Receivership can be good news for creditors

Receivership can be good news for creditors

On Behalf of | Jul 29, 2022 | Collections

A court, government regulator, or private entity appoints a receiver as the custodian of a company or property in debt. Once a receiver is selected, the company goes into receivership. The receiver, who is paid by the entity in receivership, then runs the business or oversees an entity’s property or assets. They also maximize profits and pay down debt to creditors. While they may help a company climb out of a hole, the receiver may determine that the best course of action is to terminate operations and sell all or parts of the company to generate income to pay creditors.

A practical tool that may benefit creditors

Businesses often prefer to go into receivership rather than file Chapter 11 because it has fewer court proceedings, requires less paperwork and carries less stigma. Nonetheless, the receiver reviews the finances and may negotiate repayment terms with creditors. They dissolve a board of directors (at least until it is out of receivership) and may also hire new management and take other steps to ensure the company runs more profitably and efficiently. They also submit monthly reports to creditors, the court and the company.

The receiver is a neutral third party. However, the receiver does need to take into consideration the needs of both the company and the creditor. So in some instances, a receivership can be favorable to creditors. While bankruptcy has strict guidelines, receivers have more flexibility to pay company debts, which can favor creditors and stockholders. Even so, asset sales or restructuring the debts could mean that everyone will not get paid even when there is liquidation.

Effective strategy often gets results

Those creditors dealing with a company in receivership often find it useful to work with a collection attorney who can provide insight into how to make the receivership work in the client’s favor. They can work closely with the receiver to ensure profits go to the proper creditors. They can also help the receiver identify fraudulently transferred funds and even help identify valuable assets to sell or liquidate to satisfy the debt owed.