A receiver takes control of a company’s property on the say-so of one creditor, without any Court order or vote. Section 256 of the Companies Act 1997 is the safeguard: it insists the appointee be genuinely independent.
Section 256(1) — the disqualifications
(a) a person under 18 years of age;
(b) a mortgagee of the property in receivership;
(c) a person who is, or who within the two years immediately preceding the commencement of the receivership has been, (i) a director of the company, or (ii) a director of the mortgagee of the property in receivership;
(d) a person who has, or who has had within the two years preceding the commencement of the receivership, an interest, direct or indirect, in (i) a share issued by the company, or (ii) 5% or more of any class of shares issued by the mortgagee;
(e) an undischarged bankrupt;
(f) a person of unsound mind or otherwise incapable of managing his own affairs;
(g) a person in respect of whom an order has been made under section 334(5) — removal of a liquidator;
(h) a person in respect of whom an order has been made under section 286(6) — a prohibition order against a receiver;
(i) a person who would be prohibited under section 142 of the repealed Act, but for its repeal;
(j) a person prohibited from being a director or promoter of, or being concerned or taking part in the management of, a company under section 425, 426 or 428;
(k) a person disqualified by the instrument that confers the power to appoint a receiver.
A body corporate shall not be appointed or act as a receiver. The office must be held by a natural person. An accounting firm is appointed by naming its principals, not the firm.
Under section 256(3), a person who contravenes subsection (1) or (2) commits an offence and is liable on conviction to the penalty in section 413(2).
What each ground is doing
| Ground | The concern |
|---|---|
| (b) the mortgagee itself | The appointor cannot be its own receiver. A chargeholder who wants to act personally must enter into possession as mortgagee instead — and, under section 254, is then outside Part XVII altogether |
| (c) recent directors | A receiver must be able to scrutinise the company’s affairs and, under section 277, report offences and breaches of duty to the Registrar. A person who was on the board cannot do that dispassionately |
| (c)(ii) and (d)(ii) the mortgagee’s side | The receiver owes duties under sections 268(3) and 269 to the company, unsecured creditors and sureties — not only to the bank. Too close a connection with the bank compromises those duties |
| (d)(i) any share in the company | Note there is no threshold. One share in the company, direct or indirect, held at any time in the two years, disqualifies |
| (e) to (j) | Personal fitness — bankruptcy, incapacity, and past removal or prohibition as a receiver, liquidator or director |
| (k) the instrument’s own bar | The security document may add its own restrictions, and they bind |
Every ground in subsection (1) yields to a Court order. Section 286(5)(b) makes the point expressly: the Court may order that a person may be appointed and act, or may continue to act, as a receiver notwithstanding the provisions of section 256.
That is a practical necessity in a small market where the pool of qualified insolvency practitioners is limited, and where the obvious candidate may have had some past connection with the company or its bank. But it requires an application and an order — not simply the consent of the parties.
Subsection (2), by contrast, admits no such override in its own terms: a body corporate shall not be appointed or act.
Section 261 — when the office becomes vacant
The office of receiver becomes vacant if the person holding office resigns, dies, or becomes disqualified under section 256.
Disqualification is therefore not merely a bar to appointment. A receiver who becomes bankrupt, or who is made subject to a prohibition order, vacates office automatically.
(2) A receiver may resign by giving not less than 14 days written notice of the intention to resign to the person by whom the receiver was appointed.
(5) A receiver appointed by the Court may resign by submitting not less than 14 days notice to the Registrar of the Court that made the appointment.
(3) Where the vacancy arises from disqualification, the person shall forthwith give written notice of the vacancy to the appointor.
(4) Where the vacancy arises from resignation or disqualification, the person shall, within 14 days, submit written notice in the prescribed form to the Registrar.
(8) Failure to comply with subsection (3) or (4) is an offence, penalty under section 413(1).
A person vacating office shall, where practicable, provide such information and give such assistance in the conduct of the receivership to his successor as that person reasonably requires.
And on the application of the person appointed to fill the vacancy, the Court may make any order it considers necessary or desirable to facilitate the performance of the receiver’s duties. A new receiver who cannot get records or information from the outgoing one has a direct remedy.
Note that section 261 does not deal with removal. That is done under section 286(5), where the Court may remove a receiver who fails to comply with an order to comply or who becomes disqualified — or under section 284, where the Court may order that a receiver cease to act because the purpose of the receivership has been satisfied or circumstances no longer justify it.
Filling the vacancy
Under section 258(1)(c), unless the deed or agreement expressly provides otherwise, the power to appoint a receiver includes the power to appoint a receiver to succeed a receiver whose office has become vacant. So the appointor need not return to Court, and the security need not contain a special replacement clause.
A replacement receiver must give the section 259 notices within seven days — to the company, by public notice, and to the Registrar — and under section 259(2) every notice shall state that the appointment is in addition to, or in place of, an earlier receiver.
The section 273 two-month first report obligation also runs afresh from the new appointment.
Before making an appointment
- Confirm the candidate is a natural person — section 256(2).
- Run the two-year look-back over directorships of the company and of the appointor, and over any shareholding in the company or 5% holding in the appointor.
- Check the public registers for prohibition orders — section 286(9) requires an order under section 286(6) to be kept on a public register indexed by the name of the receiver, and section 426 orders are similarly recorded.
- Read the security document for a section 256(1)(k) disqualification.
- Seek a Court order under section 286(5)(b) in advance if any ground applies but the appointment is nonetheless appropriate.
- Take the appointee’s written confirmation that none of the grounds applies — contravention is an offence committed by the receiver personally.
Sources
- Companies Act 1997 — ss 254, 256, 258, 259, 261, 268, 269, 273, 277, 284, 286, 334, 413, 425, 426, 428
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.