What Is a Receivership?
A receivership is a court-appointed tool that can assist creditors in recovering funds in default and can help troubled companies avoid bankruptcy. Having a receivership in place makes it easier for a lender to obtain the funds that are owed to them if a borrower defaults on a loan.
A receivership may also occur as a step in a company's restructuring process that is initiated to return a company to profitability.
Moreover, a receivership could arise as a result of a shareholder dispute over completing a project, liquidating assets, or selling a business.
- A receivership is a court-appointed tool that can help creditors to recover funds they're owed.
- It 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) to manage all aspects of a troubled company's business.
- For the duration of a receivership, the company's principals remain in place (but they have little authority over the company).
How Court-Appointed Receiverships Work
How Receiverships Work
In general, a receivership is a process that is put in place to protect a company. A period of receivership may be thought of as a protective umbrella for a troubled company. During this time, 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.
Traditionally, a receivership was intended to help creditors recover amounts outstanding under a secured loan in the event that a borrower defaulted on its loan payments. Receiverships are one of the most powerful solutions available to aid creditors.
Receiverships are also used by companies that are in financial distress. They can be used as part of a company's restructuring process. For example, a receivership can help when a company makes significant changes to its financial or operational structure, typically while under financial duress. Or, a receivership can be used when a company is headed toward bankruptcy.
A receivership itself is not a legal process, but it is usually invoked during legal proceedings. Either the secured creditor (lender) or a court of law appoints 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. 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. They can never act for the benefit of one party and to the detriment of another.
Receivership and bankruptcy are not the same, but neither are they mutually exclusive. They can occur at the same time. Or, a receivership can occur without a company declaring bankruptcy.
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. This includes the authority to stop paying dividends or applicable interest payments. The receiver also ensures that all company operations comply with government standards and regulations, while still maximizing profits.
The receiver customarily works with the company to help avoid bankruptcy. A receiver may choose to shed select assets for the purpose of paying some creditors and to bring the company into a period of recovery.
Should these efforts fail to achieve the purpose of the receivership—or be seen as insufficient from the start—the court may order that a company's assets 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 would cease to exist.
Bankruptcy vs. Receivership: How Are They Different?
Confusion over the terms bankruptcy and receivership is quite common. The fundamental differences are fairly straightforward.
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 shielding 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.
Unlike bankruptcy, a receivership is not a legal action, but rather an adjunct solution. For example, in the case of a secured lender, a receivership is designed to protect the borrower's assets that represent the loan during an interim period until the creditor's claim is resolved by a court.
The secured lender asks the court to protect its security (collateral)—land, buildings, business income, cash, or the like. An independent party is put in charge of the assets and remains in possession and control of them until discharged by the court.
What Are Some Benefits of Receivership?
There can be benefits for creditors as well as a company. Creditors can ensure that the assets that secure the loans they made to a company remain protected and of value until their claims are handled successfully. A business can get a neutral, objective professional to oversee problems that may concern management, operations, financials, and more. The receiver can help position the company to thrive once the term of receivership ends.
Who Requests a Receivership?
A secured creditor can request a receivership as a way to obtain funds or protect a borrower's assets until a court resolves the creditor's claim against the borrower.
How Long Does a Receivership Last?
Perhaps anywhere from a few months to several years. It depends on the reason it is implemented in the first place. A receivership put into place to help resolve the claim of one creditor could last less time than one used to remedy a company's ills so that the company can avoid bankruptcy.
The Bottom Line
Receivership is a court-appointed remedy that may be used to assist creditors in recovering funds due them when a company is unable to make payments on a loan. It can keep a company out of bankruptcy as it restructures due to financial hardship.
Receivership is not bankruptcy. It is considered a temporary phase of needed oversight by a trustee until a company resolves claims against it by lenders and/or regains its financial footing.