative receiver in respect of post-commencement charges.

While the Enterprise Act 2002 promotes the concept of administrations, it is not without its inherent procedural difficulties, and there will be a significant proportion of secured lenders who perceive receivership as a more obvious and cost-effective option than administration.

The new emphasis under the Act is on recovery rather than refuse collection.

In other words, can the business be turned round rather than dumped?

A Law of Property Act receiver - who is a chartered surveyor - should be used to property-related problem solving, rather than merely selling out at a loss.

But he must be prepared to resist the pressure of the lender who wants to close his books rather than seeing the difficulty through.

The receiver needs to remember that his duty of care is to the borrower and in a low interest rate climate, a fire sale may well not be the answer, especially when the director of the debtor company can be brought on side to assist.

Often it is the threat of the Law of Property Act appointment that can encourage this to happen in any event, without needing to incur the costs of the appointment.

If the receiver is not willing to resist such pressures, his only remedy is to discharge himself from the appointment.

Where, after the appointed day, the lender is considering his options, he will need to bear in mind the following consequences of appointing a Law of Property Act receiver.

- A receiver can be required to vacate office by a subsequently appointed administrator, schedule B1, paragraph 41(2) of the Insolvency Act 1986.

- If an administrator is thereafter appointed, the moratorium will apply in much the same way, such that the lender cannot enforce his security without the permission of the administrator or the court.

Equally, the receiver does not have the protection of the statutory moratorium against execution and enforcement.

- The receiver does not have the same investigatory powers of an administrator.

- A receiver may expose himself to personal liability in relation to contracts entered into or adopted by him whereas the administrator generally does not.

The future is uncertain, but given the changing landscape what cannot be in doubt is the fact that the rights of lenders and landlords will be restricted once a tenant becomes insolvent.

They will have to weigh up the economic and commercial realities of the options available, but given the increasing numbers of business failures, we may see an increase in Law of Property Act receiverships.

Simon Engelsman is a solicitor and partner at London-based law firm Butcher Burns, and he is a member of the Institute of Credit Management and Insolvency Lawyers Association.

Benjamin Tobin is a chartered surveyor, auctioneer and director of London-based Strettons Chartered Surveyors.

He is a fellow of the RICS and a registered member of the Property Receiver Insolvency Practitioners Association