Receivership versus Bankruptcy
Are you confused about when to use receivership versus bankruptcy? The media sometimes uses the terms interchangeably but they mean quite different things and are used for divergent reasons. A receivership is used by secured creditors and a bankruptcy is for unsecured creditors.
A receiver is appointed either by the court or by an instrument (pre-existing agreement with the secured creditor) upon default by the borrower. The receiver’s job is to seize and sell assets that are subject to a security agreement on behalf of the secured creditor. In that sense the only entity the receiver is working for is the secured creditor, even though the receiver owes a duty of care to other parties.
By contrast a bankruptcy trustee (licensed insolvency trustee) is appointed either by a court order petitioning the debtor into bankruptcy on behalf of one or more unsecured creditors or assigned into bankruptcy by the debtor or the debtor’s representative. The bankruptcy trustee owes a duty of care to all interested parties and has broader powers than the receiver, who has a relatively limited focus.
The bankruptcy trustee may act in a dual capacity as receiver and trustee but must exercise great care to avoid conflict in such cases. Accordingly, it is more common to use two different firms – one as receiver and another as trustee to avoid conflicting interests.
To learn more about receiverships or bankruptcies contact the office at 519-646-2222.