What Makes Receivership Such an Effective Alternative to Bankruptcy
Bankruptcy vs. Receivership. Maybe it is a conflict you think about often, more likely it isn’t, but we have found that receiverships offer a critical advantage to creditors. The advantage of a receivership is that it saves time and money which, for a creditor, should be a pretty persuasive argument in the competition between bankruptcy and receivership. First, we will expand on what we mean by bankruptcy and receivership in relation to creditors and then explore the reasons why we have found a receivership far more effective and efficient than bankruptcy in this context.
What is a Bankruptcy?
More likely than not, you know what bankruptcy is. In relation to receivership and as a tool for creditors, bankruptcy is actually involuntary bankruptcy which introduces far more complexity. Bankruptcy is a tool built for debtors. Debtors file for bankruptcy, and it shields them from creditors while they set their accounts in order and pay off as many debts as possible. When that is over, the remaining debts are wiped clean (at the expense of the debtor’s credit report). Conversely, involuntary bankruptcy is a measure instigated by the creditor. Whereas in a normal bankruptcy the debtor wants to reach the stage of bankruptcy, an involuntary bankruptcy may require a court battle to get there. This is where involuntary bankruptcy becomes complex and risky.
Bankruptcy is Far more Complex
Involuntary bankruptcy is implemented when a debtor refuses to enter bankruptcy despite being insolvent and failing to make payments to creditors. The creditors now must take legal action, petitioning the court. The debtor can object to the forced bankruptcy. This is where the process can become incredibly lengthy and expensive. Litigation is needed for the debtor that will not consent to bankruptcy. Both parties must now retain lawyers for pleading, discovery, and trial if necessary. This can take many months and all the while, creditors are not getting paid. In fact, the creditors are paying significant amounts of money to fund lawyers and complex discovery. Further, if the creditors lose in court, they could be responsible for the company’s attorney’s fees. While all of this is happening, the company remains in control of the assets and the creditors are no more in control than before the petition (although the court can appoint a trustee it is not required to). There must be a better way for creditors to secure their assets. This is where receiverships come in
What is a Receivership and Why is it Better?
A receivership is a tool that is readily available to creditors in Missouri due to robust and clear statutes. This creates a more cost efficient path to recovering assets for creditors. The receivership differs from bankruptcy because it is an action not a solution. Receiverships accompany other legal actions that seek a remedy. In fact, a receivership can accompany a bankruptcy. That may seem like receivership is less useful, but it is actually why it is useful. Creditors seek involuntary bankruptcy to secure their assets and improve the likelihood of recovery. A receiver speeds up this process. Creditors can be in court in a matter of days and a receiver can be in place shortly after. This is opposed to the months it may take to even get into court to argue that a bankruptcy should be forced. Once in place, a receiver secures the asset, evaluates the situation, and can then act as the court wishes. Further, these acts are highly structured and transparent.
The receiver can evaluate the health of the asset and report to the court. Once in place, the receiver is the only one that can control the asset and therefore the debtor cannot sell or transfer any value. What does this amount to? Security and transparency. The presence of the court secures the asset under their authority because the receiver operates at their discretion. Additionally, the receiver is subject to strict reporting requirements. The receiver must submit a budget, bill their monthly hours with detailed descriptions of their work, and file all actions with the court. The filing of actions is important to the process because all parties have a right to see the actions and object. For example, if the receiver is responsible for winding down a retail store and is going to begin liquidating, the receiver must report what exactly they will sell, for how much, to whom, that person's relationship with the debtor, and wait for approval before doing so. This way, parties to the action can object if they believe that the sale price is unduly low or if the buyer has a conflict of interest (such as being related to the debtor).
Because the receivership route is fast, efficient, secure, and transparent, it is far more beneficial to creditors. Additionally, it is fair to debtors. Debtors can object to the receivership, coordinate with them, and the receiver could gain control of the company and “turn it around” if possible. Saving money, time, and being fully transparent is greatly preferred when compared to complex and costly challenges that involuntary bankruptcy offers.
Creditors are looking to maximize their money and assets. They give debtors loans with the expectation that the debtor will maximize the opportunity of the loan and repay it fully and on time. When that plan goes awry, it is critical that creditors have an efficient and effective tool at their disposal to secure the remaining value of their asset and ideally recover as much as possible. This is where receivership shines because it possesses a unique ability to quickly and authoritatively secure the asset in question, preserve it, and control it at the request of the court. Learn more about receiverships and our work by checking out our receivership blogs below or by visiting our change management page.
From receiverships to leadership development, running a business can be complicated. Here at NMBL Strategies, we pride ourselves on empowering businesses with our insights and experience. If you are looking for more information and tools, check our other blogs, social media, or start a conversation anytime by emailing us at info@nmblstrategies.com.
