Receivership and bankruptcy may seem identical because they often occur at the same time. But they’re not the same. Receivership can be a part of bankruptcy. It can also be a standalone procedure. So what’s the difference?
In this article, we’ll lay out what Receivership is, why and when it occurs, and what happens during the process.
What is Receivership?
Receivership occurs when an individual or a business has secured debt and they are unable to pay. A Receiver is appointed to sell the assets and pay the bills. In the case of a business Receivership, the role of Receiver may also include the right to operate and manage the business as a Receiver-Manager until the business can be sold.
Receivership is done in accordance with Canada’s Bankruptcy and Insolvency Act. A Licensed Insolvency Trustee works on behalf of both the debtor and the lender to ensure the fair treatment of both parties.
What is a Receiver?
There are two types of Receivers: court-appointed and privately-appointed.
In a bankruptcy, if a Receiver is needed, one is court-appointed as part of the bankruptcy process. In fact, the Receiver and the Licensed Insolvency Trustee who manages the bankruptcy could be the same person. It is not unusual, however, to have two different firms involved. In any case, for a Canadian bankruptcy, the Receiver is always a Licensed Insolvency Trustee.
Not all Receivers are court-appointed. In business bankruptcies, there can also be privately-appointed Receivers. They work for the creditor. This type of Receivership has the sole purpose of recovering and liquidating the assets covered by the debt agreement. The role of these privately-appointed Receivers is to recover and liquidate specific assets that were used to secure the debt. A privately-appointed Receiver acts on behalf of the secured creditor that hired them. Receivership can occur even if a company does not go into bankruptcy.
In cases where the Receiver will be appointed over a majority of accounts receivable, inventory and other property, the secured creditor must provide a minimum 10-day notice of intent. During this 10-day period, an interim Receiver may be appointed.
What Type of Debt Does Receivership Cover?
As mentioned, Receivership is not a part of every bankruptcy procedure. In order to understand Receivership, you must understand the type of debt it covers.
Receivership and Unsecured Debt
There are two types of debt: unsecured and secured. For consumers, the most common type of unsecured debt is credit card debt. Unsecured debt may also include medical bills, utility bills, and many types of personal loans. Businesses, of course, can have the same types of debt. In addition, they may have unsecured business loans of up to $50,000 or more. But even at the higher amounts, this type of debt does not involve Receivership. That’s because unsecured loans are not backed by collateral. If the borrower defaults on this type of loan, the lender may not be able to recover the money.
Receivership is for Secured Claims
Secured debt means that the debtor has signed papers to pledge an asset as collateral for the loan. This gives the lender the right to initiate a procedure to seize the asset if the lender fails to make payments. The most common type of secured debt for consumers is a mortgage. Secured loans also include car, RV and boat loans. Although less common, some consumers may have secured credit cards or a secured line of credit. A secured loan is good for both the borrower and the lender. The lender is protected in case the borrower defaults, making them lower risk loans. And because it is low risk, the borrower may pay lower interest rates or have extended repayment terms.
For a business, secured debt can be used for start-up, equipment, buildings, vehicles and more. The borrower can offer homes, cars, stocks and bonds, inventory, equipment, even its accounts receivables as collateral. Of course, the collateral should be as valuable as the loan proceeds. For this reason, secured loans are often secured by the asset itself, i.e., a car loan is secured by the vehicle. In some cases, the value of the collateral exceeds the loan. This is because, for certain types of collateral, such as real estate, it is more difficult to recover the cash.
Regardless of whether a loan is for a consumer or a business, if the borrower fails to repay a secured loan, the lender can take the collateralized asset to mitigate the loss. In the case of a business, the Receiver can take over the enterprise.
Duties of the Receiver
Receivers must act in good faith and obtain the best price for the assets. The Court details the Receiver’s role. It generally includes:
- Notifying creditors of the Receivership
- Liquidation of assets for the benefit of creditor(s)
- Reporting to the Official Receiver who is an officer of the Office of the Superintendent of Bankruptcy Canada
- Reporting to the Court the status and outcomes of the Receivership
- Submitting tax returns on behalf of the debtor
Proceeds from the Receivership
When assets are sold, the proceeds go toward the repayment of secured claims according to the provisions of the Bankruptcy and Insolvency Act. The following are paid:
- Receivership administrative costs
- Any prior ranking secured claims and
- Statutory liens, such as for taxes or mechanics fees
After that, the surplus is distributed as follows:
- A court-appointed Receiver implements a claims process to determine who is owed and the priority in which they are paid.
- A privately-appointed Receiver will turn over the remaining funds to their firm or to the Licensed Insolvency Trustee to determine distribution.
If the proceeds of the liquidation are insufficient to cover the amount owed, the money is distributed according to the terms of Canada’s Bankruptcy and Insolvency Act. Unsecured creditors are low on the priority list and will usually not be paid.
It is important to understand that in Canada, if your business is a sole proprietorship or a partnership, a business bankruptcy will result in a personal bankruptcy. In this case, there is no separation between the business and its owners.
If you are an individual wondering how to get out of debt, you should know that most consumer bankruptcies do not involve receivership.
Need additional information? If you’d like to know more about Receivership and how it might apply for you or your business, please call us at 1-519-310-JOHN. We’re available to answer your questions about bankruptcy and other debt options. We’ve been helping individuals and small business owners for over 25 years. Call today.