Bankruptcy Alternatives: What Is a Receivership?

Outstanding debt leads many businesses to seek protection from the bankruptcy courts, but there may be another option: receivership. Receivership is an opportunity for businesses to manage the outstanding debt from unsecured creditors and secured creditors while improving how company assets are handled. In this article, you’ll learn more about the appointment of a receiver, what an administrative receivership is, what happens during a court-ordered receivership, how a receivership can benefit a business, and the difference between receivership and liquidation. 

The Appointment of a Receiver

The appointment of a receiver is similar to appointing a trustee, and receivership is technically a form of corporate bankruptcy. Receivership proceedings take less time, paperwork, and court appearances than both Chapter 11 and Chapter 13 bankruptcies. They are also less expensive. 

After the appointment of a receiver, unsecured creditors and secured creditors are notified that the receiver was appointed. The receiver is the individual who will interact with the creditors as well as monitor the daily operations, review the financial records of the business (including loan documents), and act on behalf of the business to help restructure the business and pay outstanding debts. 

What Is an Administrative Receivership? 

An administrative receivership occurs when a court appointed receiver begins to act on behalf of a company. Court appointed receivers are generally lawyers who oversee the receivership process. They may even be appointed during the Chapter 11 bankruptcy process. 

Administrative agencies tasked with overseeing certain industries may also appoint administrative receivers in certain instances. For example, if the insurance commissioner determined that an insurance company conducting business within the state needed direct supervision, the commissioner could apply for a court order for an administrative receiver to be placed within that insurance company, to assist with the managing of that company in an effort to protect the public. 

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What Happens During a Court-Ordered Receivership?

During a court-ordered receivership, the receiver takes control of the operations, real property, company assets, and accounts of the business. During the receivership, various audits take place. The receiver determines the best plans to improve the financial well-being of the business, avoid bankruptcy, or, if necessary, liquidate. 

The receiver works with both unsecured creditors and secured creditors to develop a plan to pay outstanding debt. When real property sales, liquidation, and reporting takes place by court appointed receivers, this information is provided to the bankruptcy courts or to the court that appointed them to act on behalf of the company. 

How Can Receivership Benefit a Business? 

Receivership can benefit a business in several ways. 

  • A third-party is appointed as the receiver. The benefit of a third-party appointment of a receiver is in their neutrality. Their goal is to take control of company assets and determine the best way to negotiate repayment terms on outstanding debt with creditors and determine the best course of action to make the business profitable. 

  • Receivers have more options than bankruptcy trustees. Receiverships aren’t as bogged down by federal regulations as a business would be if they filed for Chapter 11 or Chapter 13 bankruptcy. They can look at opportunities to “rehabilitate” the finances and assets by working with creditors to establish a repayment plan. This could lead to the business becoming profitable again. The receiver could liquidate the assets if it becomes necessary to pay off all or some outstanding debts. The receiver could arrange for the sale of company assets to pay off some or all unsecured creditors and secured creditors. 

  • As an alternative to bankruptcy, creditors may view the receivership more favorably, depending on the totality of the circumstances. 

Determining how to proceed during the receivership depends on the financial health of the business as well as other factors. 

What Is the Difference Between Receivership and Liquidation? 

Receivership is an alternative to bankruptcy that helps a business deal with its outstanding debt.

Receivership involves appointing a neutral third-party who takes control of company assets to assist the business in hopefully becoming more profitable or, at least, repaying some or all of their outstanding debt.

Receivership could involve liquidation, but it doesn’t necessarily include it. 

Liquidation refers to taking all of the assets of the business and selling them off. The money received from the assets is split between the unsecured creditors and secured creditors to pay off some or all of the outstanding debt of the business. It may be part of receivership, but it isn’t always used as part of a receivership plan. 

Learn More About Receivership and Bankruptcy Options

Businesses have options when they need to address their outstanding debt and reorganize. To learn more about receivership proceedings, the appointment of a receiver, or bankruptcy, the Law Offices of B. David Sisson provides free consultations. Schedule yours today and learn how your business may be able to keep its doors open.