Receivership – debt collection remedy for secured creditors

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In receivership, an appointed third party acts on behalf of a secured creditor and is tasked with taking possession of the debtor’s assets, selling them and using the proceeds to pay the secured debt.

At first glance, receivership and bankruptcy may appear to be nearly identical. Both signal financial trouble for a debtor and involve the sale or liquidation of its assets to repay outstanding amounts owed. Yet, they are different and the occurrence of one does not preclude the other. A debtor may be in receivership without being bankrupt or may be in both formal legal states at the same time.

Private or court-appointed receiver

A receiver may be privately appointed by a secured creditor under the terms of the secured loan, or may be appointed by the court.

In most cases, before privately appointing a receiver, a secured creditor is required to give 10 days’ prior to doing so. A privately appointed receiver is required to act to the primary benefit of the secured creditor who appointed it, and will only realize upon assets covered by the security agreement. Since it is acting in the interests of the appointing creditor, a private appointed receiver will normally require an indemnity from the secured creditor for actions taken by the receiver on the creditor’s behalf.

Alternatively, a receiver can be appointed by the court, either under the provincial civil rules and/or under the Bankruptcy and Insolvency Act. The court order appointing a receiver normally stays or freezes all proceedings against the creditor and delivers control of all of the debtor’s assets to the receiver, to be disposed of for the benefit of all creditors, according to their priority.

Receiver-Manager role

In cases where a debtor business will be sold as a going concern, as opposed to its assets being sold in a piecemeal fashion, a receiver-manager may be appointed. A receiver-manager operates the business itself until it can be sold as a going concern.

Carried out in good faith

Even where privately appointed, a receiver has an obligation to act in a commercially reasonable manner, having regard to the interests of all stakeholders. As such, the receiver must make a good faith effort to gain the maximum recovery possible of the debtor’s assets. If the proceeds of the sale are sufficient to fully pay out moneys that are owed to the secured creditors, then the remaining proceeds will be diverted for the benefit of unsecured creditors.

An experienced insolvency lawyer can provide legal advice to determine whether receivership is a creditor’s best remedy and to ensure that a receiver carries out duties in compliance with applicable legislation.

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