As consumers know, credit scores are an important part of personal finances. Some individuals cannot adequately manage their debt. They may face a consumer proposal or bankruptcy as a result. However, this consequence can be necessary for some consumers.
While bankruptcy hurts the consumer, it also hurts the creditors. They are often significantly disadvantaged during a bankruptcy proceeding. The main reason is that they lose owed money.
As such, a receivership plays an important role in bankruptcy. It can dictate what happens to the consumer and creditors in question. In this guide, we’ll explore what receivership is.
Receiverships are one of the financial debt relief proceedings. The Bankruptcy and Insolvency Act governs the process. Receiverships take place within two different, sometimes related, scenarios. Let’s review these circumstances below.
In the first scenario, a receivership is a tool that helps creditors. The goal is for the creditors to access funds that a borrower defaulted on. Through the receivership process, an appointed receiver takes control of a business’ property.
They oversee liquidation activities. In addition, they distribute the debtor’s assets according to the law. They are likely to have assets that the creditor can recover as collateral. This is possible because the business acquired secured debt.
There are a few ways receivers become appointed. Either through a court order resulting from a secured creditor’s application. Otherwise, it can happen privately through a secured creditor. Furthermore, a receiver must hold current licensing as a Licensed Insolvency Trustee (LIT).
In the second scenario, receiverships help companies avoid bankruptcy. The goal is to return to turning positive profits. Companies experiencing financial difficulty might consider a receivership as a temporary pause. The receiver manages the company’s assets and all financial decisions.
Are you dealing with money issues? A credit counsellor can help!
How to Avoid Receivership as a Small Business Owner
A business is in receivership if a secured lender appoints a receiver to manage the company’s assets. This is a result of the business not paying their debts to their creditors.
Before appointing a receiver, a creditor must give the business 10 days notice. This is in accordance with the Bankruptcy and Insolvency Act. The notice period is commonly referred to as a Notice of Intention to Enforce.
If you receive a Notice of Intention to Enforce, it is wise to seek professional help. Normally, a lawyer or insolvency professional is a good resource. Within the 10 days from the notice, businesses might be able to take action to avoid receivership. To do so, the following recourse may take place:
1. Sign a forbearance agreement with the creditor to temporarily postpone the receivership. The hope is to reach a mutual, alternative solution.
2. File a Notice of Intention to Make a Proposal (NOI) under the Bankruptcy and Insolvency Act. A NOI prohibits the creditor from pursuing any legal action. During this time, the business can create a proposal in response to the creditor.
3. File a Division 1 Proposal under the Bankruptcy and Insolvency Act. The business can immediately file a proposal to the creditor. This proposal prohibits legal action temporarily.
A Notice of Intention to Enforce is a serious matter. Before the 10 days pass, it’s important for the business to take action.
If the 10 days pass with no action on the business’s behalf, the creditor can appoint a receiver. At that point, the receiver has the authority to manage and distribute the company’s assets.
What is the difference between receivership and bankruptcy?
While bankruptcy is a legal process, receivership is not. Although, they result from legal proceedings. Both processes fall under the Bankruptcy and Insolvency Act in terms of governance.
On the other hand, a receiver acts in the interest of a creditor. Whereas a bankruptcy LIT acts in the interest of the debtor.
What is the difference between receivership and liquidation?
First off, both processes fall under different legislation in terms of governance. Receivership falls under Canada’s Bankruptcy and Insolvency Act. Whereas liquidation falls under the Business Corporations Act or Wind-Up Acts.
Liquidation entails shuttering a business and liquidating all the assets of that business. The process is for the benefit of their creditors. Receivership entails an appointed receiver liquidating either all, or part of, a business’ assets. In some cases, the business continues to operate.
How Do You Find Out if a Business is in Receivership?
Canada’s Office of the Superintendent of Bankruptcy has a list of companies that have protection under the Companies’ Creditors Arrangement Act (CCAA). These are records of insolvent companies owing their creditors $5 million or more since 2009. By being on this list, they have protection and support. For example, they receive special treatment to assist with restructuring their business.
Receivership is a scary thought for many business owners. Essentially, it means that an external party will obtain control over their finances. Of course, would be alarming to anyone.
For this reason, it’s important to stay on top of debts. Although, everyone makes mistakes. Lastly, if you’ve received a Notice of Intention to Enforce, contact a credit counsellor today for help.
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