Businesses attempting to collect on debts often have more options when a debtor is a business rather than an individual. There are multiple ways to hold another company responsible for unmet financial obligations. In some cases where leadership at an organization has proven unwilling or incapable of properly managing company resources and fulfilling financial obligations in a timely manner, the courts may appoint a receiver.
When a business is in receivership, a third-party professional assumes responsibility for company operations and financial matters. Receivership can be beneficial for creditors, who may have a better chance of securing appropriate repayment under receivership than they might if a debtor organization filed for bankruptcy.
How receivership works
Receivership is a legal process controlled by state statutes and implemented by the courts. The appointed receiver assumes control over an organization’s finances. Receivers have an obligation to help address an organization’s financial struggles, including outstanding debts.
They may attempt to streamline company operations or liquidate assets as a means of fulfilling financial obligations. After a thorough review of the company’s financial records, the receiver may change how the company does business.
They may choose to liquidate certain assets to repay creditors. They may also seek to optimize company operations to maximize the profit generated by the business. In such cases, the profits generated through the change in business operations or the revenue produced by the sale of assets can go to repay creditors.
Typically, the receiver must address financial obligations in a specific order of priority. Certain creditors, including those with secured debts and judgments, may take priority over unsecured creditors. Receivership can potentially help a company overcome financial hardship while simultaneously fulfilling its financial obligations to others.
Creditors frustrated by a business’s current management or financial practices may benefit from receivership. They may not be able to specifically seek receivership, as it is an ancillary remedy employed during pending legal disputes. The debtor organization may propose receivership in response to a creditor lawsuit. Creditors typically cannot force an organization into receivership, but litigation could lead to a debtor organization recognizing the need for outside support.
Exploring every viable option is crucial for businesses attempting to engage in commercial collection efforts. Receivership is one of several ways to obtain appropriate payment from a business debtor.