In the current volatile economic landscape, many businesses grapple with financial stress. This often leads to a state of either bankruptcy or receivership. But what do these terms mean, and how do they differ? Let’s unravel the complexity of receivership vs bankruptcy to gain a clear understanding.
The Underpinnings of Receivership
Receivership is an intricate process that involves the appointment of a Receiver. This can be done by the Courts, leading to a “Court-Appointed Receiver,” or by enforcing a contract like a General Security Agreement (“GSA”), resulting in a “Privately Appointed Receiver.”
In a Court-Appointed Receivership, the Receiver’s responsibilities are broad and defined by the Court Order. These are usually derived from the Court’s Model Receivership Order. The Receiver acts as an officer of the Court, and their appointment serves the secured lender’s interest.
In contrast, a Privately Appointed Receiver’s duties mainly involve enforcing the collection of the secured debt. This includes seizing the secured property and selling it. The Receiver is accountable primarily to the secured creditor, while other creditors are notified of the appointment. The assets are liquidated, and the net proceeds after all professional fees and disbursements are paid to the secured lender.
Various creditors, both secured and unsecured, generally aim to cooperate with a financially distressed debtor to optimize their recovery. However, if a comprehensive resolution cannot be reached, it’s advisable for the company to seek guidance from a Licensed Insolvency Trustee (“LIT”).
The 10-Day Notice of Intention to Enforce Security (“NOI”)
In case the creditor and debtor cannot agree, a secured lender often issues a 10-day NOI. It’s crucial to understand the implications and potential options before the 10-day deadline expires.
Once the 10-day period passes, the insolvent company or individual loses their chance to explore potential remedies. Therefore, upon receiving an NOI, they should immediately consult a lawyer or an insolvency professional.
Several possible remedies or options are available, including:
1. Forbearance agreement with the secured lender
This agreement temporarily halts the enforcement while the parties negotiate alternative arrangements.
2. Filing a Notice of Intention to Make a Proposal ( “NOI”)
Under the Bankruptcy & Insolvency Act, the insolvent entity can file a NOI. This stays all creditors from legal action while a proposal for all creditors is being formulated.
3. Filing a Division 1 Proposal
This option, also under the Bankruptcy & Insolvency Act, allows the insolvent entity to file a proposal to their creditors. This stays all legal actions and the enforcement of security.
If the 10-day notice period expires without one of these remedies being implemented, the lender can appoint a Receiver to seize and possess the company assets without further delay.
Usually, businesses under Receivership cease to operate. As a director of such a company, you should be aware of various critical issues, including statutory obligations, personal guarantees provided to the Bank, and possible trade creditors.
Bankruptcy Unveiled
Bankruptcy is a process triggered when an insolvent person or entity cannot meet their financial obligations. This can either be voluntary (through an assignment in bankruptcy) or involuntary (through a petition for a Bankruptcy Order). In both cases, the Licensed Insolvency Trustee (LIT) takes over the assets (except those exempted by law).
The LIT’s duties in bankruptcy include realizing all non-exempt assets and collecting all surplus income for the general benefit of the unsecured creditors.
In corporate bankruptcy, the company becomes defunct. The Trustee liquidates the assets to pay creditors based on their statutory and legal priority and then distributes the remaining funds pro-rata to the unsecured creditors.
A company can continue as a legal entity post-bankruptcy only if it can successfully file a proposal to its creditors. While this is possible, it’s often not feasible.
Receivership vs Bankruptcy: A Summary
In a nutshell, a Receiver works for the secured creditor, while a Licensed Insolvency Trustee works for the unsecured creditors’ general benefit.
When facing a payment demand, always seek professional help promptly to understand and navigate the complexities of receivership vs bankruptcy.
