Receivership

Last Updated :

21 Aug, 2024

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Dheeraj Vaidya

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Receivership Meaning

Receivership is a process through which a secured creditor (such as banks) or the court takes over a financially unstable company. In such situations, an independent and suitably qualified person (the receiver) takes control of some or all of a firm's assets to protect creditors' interests and recover outstanding debt.

Receivership

The main goal of initiating this process is to preserve assets for a time frame that allows for an orderly liquidation. As a result, the process attempts to ensure an equitable distribution of the liquid assets that arise. It is a remedy for secured creditors to recover outstanding secured loans due to default loan payments by the company.

  • Receivership is a process through which a secured creditor or the court takes over a financially unstable company. In such situations, an independent and suitably qualified person (the receiver) takes control of some or all of a firm's assets to safeguard creditors.
  • It is carried out to collect and safeguard particular assets and distribute resources in accordance with applicable legislation. The main goal is to preserve the assets until they decide who should receive them.
  • The length of the underlying case determines the length of the process. The court makes payments to the receiver from the company's assets.

Receivership Explained

Receivership refers to the procedure for appointing a person who is known as the receiver in the legal system. It is carried out to collect and safeguard particular assets and distribute resources in accordance with applicable legislation. The main goal may be to preserve the assets until a decision regarding who should receive them is made. It may also liquidate the assets and distribute the proceeds to the legally entitled parties. A court or a secured creditor may appoint the receiver.

A secured creditor is a party with a "charge," such as a mortgage, over all or a portion of the company's assets to recover a debt the company owes. Lenders typically want a charge over the organization's assets when they offer a loan. The security, or fee, held could include:

  1. A floating charge over assets that are utilized and disposed of during regular business operations, such as debtors, cash, and stock or
  2. A fixed charge over certain assets such as land, plant, and other equipment.

The official receivership process in a nutshell:

  1. The receiver takes control of the company's assets and documents.
  2. The receiver will put policies and processes in place to protect assets and evaluate claims.
  3. The receiver will next present their recommendations to the judge regarding what should be done with the recovered assets.
  4. The idea will then be made known to the public, giving everyone impacted a chance to disagree.
  5. The judge will consider the plan and objections before deciding on the assets.

Examples

Let us look into a few examples of receivership:

Example #1

Imagine a clothing store, ABC, experiencing financial challenges. The bank initiates receivership to recover its outstanding loan. The bank appoints a receiver to manage ABC’s assets. During this process, the store continues its operations under the receiver's supervision. The receiver works to settle the debts with the bank. After settling the debts, the receiver's responsibilities come to an end, and ABC regains command of its operations.

Example #2

A website called "ZeekRewards.com" has raised around $600 million since 2011. The investors were allegedly promised up to 50% of the company's daily net profits through a profit-sharing system. However, the reality was different; their payouts were from the funds received from new investors, akin to the Ponzi scheme. The situation was brought to the attention of the SEC, and the company was charged with fraud and an Official receivership was initiated.

In this situation, the court appointed a receiver (Kenneth Bell) to bring the situation under control. The receiver would obtain control of the assets, preserve them, and, after analyzing them, draw conclusions about what has to be done with the recovered assets. The proposal will be made public to receive objections, and judges will review the objections and the proposal and decide what to do next. Similar steps were executed as other receipt processes.

Example #3

Another example is associated with Greece. In 2015, the European Union (EU) put forth an option whereby Greece would be placed under receivership directed by the EU. The European Union leaders, in a unanimous agreement, effectively place Greece into receivership under EU direction if the deal is accepted. One of the ideas in the proposal involved creating a trust fund from the proceeds of selling the country's public assets. The amount would then be redirected to repaying the nation's external debts.

Receivership vs Liquidation vs Administration

Here is a comparison between the three:

Key pointsReceivershipLiquidationadministration
MeaningReceivership is a debt recovery process for secured creditors, such as banks.  Liquidation is a process through which the legal existence of a firm is terminated. In these circumstances, the company's assets are sold off, and its liabilities are settled using the proceeds from the sale of those assets or the contributions made by the members. Any surplus, if any, is then given to the members in proportion to their ownership.  Insolvency practitioners are appointed administrators to restructure businesses to make them profitable or sell them to protect value and employment. This process is known as "company administration."
AimThe receiver aims to recover the debts incurred by secured creditors.Liquidators close down businesses and sell off their assets to pay off creditors in order of priority.The administrators' responsibilities are investigating the company's affairs and developing a solution most advantageous for creditors.
InitiationReceivership, however, has to be initiated by an outside entity.  Liquidation can be both voluntary and involuntary.Administration can also be voluntary or involuntary.
Continuity of businessThe business operations may continue.No, the company ceases its business operations.The business operations may continue.

Frequently Asked Questions (FAQs)

1. How long do receiverships last?

 The duration of the process depends on how long the underlying case lasts. Therefore, it might be between a few months and a few years.

2. Is receivership bankruptcy?

Receivership bankruptcy is not a single term but two different concepts. The former is often considered a bankruptcy alternative to avoid bankruptcy. However, they can both occur simultaneously, depending on the circumstances. 

3. In which circumstances can a receiver be removed from a receivership?

The mortgagee and the mortgagor in writing may at any time dismiss a receiver. The court may also remove them upon application from either party with a good reason stated. This may again vary depending on the laws of different nations.

4. Who pays the receiver in receivership?

The court typically uses the receivership estate assets to pay a receiver. The court must receive an itemized account of the receiver's costs and expenses before the receiver can be paid.

This article has been a guide to Receivership and its meaning. Here, we compare it with liquidation and administration and explain its examples. You may also find some useful articles here –