Understanding Receivership vs Bankruptcy

Understanding Receivership vs Bankruptcy

In the current global economic landscape fraught with uncertainties, several businesses find themselves grappling with financial issues. This has led to a surge in instances of companies being declared bankrupt or put under receivership. Given the frequency of these occurrences, Understanding Receivership vs Bankruptcy is crucial for both businesses and individuals.

Receivership: An Overview

Receivership pertains to the appointment of a Receiver by either a Court (“Court-Appointed Receiver”) or in response to the enforcement of a contract like a General Security Agreement (“GSA”), referred to as a “Privately Appointed Receiver.”

In Court-Appointed Receivership, the Receiver’s duties are typically extensive and dictated by the Court Order. The Receiver acts as an officer of the Court and is expected to report periodically to the Court on their appointment and any encountered difficulties. The main goal of this appointment is to serve the interests of the secured lender.

In a Private Appointment, the Receiver’s primary role is to enforce the collection of the secured debt. This involves taking possession of the secured property and selling it. Here, the Receiver’s primary responsibility is towards the secured creditor. All other creditors merely receive a notice of the appointment. The Receiver then liquidates the assets and pays the net proceeds (after all professional fees and disbursements) to the secured lender.

The 10-Day Notice of Intention to Enforce Security (“NOI”)

In instances where the creditor and debtor fail to reach an agreement, a secured lender may issue a 10-day Notice of Intention to Enforce their Security (“NOI”). Understanding the implications and options available during this 10-day frame is crucial.

Upon receiving a Notice of Intention to Enforce, the insolvent company should immediately consult their legal counsel or an insolvency professional to understand the legal remedies and options available. Here are some potential remedies or options:

1. Forbearance Agreement with the Secured Lender

This agreement temporarily postpones the enforcement while the parties attempt to come to alternative arrangements.

2. Filing a Notice of Intention to Make a Proposal ( “NOI”)

This option is available under the Bankruptcy & Insolvency Act, allowing the insolvent company to file a NOI, which prevents all creditors from legal action while they formulate a proposal to all their creditors.

3. Filing a Division 1 Proposal

Also available under the Bankruptcy & Insolvency Act, this option enables the insolvent company to immediately file a proposal to their creditors, staying all legal actions and enforcement of security.

Bankruptcy: An Overview

Bankruptcy occurs when an insolvent person or entity is unable to meet their financial obligations as they come due. This can occur voluntarily (through an assignment in bankruptcy) or involuntarily (through a petition for a Bankruptcy Order). In either case, their assets are transferred to the Licensed Insolvency Trustee (LIT) (except those assets exempted by law).

The LIT’s duties include realizing all non-exempt assets and collecting all surplus income for the general benefit of the unsecured creditors.

Receivership vs Bankruptcy: The Differences

In the simplest terms, a Receiver acts for the secured creditor while a Licensed Insolvency Trustee acts for the general benefit of the unsecured creditors.

In conclusion, it is critical to act promptly when faced with a demand for payment and seek professional assistance.

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