Receivership is a complicated process which applies to a number of different fields. It can apply to banks, financial institutions, and basically any business which is capable of taking out a loan. When a business is put into receivership it means that the business has come into severe financial difficulties and most other avenues have been exhausted. But what happens during receivership and what does it mean for a business?
What is Receivership?
If a company defaults on its loans then the lender will first try and find other ways of recovering their money. In the case of a secured business loan this may mean repossession, but if it’s an unsecured business loan then there are very few methods which creditors can use to recover their money. At this point the civil court may then receive a claim against the debtor at the hands of the lender. The company will then either have to pay the remaining balance or file for receivership or bankruptcy.
Receivership differs from bankruptcy because receivership won’t give a company any bad credit because it doesn’t have to be reported. This process is also less tight in its regulation so creditors have much more freedom when it comes to recovering their money. When receivership applies the creditor will be able to sell the company’s assets to recover their money or may even use the bulk of a company’s profits to pay off the outstanding balance.
What are the Duties of a Receiver?
The duties of a receiver can be summarized in three basic points. The receiver has a duty to:
- Realize the assets of the company in order to pay back the outstanding balance.
- Secure the assets of the company in order to pay back the outstanding balance.
- Manage the company in order to pay back the outstanding balance; however, it should be noted that this applies less to liquidation receivership.
Two Types of Receivership
When it comes to the process of receivership there are two types which may be chosen if a loan is defaulted upon.
The first type of receivership is known as liquidation. This is where a court-ordered receiver will survey a company’s assets to assess their value. The assets will then be sold in order to pay back the creditor. Assets which can be sold can include anything from property, company vehicles, and even interior furniture.
The second type of receivership is where an operating receiver is given control of the business. This operating receiver will then seek to make the company as profitable as possible in order to pay back the outstanding debts of the company. In situations like this, the majority, if not all, of the company’s profits will go to paying off debts. Although this may seem like a bad idea, this is the most efficient way to pay the company’s creditor(s) because it won’t put people off the company as the process of receivership is not publicly acknowledged.
How Does Bankruptcy Differ?
The main differences between bankruptcy and receivership is the fact that receivership is never acknowledged to the public, which ultimately means that the market value of the company won’t be affected if it goes into receivership. This is different from bankruptcy because when a company goes into bankruptcy it has to be publicly acknowledged, which means that shareholders are content to dump all of their shares and cut their losses.
In the case of the selling of assets during the bankruptcy process, the assets which can be sold are designated by both state and federal bankruptcy laws. With receivership there is much more freedom because any asset can be sold here. Remember, the process of receivership is practically the taking over of a company by a designated individual.
What about the Employees?
When an employee is working for a company which has gone into receivership, there is considerable uncertainty when it comes to job security. There is no straight answer to whether the employees will keep their jobs or not because this depends entirely on the type of receivership used.
There are two major scenarios which could arise when it comes to the employees, though.
The first scenario is where a company may be valued at $10 million with debts of $8 million. In this case, the receiver may decide that it’s more prudent to sell the company’s assets. This would recover the entire debt, but a lot of employees would have to be laid off because without assets there is no work. This doesn’t mean all the employees would be fired, but the majority certainly would be.
However, if a company was valued at $10 million and it had debts of $1 million then it would likely be a better idea to simply take control of the company and direct the profits back to the creditor, which means that the employees would keep their jobs. But receivership is a tricky business as it relies entirely on the personal situation of the company, so there’s no definitive answer which can be given.