Introduction
This is the third in our series of articles covering interim measures available in English law against debtors seeking to evade their obligations.
The first article deals with worldwide freezing orders and is available here.
The second article deals with the appointment of provisional liquidators and is available here.
This article deals with the appointment of interim receivers. English Courts have the power to appoint interim receivers in support of insolvency proceedings or in support of arbitration/litigation where it is necessary to protect the debtor’s property pending the substantive hearing in the arbitration/litigation or the hearing of the winding-up petition against the debtor.
This article will first outline the statutory basis for appointment of interim receivers, and then provide examples of cases and factual scenarios where interim receivers were appointed by the Court.
Statutory Basis
The jurisdiction of the English Court to appoint an interim receiver is conferred by section 37(1) of the Senior Courts Act 1981, which states:
"The High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so".
This is the provision normally relied upon where a receiver is appointed in support of arbitration or litigation proceedings – which may not be concerned with the debtor’s insolvency.
Additionally, in the context of insolvency, Section 286 of the Insolvency Act 1986 states the following:
“286.— Power to appoint interim receiver.
(1) The court may, if it is shown to be necessary for the protection of the debtor's property, at any time after the presentation of a bankruptcy petition and before making a bankruptcy order, appoint the official receiver [or an insolvency practitioner] to be interim receiver of the debtor's property.
[…] (Repealed)
(3) The court may by an order appointing any person to be an interim receiver direct that his powers shall be limited or restricted in any respect; but, save as so directed, an interim receiver has, in relation to the debtor's property, all the rights, powers, duties and immunities [given by] the next section.
(4) An order of the court appointing any person to be an interim receiver shall require that person to take immediate possession of the debtor's property or, as the case may be, the part of it to which his powers as interim receiver are limited.
(5) Where an interim receiver has been appointed, the debtor shall give him such inventory of his property and such other information, and shall attend on the interim receiver at such times, as the latter may for the purpose of carrying out his functions under this section reasonably require.
(6) Where an interim receiver is appointed, section 285(3) applies for the period between the appointment and the making of a bankruptcy order on the petition, or the dismissal of the petition, as if the appointment were the making of such an order.
(7) A person ceases to be interim receiver of a debtor's property if the bankruptcy petition relating to the debtor is dismissed, if a bankruptcy order is made on the petition or if the court by order otherwise terminates the appointment.
(8) References in this section to the debtor's property are to all his property, whether or not it would be comprised in his estate if he were [made] bankrupt”.
This jurisdiction is discretionary and there are no strict rules as to when the Court will appoint a receiver. While there is no formal requirement as to who can serve as a receiver, they are typically licensed insolvency practitioners due to their expertise in asset investigation and business management. The specific powers of a receiver are tailored to the case at hand and outlined in the Court Order. These powers can be extended by the Court if deemed insufficient.
The Court’s jurisdiction must be exercised to support a legal or equitable right and must pertain to property that is subject to that right. This principle was affirmed in Britannia Building Society v Crammer [1997] B.P.I.R. 596, where the Court emphasised that jurisdiction to appoint a receiver must be exercised in aid of a legal or equitable right and in relation to property subject to that right.
A receiver’s main duty is to collect the property over which they have been appointed. Unlike receivers appointed in respect of a fixed charge, interim receivers are independent officers of the Court and must act impartially, considering the interests of all parties involved, not just the party seeking their appointment.
Rationale for the Appointment of Interim Receiver
Preservation of Property
A receiver may be appointed to preserve property from imminent danger, such as dissipation of assets.
For example, in JSC BTA Bank v Ablyazov [2015] UKSC 64, the Court appointed a receiver because the defendant's disclosure of assets was inadequate, leaving the judge unable to trust the defendant to comply with a freezing order.
The Court will not appoint a receiver if doing so would secure no legitimate advantage for the applicant, unfairly prefer one creditor over another, or if the property is incapable of beneficial realisation, as established in J Walls Ltd v Legge [1923] 2 K.B. 240 (CA).
Jeopardy to Security
The Court may appoint a receiver when the mortgage or other security is in jeopardy, as seen in Cryne v Barclays Bank Plc [1987] B.C.L.C. 548 (CA).
In London Pressed Hinge Co Ltd, Re [1905] 1 Ch. 576, a receiver was appointed to protect assets from execution by a judgment creditor. A receiver may be appointed by a Court merely on the basis of arrears of interest, without the principal being due.
The jeopardy principle also applies when companies with floating charges over their business propose to dispose of the business or wind up. In such scenarios, a receiver can be appointed under a floating charge even before a fixed repayment date if a resolution is passed to wind up the company and its assets are transferred to a new entity, as in Wallace v Universal Automatic Machines Co [1894] 2 Ch. 547 (CA).
Disputes and Deadlock
Receivers may be appointed to manage businesses where there is a dispute or deadlock among owners or directors, such as in the Libyan Investment Authority v Goldman Sachs International [2016] EWHC 2530 (Ch), where a receiver was appointed to manage claims amid conflicting instructions from disputing factions within the company.
Risk of Asset Dissipation
The risk of asset dissipation often forms the basis of an application for the appointment of a receiver. This need may arise to preserve assets in a company subject to an unfair prejudice petition under s.996 of the Companies Act 2006, or in support of Mareva orders (asset-freezing injunctions).
Both Mareva orders and receivership orders can disregard the corporate entity of offshore companies to reach real assets involved in "judgment-proofing" operations, as demonstrated in International Credit and Investment Co (Overseas) Ltd v Adham [1998] B.C.C. 134, where Robert Walker J addressed the shifting of assets between entities to avoid judgment enforcement. Here, the Court disregarded the corporate entity of offshore companies to reach the real assets, emphasising the possible use of receivership orders to combat judgment-proofing operations.
In BCCI SA v BRS Kumar Bros Ltd [1994] 1 B.C.L.C. 211, the Court appointed a receiver for the transferee company. The plaintiff held a debenture secured by fixed and floating charges over BRS’s assets. The liquidators applied for a receiver for BRS International Ltd, where assets were transferred without clear authority. Mervyn Davies J justified the appointment on two grounds: either International was a nominee of BRS, or the transfer of assets and cessation of business crystallised the charge, with International taking the assets subject to the charge.
Overlaps and differences between the roles of interim receivers and provisional liquidators
There is a substantial overlap between the powers and the roles of interim receivers and provisional liquidators. They are both officers of the Court (save in cases where interim receivers are appointed pursuant to contractual documents). They can both take control of the debtor company/assets so as to preserve them pending the final resolution of the substantive dispute/winding-up petition. They can both conduct investigations / make inquiries about the asset position of the debtor company. Appointment of both can have the effect of terminating the directors’ powers.
Some of the differences between the appointments of interim receivers and provisional liquidators are as follows:
- While receivers may be appointed under contracts/security documents, provisional liquidators cannot be. They can only be appointed by Courts.
- While receivers may be appointed outside of the context of winding-up proceedings, to preserve assets in issue in arbitration or litigation, or a contractual security, provisional liquidators can only be appointed after the presentation of a winding-up petition.
- While English Courts only have jurisdiction to appoint provisional liquidators over English companies, interim receivership is a personal remedy and can thus potentially cover foreign companies and foreign assets.
Conclusion
Interim receivership is an important interim measure in the arsenal of English Courts. It has the potential to block the business of the target company and deprive its directors of most of their powers. It enables the interim receiver to take possession of assets subject to the order/security agreed by the parties and preserve assets pending resolution of the parties’ substantive dispute/winding-up petition.
The test for the appointment of an interim receiver is that it is “just and convenient” to do so. However English case law suggests that the main scenarios where interim receivers are appointed are where it is necessary to preserve security or other property, prevent dissipation of assets, or resolve a deadlock within the company.
Similarly to the worldwide freezing injunctions and orders for appointment of provisional liquidators, interim receivers can be appointed ex-parte, i.e. without notifying the respondent in advance, and on an urgent basis, within several hours or days of an application.
Fortior Law is a dynamic and growing international dispute resolution practice. Our London office is able to assist clients in their applications to appoint interim receivers or to resist the appointment of interim receivers by their opponents. Our Nicosia office also has substantial experience in appointment/resisting the appointment of interim receivers in Cyprus, which operates under similar principles to those described above. For more information, reach out to your contact at Fortior, to [email protected] for English matters, or to [email protected] for Cypriot matters.
