What is a receivership?

2021-11-30   minute read

Julie Kennedy

The following article is for general information purposes only and does not constitute legal or professional advice. Consult your legal counsel and / or a Licensed Insolvency Trustee directly for a more in-depth understanding of receiverships and how receivership situations may specifically impact you.

A receivership is a remedy available for secured creditors to recover amounts owing under a secured loan when a debtor company is unable or unwilling to repay the outstanding debt.

Registering a secured charge

Upon lending funds to a corporation, a lender will often require the borrowing entity to give priority or a secured charge against the corporation’s assets in the form of a general security agreement (GSA). The lender must register this GSA with the appropriate provincial Personal Property Registry, which records security interests and liens against personal property.

The typical GSA will contain a provision which allows the lender to appoint a receiver over the borrowing corporation’s assets if the corporation defaults on its loan payments. In Canada, a receiver must be a Licensed Insolvency Trustee whose license was granted by the Office of the Superintendent of Bankruptcy.

Businessman employer thinking of business reading letter at workplace

Enforcing security

A secured lender must issue a notice to the debtor corporation and provide an opportunity to address the outstanding balance at least 10 days in advance of enforcing its security under a GSA. In practice, this usually takes the form of a demand letter. It’s therefore important the debtor company promptly review and address any such notices from their lenders or their lender’s legal counsel.

Appointing a receiver

A receiver can be appointed privately or by the court.

A privately appointed receiver is appointed by the secured creditor solely under the terms and provisions of the GSA and is typically only responsible to the secured creditor. However, the privately appointed receiver must still provide notice of the receivership to all known creditors.

A court appointed receiver is appointed by the court upon an application made by the secured creditor. The court appointed receiver is an officer of the court and must report to the court at various stages throughout the engagement. The court appointed receiver’s duties and powers are set out in the court order.

Liquidating assets and repaying creditors

The receiver’s primary roles include preserving and protecting the debtor company’s assets, liquidating the assets through an orderly sales process — and distributing the proceeds on a priority basis.

Once liquidated, funds will first go toward any priority claims (such as certain statutory amounts owing), then to the secured lender to repay the outstanding debt and cover the costs of appointing a receiver. Any remaining funds will be subject to a claims process for distribution to unsecured creditors.

Maximizing asset realization

Receiverships can happen in any industry and there are many moving parts. Once a receiver is appointed — especially under court order — the debtor company has no capacity to deal with any of the company’s assets.

Sometimes the receiver will determine the business should continue operations throughout the liquidation process to maximize asset realizations. This is particularly common in instances where the operations / production is the asset such as the oil and gas or agriculture sectors. Other times the receiver will choose to shutter operations upon its appointment and immediately take steps to liquidate the assets.

Seek professional advice

Given the consequences of a receivership it is important both lenders and debtors obtain proper advice prior to appointing a receiver / having a receiver appointed. This could include strategies for better communication between the lender and debtor company, options available in an insolvency scenario, or a review and legal opinion about the enforceability of a GSA.

Receiverships are complex matters and its helpful to have a strong understanding of the receivership process. If you have any questions or comments about receiverships, contact me via the link below.