What Is a Receivership?

A receivership is a court-appointed tool that can assist creditors to recover funds in default and can help troubled companies to avoid bankruptcy. In the first instance, having a receivership in place makes it easier for a lender to recover funds due to them when a borrower defaults on a loan. In the second case, a receivership may occur as a step in a company's restructuring process, with the goal of returning the company to profitability. A receivership could also arise during a shareholder dispute to complete a project, liquidate assets, or sell a business, for example.

Receivership and bankruptcy are not the same, nor are they mutually exclusive; they can occur at the same time, or a receivership could occur without a company being bankrupt.

How Receiverships Work

A receivership is a process or a solution that is put in place to protect a company. In its original meaning, a receivership can help creditors to recover amounts outstanding under a secured loan when the borrower defaults on its loan payments. Receiverships are grounded historically in our system of jurisprudence and offer one of the most powerful tools available to protect creditors. However, receiverships are invaluable for managing and preserving assets of all kinds.

Receiverships also can be useful for companies that are in financial distress; they can occur as part of a restructuring or when a company is headed toward bankruptcy. You may think of a period of receivership as a kind of "time out," or protective umbrella, for a troubled company. A "receiver," or trustee, steps in to manage the entire company, its assets, and all financial and operating decisions. While the receivership is operative, the company's principals remain in place as material contributors, but their authority is limited.

A receivership itself is not a legal process, but it is usually is invoked during legal proceedings, with either the secured creditor (lender) or a court of law appointing a receiver to act as trustee of a business. Privately appointed receivers will generally act only on behalf of the secured creditor that appointed them, but court-appointed receivers act on behalf of all creditors.

The receiver must be an independent party, with no prior business relationship to either the borrower or lender, and can never act for the benefit of one party and the detriment of the other.

What Are the Responsibilities of a Receiver?

In the case of a restructuring, the appointed receiver generally has ultimate decision-making power over the company's assets and management decisions, including the authority to stop paying dividends or applicable interest payments. The receiver also ensures that all previous company operations comply with government standards and regulations while maximizing profits.

The receiver customarily works with the company to help avoid bankruptcy and complete liquidation of all assets. However, a receiver may choose to shed select assets for the purpose of paying some creditors and bringing the company into a period of recovery. Should these efforts fail—or be seen as insufficient from the start—the court may order a company's assets to be liquidated. In that case, a liquidator would oversee the sale of assets and collect the funds to repay creditors. When the assets are all sold, the company ceases to exist.

Key Takeaways

  • A receivership is a tool that can assist creditors to recover funds in default and can help troubled companies to avoid bankruptcy.
  • The goal of a receivership is to return companies to profitability.
  • In a receivership, the court appoints an independent "receiver," or trustee, who effectively manages all aspects of a troubled company's business.
  • For the duration of a receivership, the company's principals remain in place but have little authority.

Bankruptcy vs. Receivership: How Are They Different?

Confusion between the terms receivership and bankruptcy is quite common, but the fundamental differences are fairly simple.

Bankruptcy

Bankruptcy is an action that's usually taken to protect a debtor from collection actions by creditors. Bankruptcy courts and rules are primarily aimed at protecting the borrower, not the lender. A company may file for Chapter 11 bankruptcy when it wants time to solve its financial problems while maintaining business operations. On the other hand, when a company files for Chapter 7 bankruptcy, it's generally for the purpose of liquidating and closing a business. There are other forms of bankruptcies, but these two are the most common.

Receivership

Unlike bankruptcy, a receivership is not a legal action, but rather an adjunct solution. In the case of a secured lender, a receivership is designed to protect the lender’s assets during an interim period, for example, while a foreclosure action is pending. In this case, the secured creditor is asking the court to protect its security (collateral)—land, buildings, business income, cash, and the like—until the foreclosure is resolved. An independent party “receives” the assets on behalf of the court and remains in possession and control of those assets until discharged by the court.