how receiverships work
a receivership is generally a process that s put into place to protect a company a period of receivership can be thought of as a protective umbrella for a troubled company a receiver or trustee steps in to manage the entire company its assets and all financial and operating decisions during this time the company s principals remain in place as material contributors while the receivership is operative but their authority is limited a receivership was traditionally intended to help creditors recover amounts outstanding under a secured loan if a borrower defaulted on its loan payments receiverships are one of the most powerful solutions available to aid creditors they re also used by companies in financial distress they can be part of a company s restructuring process a receivership can help when a company makes significant changes to its financial or operational structure typically while under financial duress a receivership can be used when a company is headed toward bankruptcy a receivership itself isn t a legal process but it s 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 the lender they can never act for the benefit of one party and to the detriment of another 1receivership and bankruptcy aren t 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 receiverthe appointed receiver generally has ultimate decision making power over the company s assets and management decisions in the case of a restructuring 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 to pay some creditors and to bring the company into a period of recovery the court may order that a company s assets be liquidated if these efforts fail to achieve the purpose of the receivership or be seen as insufficient from the start a liquidator would oversee the sale of assets and collect the funds to repay creditors in this case the company would cease to exist when the assets are all sold bankruptcy vs receivership how are they different confusion over the terms bankruptcy and receivership is quite common but 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 might file for chapter 11 bankruptcy when it wants time to solve its financial problems while maintaining business operations 2 it s generally for the purpose of liquidating and closing a business when a company files for chapter 7 bankruptcy 3there are other forms of bankruptcies but these two are the most common unlike bankruptcy a receivership isn t a legal action but rather an adjunct solution 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 or cash an independent party is put in charge of the assets and remains in possession and control of them until discharged by the court 