Receiverships: Who, What and Why?
The recent enforced receivership of national construction firm Ebert Construction has thrust receiverships back into the spotlight. With some 95 staff laid off and creditors owed around $40 million, the consequences of a high-profile company being forced into a receivership are apparent.
Nonetheless, many people involved in the construction industry, and the general public, may have little knowledge of what a receivership entails.
This article provides a broad overview of the receivership process and the implications of a company being placed into receivership.
The appointment process
There are two mechanisms by which a receiver may be appointed. The first (and least common) is by appointment by the High Court, either pursuant to a specific power conferred by statute, or in the exercise of its inherent jurisdiction.
The vast majority of receiverships in New Zealand are private receiverships. The right to appoint a receiver will usually be conferred by a deed or agreement (most often a security agreement) (Receiverships Act 1993, section 6(1)).
The security agreement will set out the grounds upon which this power of appointment may be exercised; common examples being an act of default by the grantor, or some other specified event. A secured creditor will also normally be required to make demand on the grantor before appointing a receiver, with the grantor being accorded reasonable time to comply with the demand. The creditor must also ensure he or she acts in good faith, and in accordance with any obligations imposed by the Credit Contracts and Consumer Finance Act 2003.
A receiver having been appointed, the power of the company’s directors as regards its assets will be suspended so far as is necessary to enable the receiver to discharge his or her functions. In all other respects, the company remains intact: the directors continue in office and the company’s internal structures are preserved.
The role of a receiver
A court appointed receiver is answerable to the court alone and is controlled by neither the company nor its creditors. Conversely, a privately appointed receiver is presumed to be the agent of the company (known as the debtor / grantor), unless the security agreement provides otherwise (section 6(3)). The label ‘agent’ is a misnomer, however, as the relationship between company and receiver has several peculiar incidents, including that:
- The company has no say in the appointment or dismissal of the receiver and is not entitled to direct the receiver in any way.
- No contractual relationship exists between company and receiver, nor is any duty owed in tort. A receiver’s duties are statutory and equitable.
- The equitable duty is owed to both the company and the secured creditor.
- The receiver’s primary duty is to try and bring about a situation in which the secured debt is repaid, and the management of company property occurs, not for the benefit of the company, but for that of the secured creditor.
Notwithstanding this, the general principles of agency do have some relevance. For example, a receiver holds in trust any proceeds that remain after satisfaction of the company’s debts, and property dealt with by the receiver remains, in law, the property of the grantor.
Powers of a receiver
The powers of a receiver in respect of the property in receivership include those listed in section 14(2) of the Act, the most notable of which are:
- The power to demand and recover income of the property.
- The power to manage the property.
- The power to insure the property.
- The power to repair and maintain the property.
- The power to inspect the books and documents that relate to the property.
Additionally, a receiver has the powers expressly or impliedly conferred by the security agreement they were appointed under (section 14(1)). In almost all cases, such powers will include a power to sell the company’s assets for the purpose of repaying its debts.
Another notable non-statutory power is the ability to compel a grantor to complete its obligations under a pre-receivership contract. Alternatively, a receiver may repudiate a contractual obligation binding on the grantor, thereby leaving the other party to the contract to a remedy in damages. The determining factor will be the receiver’s obligation to act in the best interests of the person in whose interests he or she was appointed.
A receiver is also empowered to lawfully terminate the employment contracts of a company’s employees within 14 days of his or her appointment (section 32). Electing not to do so will render a receiver personally liable for payment of the remuneration due to existing employees.
DUTIES OF A RECEIVER
The duties of a receiver are numerous. Among others, they include:
- A duty to act in good faith and for a proper purpose (section 18(1)).
- A duty to exercise one’s powers in the best interests of the person in whose interest he or she was appointed (section 18(2)).
- A duty, when exercising a power of sale of property, to obtain the best price reasonably obtainable at the time of sale (section 19).
- A duty to distribute surplus proceeds in accordance with the priorities set out in the Act (section 30A).
- A duty to keep proper accounting records (section 22).
- A duty to report on the state of affairs with respect to the property (sections 23 – 24).
- A duty to notify the Registrar if it is believed that the company or a director has committed an offence (section 28).
A receiver that fails to comply with any of the above duties, or a duty imposed by the security agreement under which he or she was appointed, may be the subject of an application brought in the High Court (sections 36 – 37). Those persons entitled to bring an application include: the company; a creditor or guarantor of the company; a liquidator of the company; and a shareholder of the company (by mechanism of a derivative action).
In response to an application, the court may remove a receiver from office and impose a prohibition order on him or her (section 37), whilst also making any other orders it thinks fit for preserving the property in receivership (section 39).
It is obvious that a company being put into receivership is not a positive sign for the future of a company. Given the role of a receiver is to act for the benefit of the appointing creditor (within the bounds of the law) it is often the case that there are insufficient funds available for a distribution to unsecured creditors after the receivership has concluded.
In the construction industry, matters are slightly more nuanced following the coming into force of the Construction Contracts Amendment Act 2015 and the Regulatory Systems (Commercial Matters) Amendment Act 2017.
Where a construction contract has been entered into on or after 31 March 2017 (see section 11A(3) of the Construction Contracts Act 2002 (CCA)) then the following regime applies:
- Retention monies are those held by the head contractor from an amount payable to the subcontractor as security for the performance of the sub-contractor’s obligations under the contract (section 18A).
- All retention monies are held on trust (section 18C).
- The head contractor must keep proper accounting records of retention monies and must make these records available for inspection at all reasonable times and without charge (section 18D).
- The head contractor is prohibited from using retention monies other than to remedy defects in the performance of the sub-contractor’s obligations (section 18E).
- Interest is payable on late repayment of retention monies (section 18G).
- The retention money is not available to pay the debts of any creditor other than the sub-contractor and is not liable to be taken in execution under the order or process of a court, or at the instance of any creditor of the head contractor other than the sub-contractor (section 18H).
- The retention provisions cannot be contracted out of (section 18I).
This regime was put in place from 31 March 2017 to avoid head contractors using retention monies as working capital to fund projects in an industry operating on very low margins. Where the regime applies, the retention monies do not form part of the general pool of funds in the receivership (or liquidation) and must be used to pay the creditor that is intended to benefit.
Receiverships occupy an important role in the New Zealand business landscape. The New Zealand construction industry has had some high-profile receiverships of late (Ebert Construction and Orange H Group are two obvious examples). When receivership of a company occurs, it is important to understand what the role of the receiver is, and what rights you may have. This article has sought to summarise some of those issues.
Importantly, if you have entered into a construction contract after 31 March 2017 with a head contractor then you should seek legal advice about the rights and remedies you may have.