What does “Receivership” mean?

What is Receivership? What does it mean for a company to go into Receivership? What happens when a company goes into Receivership in Canada?

These are all questions that you may be wondering about. Truth be told, they are things that many people do not know. Most people will have heard the word “Receivership”, but a much smaller portion of the population knows what it is.

A Receivership is a formal process in which a third party is appointed to realize on assets secured as collateral and/or assets subject to a court order. When the assets of an entity are placed into Receivership, it typically loses control of these assets to a Licensed Insolvency Trustee who is acting as a Receiver.

The Receiver then protects and preserves the assets and administers a sales process for them. The assets can be sold off individually, “en bloc”, or even as a going concern to a buyer who wishes to take over and run the entire operation or operational division. Sometimes it is determined that the best outcome would be achieved by continuing to operate the business or business division until a buyer is found, rather than shutting it down and selling it “cold”.

Receiver-Managers

A Receiver who operates a business or business division is known as a Receiver-Manager because, in addition to preparing the assets for sale, the Receiver-Manager is acting as a manager of the business or business division on a day-to-day basis until a suitable buyer is found. The decision between appointing a Receiver vs. a Receiver-Manager is typically made after careful consideration of the nature of the situation and the types of assets involved.

Court Appointed Receivers and Privately Appointed Receivers

A Receivership occurs through a court order or a letter of appointment from a lender. If the Receiver is appointed through a court order, it is unsurprisingly known as a “Court Appointed Receiver”. A Court Appointed Receiver is considered to be an officer of the court and therefore acts for all creditors. If the Receiver is appointed directly by a lender, it is known as a “Privately Appointed Receiver”.

Privately Appointed Receivers can only be appointed if the related loan documents specifically provide for the appointment of a Receiver in the event that certain conditions are met, including a default on the loan. This means that the borrower would have agreed to this possibility when it signed the document and received the secured loan or secured line of credit. Privately Appointed Receivers generally only act on behalf of the creditor that appointed them, within the confines of the security agreement and the applicable legislation.

Receiverships are usually initiated for the benefit of secured creditors. Secured creditors are lenders who hold assets of an entity as collateral for an outstanding debt. If the terms of the debt arrangement are breached and a receivership is permitted, it allows the secured creditor to begin the process of converting the assets that it holds as collateral into cash in order to reduce the indebtedness.

In the case of a Court Appointed Receiver, the asset sale must be approved by the court. The court will usually consider how the sale process was conducted and what the outcome was when deciding whether or not it is appropriate to approve the asset sale. The Receiver must demonstrate that they obtained a reasonable outcome considering the circumstances.

In the case of a Privately Appointed Receiver, the asset sale is approved by the secured creditor that appointed it. That said, the Receiver and the secured creditor must still be careful to achieve a reasonable outcome, as poor sale terms may harm other creditors and/or the debtor. If the funds from the asset sale are sufficient to pay out the debt to the secured creditor in full, other creditors and/or the debtor as applicable may stand to receive the surplus proceeds. Failure to realize a reasonable sale price could open the Receiver and secured creditor to claims of improvident realization from other parties who stood to have benefited had a better price been obtained.

Receiverships as a Useful Tool

There are other instances where Receivership can be a useful tool. Receivers are often appointed in situations such as disputes between shareholders, where there are competing secured claims, or when ownership of an asset is unclear. In such instances, the court may find it appropriate to appoint a Receiver to take control while the dispute is resolved so that all parties involved can be confident that the assets are in impartial hands and no party is using them to the detriment of the others. Having the assets under the control of a neutral party can sometimes allow the opposing sides to focus on a resolution of the larger issues between them.

The costs of a receivership are usually paid out of the proceeds received from the sale of the assets under the receivership. The remaining funds are then remitted according to the legal priorities as outlined by law. The Receiver is required to report on its activities to the Office of the Superintendent of Bankruptcy and either the court or secured creditor that appointed it, and sometimes to other interested parties as well. The Bankruptcy and Insolvency Act provides the ability for stakeholders to apply for the intervention of the courts if they feel that their legal rights have not been respected.

What is the Licensed Insolvency Trustee’s role in a Receivership?

The federal Bankruptcy and Insolvency Act requires that any receiver appointed be a Licensed Insolvency Trustee (LIT). It has been determined that the unique skills, ethics and education that LITs have are essential when administering the complicated process of Receivership. This legislation applies to anyone who is acting in a role with the characteristics of a Receiver, even if the appointment is formally called something else.

The Office of the Superintendent of Bankruptcy with the Government of Canada has taken the position that someone is acting as a Receiver, and therefore must be an LIT, if they are doing one or both of the following things:

• Have taken possession under a court order or security agreement of substantially all of the inventory, receivables or other property that was used or was to be used for business
• Are appointed by a court to exercise control over the business of an insolvent person or bankrupt

It is therefore advisable for a secured creditor to consult with a Licensed Insolvency Trustee when the creditor is considering taking control of business assets of a debtor – in order to determine if the actions they are contemplating could be considered to be those of a Receiver.

Are a Bankruptcy and a Receivership the same?

There are many similarities between Receivership vs. Bankruptcy, but they are distinct legal processes. Sometimes both happen at the same time, but each can happen without the other necessarily occurring. Both are similar in the sense that a third party (a Trustee in a Bankruptcy and a Receiver in a Receivership) takes control of assets of the debtor and tries to maximize the proceeds from them in order to pay debt.

Another similarity between a business Bankruptcy and a company Receivership is that both usually result in the end of the business in its current form. The primary difference is that a receivership largely deals with assets that are held as collateral for the benefit of the creditor that holds the security interest in the collateral, whereas a Bankruptcy looks to provide a return to the unsecured creditors who do not hold a collateral interest in assets of the debtor.

Sometimes the same LIT can act as both Trustee and Receiver, but in many circumstances, the differing interests of the unsecured and secured creditors mean that it is prudent to have a different LIT for each of the respective roles. Receivership and Bankruptcy are similar, but there are many important differences.

Is there a cost to consult with a Licensed Insolvency Trustee about Receivership?

Unlike a Bankruptcy or a Consumer Proposal, a Receivership isn’t usually something that is triggered by the debtor. As noted above, Receiverships are typically driven by lenders, who initiate Receivership proceedings in order to protect their own interests. As such, management of a debtor company cannot walk into a Licensed Insolvency Trustee’s office and walk out having put their company into Receivership. That said, the possibility of Receivership and its ramifications is certainly something that an LIT is able to discuss with a debtor or a representative of a debtor should they get in touch with us to discuss their financial issues.

At LCTaylor, we do not charge for this initial consultation, so if your lender has raised the possibility of putting your company into Receivership and you wish to know what this means for you and your business, please do not hesitate to contact us. Sometimes Receiverships become inevitable and it is in your best interest to speak to a professional about the impact it could have on both your business and your personal finances, and how it may be possible to minimize the damage.

Likewise, many LITs, including those of us here at LCTaylor, are generally happy to take calls from secured creditors as a professional courtesy to discuss situations that may require a Receivership or other forms of LIT intervention, such as an Assignment in Bankruptcy, Bankruptcy Order, or a Proposal to Creditors. As noted above, secured creditors should be careful not to act in a role that legally requires the appointment of an LIT.

If you are looking for advice on your financial situation or that of your business, or if you represent a secured creditor looking to protect your interests, please give us a call at 204-925-6400 or email us at questions@lctaylor.net. We would be happy to discuss the matter with you.