A receivership is a legal process which occurs when control over the assets (a.k.a. security interests) of an institution or incorporated entity is passed over to a receiver. This receiver maintains ‘custodial responsibility’ of the company’s property, both tangible and intangible, primarily in cases where the company cannot meet financial obligations, and is therefore insolvent.
There are two types of security interest:
- Non-circulating security interests (such as land, plant and equipment)
- Circulating security interests (such as cash, stock and debts owed to the company)
Receivership is an old equitable remedy, but receivers are now permitted to be appointed by the court, although this is not often necessary.
The primary difference between a receivership and other methods of managing an insolvent company is that a secured creditor usually chooses the receiver, to ensure they are paid. Thus, the main role of the receiver is to act solely on behalf of the secured creditor, to the potential detriment of other creditors. Receivers are often appointed under provisions of a security instrument which outlines their specific functions.
Depending on the state of the business taken into receivership, a receiver may be appointed to sell secured assets or to continue conducting business for the insolvent company.
Companies in receivership do not always necessary fail, but administrators and liquidators are sometimes appointed to represent unsecured creditors during receiverships.