Receivership

3 key takeaways

• Receivership involves appointing a receiver to manage a company’s assets and operations to repay creditors.
• The receiver’s primary duty is to recover and sell the company’s assets to pay off its debts.
• Receivership can be initiated by secured creditors to protect their interests when a company is insolvent.

What is receivership?

Receivership is a remedy available to secured creditors when a company is unable to meet its debt obligations. In this process, a receiver is appointed either by a court or by a secured creditor to take control of the company’s assets and manage its operations.

The primary goal of the receiver is to recover and sell the company’s assets to repay the creditors.

When a company enters receivership, the receiver takes over the management of the company. This can include selling assets, restructuring the business, or even continuing operations if it is deemed beneficial for maximizing the return to creditors.

The receiver acts in the best interests of the creditors, ensuring that their claims are addressed before any other obligations.

How does receivership work?

The process of receivership typically involves the following steps:

1. Appointment of a receiver: A secured creditor or a court appoints a receiver when a company defaults on its debt obligations. The receiver can be an individual or a firm with expertise in insolvency and restructuring.
2. Taking control of assets: The receiver takes possession of the company’s assets, which are usually specified in the security agreement. This can include real estate, equipment, inventory, and other valuable properties.
3. Managing operations: The receiver may choose to continue the company’s operations if it is likely to increase the value of the assets. Alternatively, the receiver might cease operations to prepare for asset liquidation.
4. Selling assets: The receiver sells the company’s assets to repay the secured creditors. This process must maximize the creditors’ return.
5. Distributing proceeds: The proceeds from the asset sales are distributed to the secured creditors. Any remaining funds may be distributed to unsecured creditors if possible.

Consequences of receivership

Receivership has several significant impacts on a company:

• Loss of control: The company’s management loses control over the business, as the receiver takes charge of decision-making.
• Asset liquidation: The company’s assets may be sold off to repay debts, which can lead to the closure of the business.
• Creditor priority: Secured creditors have priority over unsecured creditors in the repayment process. Unsecured creditors may receive little to no repayment if the company’s assets are insufficient.

Receivership is often seen as a last resort for creditors to recover their investments. It can provide a structured and legal means to manage the liquidation of assets and repayment of debts, ensuring that secured creditors’ interests are protected.

Understanding receivership is crucial for businesses and creditors. It outlines the procedures and implications of appointing a receiver to manage and liquidate assets to settle outstanding debts.