ZAMBIA INSTITUTE OF ADVANCED LEGAL EDUCATION

COMPANY LAW AND PROCEDURE

CLASS NOTES FOR STUDENTS ONLY

These notes are strictly meant for students at the Zambia Institute of Advanced Legal Education
 TOPIC 8: RECEIVERSHIP

Introduction
As we saw in Topic 6, most companies do not operate using only equity funding from
shareholders. Borrowing from lenders, and use of credit such as deferred payment for goods
and services, provide additional and important methods of financing corporate activity. The
rights of lenders (banks, lenders, creditors, debenture holders) depend on the precise terms
of their contract with the company. Many lenders of course go to great lengths to secure the
funds lent. As an introduction to receiverships, it would suffice to say that in order to
understand what receivership is, one must understand that the genesis is debt financing.

This Topic provides an overview of how creditors enforce their security in practice and the
role of receivers in this process.

Learning Outcomes

At the end of this topic, you should:

1. Define receivership.
2. Show an appreciation of the process of receivership including commencement and
practice.
3. Give a detailed overview of the role of the receiver.
4. Describe legal provisions on treatment of assets during a receivership.
5. Be able to confidently advise a client on all aspects of receivership.

8.1 Definition of Receivership and Appointment of a Receiver

Receivership is a process in which a creditor assumes ownership of a debtor’s property after

they default on a debt that is secured by a fixed legal charge. Thus, any secured creditor can
appoint a receiver to enforce his security. The appointment is mostly done by the order of
the court but in practice the instrument by which the security is created will confer on the

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holder of the security a power to appoint a receiver without recourse to the court. (See
sections 4, 9 & 10 of the CIA).

Section 5 of the CIA deals with the requirement to give notice to the Registrar. (See
Regulation 2 of SI 41 of 2017 which states what form (Form I) to file in with the Registrar)

A receiver appointed by the court is an officer of the court and is accountable to it, and is
not subject to direction or dictation by the creditor in whose interests he has been appointed
(section 12 of the CIA). A receiver appointed independently (as in under a deed of
appointment) shall be considered an agent of the company and not of the creditor who
appointed him. (Section 13 of the CIA). This agency enables the receiver to enter into
contracts in the company’s name, employ staff etc but ceases if the company goes into
liquidation. From then on he continues to be competent to realise the company’s assets and
preserve those assets but he cannot any longer incur credit in the company’s name or cause
it to incur executory obligations.

8.2 The Role of a Receiver

The primary duty of the receiver is to get in and, as necessary, realise sufficient of the
company’s assets and undertaking to satisfy the outstanding debt of the creditor on whose
behalf he has been appointed. He does not owe duties of a fiduciary nature (in the fullest
sense) to the company or the other creditors, although he may be liable to them if he uses
his powers for an improper purpose. He is under an obligation to keep and produce to the
company proper accounts. A receiver's duty is owed first and foremost to the security-
holder who has appointed him, and the interests of the company, its trade creditors and
any other person concerned can legitimately be subordinated to those of the security-
holder.

It is common for an appointment to be made, not simply of a receiver, but of receiver-

manager-a twin office under which the appointee is empowered to manage the business
and not just get in and sell off its assets. This is done in the hope that the company may be
able to trade its way back to profitability or that it can be sold as a going concern rather

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than on a break up basis and fetch more. Of course, a power to manage the business of a
company can be given to a receiver only if the charge is over the whole of the company’s
undertaking –which means that it must be a floating charge.

The appointment of a receiver and manager puts an end to the directors’ powers to manage
the business, though they will revert once he has discharged his functions, so long as the
business or part of it has survived. But the directors do retain their office and their other
powers and functions.

Cases: Magnum (Zambia) Limited v Basit Quadri (Receivers/Managers) & Grindlays

Bank International Zambia Limited [1981] ZR 141. The court held that a) a receiver who is
an agent of the company under receivership is there to secure the interests of the debenture
holder, and in those circumstances, the company concerned is debarred from instituting
legal proceedings against its receiver/manager; b) a company under receivership has no
locus standi independent of its receiver. As long as a company continues to be subjected to
receivership, it is the receiver alone who can sue or defend in the name of the company.

Goodwell Siamutwa v Southern Province Co-operative Union and another SCZ Appeal
No. 114 of 2002. “It is trite law that a Receiver/ Manager, appointed pursuant to a
debenture, is an agent of the company. The paradox however is that while he is an agent of
the Company, he is appointed to protect the interests of the debenture holder. There is no
doubt therefore that this dual and conflicting loyalty of a Receiver may at times create
untidy and difficult situations.”

Zambezi Portland Cement Limited and another v Stanbic Bank Zambia Limited [2010]
ZR 499, the High Court emphasised the dual role of a receiver as that of being an agent of
both the mortgagor and the mortgagee.

Livingstone Motor Assemblers Limited (in Receivership) v Indeco Estates Estates

Development Limited & Others [2013] ZMSC 1. We agree with the position that during the
receivership of a company in liquidation, the receiver’s administration takes precedence
and a liquidator takes a secondary role regardless as to whether the receiver was appointed

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before or after the commencement of the winding up. The rationale for this is found in the
words of HUBERT PICADA, that “…..the right to appoint a receiver is virtually absolute:
the debenture holders as secured creditors stand outside the liquidation.”

In this case, it is not in dispute that the Bank was a secured creditor. It appointed a receiver
under a legal instrument to recover money loaned to the Appellant; there was a floating
charge on the Appellant’s “….undertaking and all its property whatsoever and wheresoever,
both present and future…” The charge crystallized on all the property of the Appellant when
the Bank sought to enforce the security through the appointment of the receiver. The
receiver therefore, should have had custody and control of all the property comprised in the
charge. It was therefore a misdirection on the part of the Court to have held that the control
of assets of a liquidated company is in the hands of the liquidator and not the receiver. The
receiver is under a duty to perform his function and recover the money for his secured
creditor. If he has a surplus, it is surrendered to the liquidator.

Medforth v Blake [2000] Ch 86 Court of Appeal – a receiver who is appointed to manage

the business of a charger has a duty to do so with due diligence.

8.3 Distribution of Assets subject of the Receivership

If there is more than one charge over the secured assets, then priority as between charges
depends upon section 127 of the CIA of 2017.

If the charge over the secured assets is floating, then various claims rank ahead of the
secured creditor’s claim to have the secured debt repaid. This is one of the disadvantages of
floating charges. The order of payments out of the realisations is as follows:

1. The expenses of winding up (including the remuneration of the liquidator).

2. The expenses of the receiver. The basis is that the person who has produced a fund for
distribution should have the costs of doing so paid in priority.
3. The statutory share of assets for unsecured creditors.
4. The preferential debts.

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5. The debt owed to the charge holder.

By contrast, if the charge over the secured assets is fixed, rather than floating, then the
property cannot be used to pay off the debts (1) (3) and (4). That is why a lot of time is spent
in drafting charges that are classified as fixed rather than floating.

PRESCRIBED FURTHER READING

Gates, Blankfein R. Gates on Understanding Zambian Corporate Insolvency Law. 2019.

See Chapter: “Receivership”.

Sealy, Len and Sarah Worthington. Sealy’s Cases and Materials in Company Law. Oxford
University Press. See Chapter: “Rescue and Insolvency Procedures”. (9th Edition or any
latest edition)

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