LPA Receivers - an efficient means for a lender to enforce against defaulting creditors 

In the right circumstances and providing the documentation is correctly worded, the LPA Receiver can be a low cost and efficient means for a lender to enforce against defaulting creditors. Either Administrative Receivership (in the limited circumstances where this is now possible) or Administration, the regime introduced by the Enterprise Act 2002, can however sometimes be the better choice.

The power to appoint LPA Receivers is given by the Law of Property Act 1925, once the Power of Sale has arisen under a fixed charge (as provided for in that Act) , and provided none of the exceptions provided for in s.103 of that Act apply. The primary power given to an LPA receiver is to claim income from a “Property” and distribute it in accordance with the guidelines given in the Act. They can also “distrain” for such income if it is not received, and have the power to sell the Property mortgaged by the charge which appoints them These powers can be and generally are varied and amplified by the provisions of the charge documentation. If the remuneration of an LPA receiver is not specified or agreed between the lender and the receiver it is payable at 5%, which is to put it mildly high by today’s standards. An LPA receiver is not required to be a Licensed Insolvency Practitioner (because they’re not governed by the 1986 Insolvency Act). They’re usually in fact surveyors.

The powers and “identity” of an LPA receiver fit most comfortably with enforcement against real property. This can be freehold or leasehold. A separate Property mortgage is not always required since “standard” Debentures will create a fixed charge even over leases which could not be assigned for a premium(although appointment in such cases has problems as to which see below).Property Investors, and the property of a Holding Company where the trading subsidiary holds a lease are both very suitable prima facie targets for LPA receivership. A moratorium on a Companies debts will prevent the subsequent appointment of an Administrative Receiver, but not (at least in principle) the appointment of an LPA Receiver as long as the leave of the Court is obtained. LPA receivership in the right circumstances can therefore be very effective if the prospects of full recovery are good and wider business considerations do not persuade against it.It is not however, a “cure all”, and in a depressed Property Market there also potentially negative equity problems, and cashflow lacunae to contend with.

Administrative Receivership is available to an enforcing lender in respect of security documentation executed before 15 September 2003, and in certain limited circumstances after that date. The Powers of an Administrative Receiver are well known and therefore less liable to be disputed or challenged in the courts than those of a LPA receiver. Administrative Receivers can deal with property of all sorts even if it is only subject to a floating charge, and they can sell a business as a going concern, preserving where applicable and possible the employment status of the staff of that business, which will have favourable reputational consequences. Administrative Receivers have to be Licensed Insolvency Practitioners, so their appointment brings into play for the lender the Receiver’s experience and knowledge (not to mention their indemnity insurance ! )

Administration, which is supposed to lead to the rescue of a failing business(although in practice this rarely seems to happen and Administration is usually followed by Liquidation) has some advantages over Receivership of either kind. The concept was introduced by the 2002 Enterprise Act to bring the UK into conformity with other EU states, and therefore Administration, unlike either form of Receivership is recognised internationally, which can be important if there is a cross border dimension. Also, if a debtor’s premises are leasehold, the appointment of either type of Receiver will generally entitle a lessor to forfeit the lease (although in a depressed Commercial Property Market this is perhaps something they’re less likely to want to do)The appointment of an Administrator however will prevent the lease being forfeited without the Administrator’s consent.

There are a number of options available to an enforcing secured creditor, each of them with advantages and disadvantages, but LPA Receivership in the right situation is rather like an antique revolver. It looks a bit dated and quaint compared with modern weapons, but it can still make a good job of killing you, and in a challenging environment where creative thinking is required, it is well worth bearing in mind.

For more information, contact Paul Goss at DMH Stallard, on paul.goss@dmhstallard.com