What is a Receivership?
November 15th, 2018
No business owner or entrepreneur ever starts a business with failure in mind, however, it is inevitable that some proportion of businesses will not break even, or not have the hoped-for success. Where a business cannot pay its debts, or is otherwise in a financially dire situation, there are various options available, including a receivership.
How Does a Receivership Differ from a Bankruptcy?
There are important differences between receiverships and other debt solutions, such as bankruptcy.
Bankruptcy is an option where a business cannot pay its debts and must be discharged from a majority of them.
Bankruptcy is governed by a highly technical legal regime and overseen by the Bankruptcy Court. It can be initiated either voluntarily (i.e. at the request of the business/business owner) or involuntarily (i.e. where a business is requested to go into bankruptcy by creditors rather than at the request of the business/business owner.
Once a bankruptcy is commenced, a court-appointed Trustee will take over to operate, sell, or liquidate the business and the business will no longer be in control of its assets. The Trustee has a responsibility to obtain the optimal terms for the creditors. The Trustee will report back to the court at the end of the bankruptcy process. The business will be discharged of the bankruptcy (either with conditions or without).
Unlike a bankruptcy, where a receivership is never voluntary.
Unlike a bankruptcy which can be initiated voluntarily, a receivership can never be voluntary. Rather, the process begins with the appointment of a Receiver either by a secured creditor under a security agreement (called a Privately Appointed Receivership) or by the court on behalf of a secured creditor (called a Court Appointed Receivership).
Receivership and bankruptcy are not mutually exclusive: they can occur concurrently, or a receivership can occur without a company being bankrupt. The same firm or company may act as Trustee and Receiver, but different firms are generally appointed to carry out these roles.
A Receiver is generally an independent third party (e.g. an accounting firm). The Receiver must be licensed as a Licensed Insolvency Trustee by the Office of Superintendent of Bankruptcy. There are four types of Receivers: private, interim, provincial, and national. In a Receivership, a Receiver-Manager may also be appointed to operate and manage the business until it is sold.
The receiver has the power to:
- take control of the business assets (including inventory, accounts receivable, or other property);
- determine what is to be done (sale of business, orderly wind-down, liquidation); and
- ultimately distribute funds/remit the proceeds to the creditors.
If you require legal assistance and representation resulting from an outstanding debt matter, contact Financial Litigation. We are always responsive, anytime you need us and will act quickly to review your matter and take any necessary steps to protect your rights and help your business.
Eli Karp is an experienced commercial litigator who focuses on the financial elements of legal disputes. Eli continually strives to minimize the impact of commercial disputes on his client’s financial security, and resolve litigation as quickly as possible, so clients can get back on their feet. We are available seven days a week to discuss strategy and answer questions, so clients know their matter is in good hands. Schedule your consultation online, or by calling us at 416-769-4107 x1.