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 avoid bankruptcy. Having a receivership in place makes it easier for a lender to recover 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—this process is initiated in order to return a company to profitability. A receivership could also arise during a shareholder dispute to complete a project, liquidate assets, or sell a business, for example.

Key Takeaways

  • A receivership is a court-appointed 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 they have little authority over the company).

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.

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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 tools available to protect creditors.

Receiverships are also used by companies that are in financial distress; they can occur as part of a company's restructuring process (when a company makes significant changes to its financial or operational structure, typically while under financial duress) or when a company is headed toward bankruptcy.

A receivership itself is not a legal process, but it is usually is 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, 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 still maximizing profits).

The receiver customarily works with the company to help avoid bankruptcy and complete aliquidation of all assets. However, 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—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.

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.