The effect of liquidation or dissolution on a fixed charge receivership

24th April 2015

What is the effect of liquidation/bankruptcy and dissolution on the ability of a fixed charge receiver (whether appointed under a mortgage deed or as LPA receiver) to exercise the powers usually given to a receiver under the LPA or mortgage deed?

In summary:

• the powers of the receiver survive the liquidation or bankruptcy of the mortgagor save that the receiver may not incur new liabilities that would be provable in the liquidation or bankruptcy
• the powers of the receiver survive the dissolution of the mortgagor
• the receiver is entitled to his indemnity under the mortgage or statute from the charged asset, although it usually sensible for the receiver to obtain a comprehensive indemnity from his appointor.

As is well known, the agency of a receiver ceases upon the commencement of the winding up. However, there is clear case authority, accumulated over several decades, to the effect that this does not prevent the receiver from exercising his powers, including the power to dispose of the company’s property (and to use the company’s name for that purpose). In effect, the fixed charge holder stands outside the liquidation and is entitled to realise the charged assets independently under the terms of the mortgage.

The same principle applies with bankruptcy. It is also the case that the bankruptcy – and the winding up – bring to an end the power of the receiver to impose fresh obligations on the mortgagor. Accordingly, while the receiver can carry on business after the liquidation/bankruptcy, he may be personally liable to persons dealing with him, subject, of course, to any right of indemnity against the mortgagee.

In contrast to the position in respect of liquidation and bankruptcy, there is a dearth of authority as to the effect of dissolution on the receiver’s powers but, logically, the position ought to be the same, namely that he proprietary rights of the charge holder are granted on the creation of the charge and survive dissolution, as they survive liquidation.

Similarly, the right to an indemnity is a right granted pursuant to the charge and there is no legal basis for considering that it will fall away on liquidation or dissolution.

We are often asked very specifically on a receiver’s ability to serve notice under section 8 or section 21 of the Housing Act 1988 following a winding up or bankruptcy. Our view is that the receiver’s ability to serve notices and issue proceedings in the name of the company survives the winding-up/bankruptcy. The right to use the name of the company is a chose in action that will usually be charged to the lender and the receiver will be authorised to realise such property. Ordinarily, this will not create any new provable liability as the charge provisions will provide that all costs and expenses of enforcing the security form part of the charged liabilities; therefore, the receiver is not creating any fresh liabilities in his own name.