If you’re facing bankruptcy for your financially distressed business, receivership may be a better option for you. A receivership is designed to protect a lender’s assets for an interim period, such as during a pending foreclosure or other litigation involving the business.
Today, we will cover court-appointed receiverships, and why they may be favorable to bankruptcy depending upon the unique needs of your business. Remember to speak to an experienced business attorney to learn more about your specific options.
What is Receivership?
A receiver is a neutral person legally appointed to manage a business’s finances, property, and operations should they default on their loan payments.
The objective of a receivership is to manage assets that are in default, negotiate lower interest rates or better loan terms with creditors to avoid foreclosure or bankruptcy, ensure compliance with government regulations, and, if needed, restructure the business to be more profitable.
What Authority Does a Receiver Have?
While the goal of receivership is to take the business into financial recovery, the receiver has the power to take possession of business assets and property and repay creditors. They may also collect any profits from the business to pay creditors.
Receivers sometimes also have authority to enter into contracts, maintain bank accounts, and take other necessary actions to preserve and maintain the business’s assets for the duration of court proceedings.
What Are the Types of Receivers?
There are two main types of receivers: court-appointed and privately-appointed. They differ based on the interests they represent. A privately-appointed receiver acts on behalf of a bank or other creditor and the authority to appoint the receiver typically comes from provisions of the loan documents or other documents governing the relationship between the creditor and the business.
Meanwhile, court-appointed receivers are neutral third-party officers appointed by the court. They work on behalf of the company in debt and its creditors. Because of the receiver’s neutral position, the likelihood for the parties in interest reaching mutually beneficial agreements while maintaining business operations increases significantly. This is a big advantage of receiverships compared to other forms of debt restructuring, such as bankruptcy.
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Why Court-Appointed Receivership May Be Preferred
Rather than filing for bankruptcy or using a privately appointed receiver, court-appointed receivership is likely the least expensive option possible. A receiver does charge a fee, but it is significantly less costly than a bankruptcy. Additionally, this neutral third party is flexible and looks for a mutually favorable outcome that is often faster and easier than bankruptcy, getting the affiliated company back to business sooner. With debt restructuring and better asset management, a company can often be saved from liquidation.
An added consideration is the public perception associated with a receivership compared to bankruptcy. News of bankruptcy can have a serious negative impact on a brand, as it causes distrust among the public. However, a receivership may not have the same stigma and may have less of a negative effect on the business’s brand than bankruptcy.
Contact The Frazer Firm
The business attorneys at The Frazer Firm have experience litigating business disputes involving receivers. We can guide businesses and business owners involved in potential receiverships through the litigation process with a goal to maximize the value of the business, meet creditor obligations, and potentially emerge to continue and grow the business.
If your company is facing pressure or litigation from creditors, contact The Frazer Firm today to get back to business. Our business is protecting yours.
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