Understanding Receivership vs Bankruptcy
Given the recent downturn in the global economy and the numerous new risks faced by businesses, many are struggling. You may have read in the newspaper or seen on the news references to a company being in bankruptcy or receivership and been wondering is there a difference?
The quick answer is yes. Here is an explanation of the differences between receivership and bankruptcy.
What is Receivership?
A Receivership is the process of the appointment of a Receiver, by either the Courts (typically referred to as a “Court-Appointed Receiver”), or pursuant to the enforcement of a contract such as a General Security Agreement (“GSA”), typically referred to a “Privately Appointed Receiver.”
The Receiver’s duties in a Court-Appointment are set out in the Court Order and are often extremely broad. These powers are initially taken from the Court’s Model Receivership Order in most Court-Appointed receiverships. In a Court-Appointed Receivership, the Receiver is an officer of the Court. They are responsible to report periodically to the Court on their appointment and difficulties encountered. The purpose of his or her appointment is for the benefit of the secured lender.
The Receiver’s duties in a Private Appointment are to enforce the collection of the secured debt. This includes taking possession of the secured property, and selling the property. The Receiver is generally responsible primarily to the secured creditor only and all other creditors merely receive a notice of the appointment. The receiver will liquidate the assets and pay the secured lender the net proceeds after all professional fees and disbursements.
Lenders, both secured and unsecured creditors, generally try to work with a financially troubled debtor to maximize their recovery. Nevertheless, often the parties are unable to come to a comprehensive plan or resolution to deal with the financial difficulties. In these circumstances a company should seek professional assistance from a Licenced Insolvency Trustee (“LIT”).
10 – Day Notice of Intention to Enforce Security (“NOI”)
Should the creditor and debtor fail to reach an agreement, often a secured lender will then issue a 10-day Notice of Intention to Enforce their Security (“NOI”). It is imperative that the 10-day frame deadline is not allowed to lapse without understanding the consequences and options available.
The consequences and remedies available to the insolvent company or person are foregone and negated after the 10-day period expires. Therefore, once a Notice of Intention to Enforce has been received, the insolvent company should immediately contact either their lawyer or an insolvency professional to understand all legal remedies and options available.
Some possible remedies or options available in the case a 10-day notice to enforce be issued include but are not limited to:
1. Enter into a forbearance agreement with the secured lender
This is an agreement that temporarily postpones the enforcement while the parties attempt to come to alternative arrangements
2. Filing a Notice of Intention to Make a Proposal (“NOI”)
There is an option available under the Bankruptcy & Insolvency Act, whereby the insolvent company or person files a NOI, staying all creditors from legal action while they formulate a proposal to all their creditors
3. Filing a Division 1 Proposal
This an option available under the Bankruptcy & Insolvency Act, whereby the insolvent company or person would immediately file a proposal to their creditors, staying all legal actions and enforcement of security.
As previously stated, should the 10-day notice period expire without the company completing one of the above remedies, the lender may appoint a Receiver without further delay to enter and take possession of the company assets.
Generally, once the business is placed in Receivership the business will never resume. As a director for a company in Receivership, there are several important issues. These issues should be discussed with your legal counsel, but include both statutory obligations, and personal guarantees previously provided to the Bank and possible trade creditors.
What is Bankruptcy?
Bankruptcy is a process whereby an insolvent person or entity cannot meet their financial obligations as they come due, either voluntarily (through an assignment in bankruptcy) or involuntarily (through a petition for a Bankruptcy Order). In both cases, their assets vest in the name of the Licensed Insolvency Trustee (LIT) (except those assets exempted by law).
The LIT’s duties include but are not limited to the realization of all non-exempt assets, the collection of all surplus income for the general benefit of the unsecured creditors.
In the case of corporate bankruptcy, the company becomes defunct. The assets that vest in the Trustee’s name will be liquidated to pay creditors based on their statutory and legal priority and thereafter pro-rata to the unsecured creditors.
The only way a company can continue to maintain as a legal entity once bankrupt is if it can successfully file a proposal to its creditors. This is possible but often not practical.
To Summarize the Difference Between Company Receivership and Bankruptcy
In the simplest of terms, a Receiver acts for the secured creditor. A Licensed Insolvency Trustee acts for the general benefit of the unsecured creditors.
Always act promptly to deal with the situation of demand for payment and seek the assistance of a professional.