Receiverships

A receivership is a remedy commonly used by secured creditors when a debtor has defaulted and the creditor seeks to preserve, manage, sell, or realize on collateral. A receiver may be appointed privately under a security agreement or by court order. Court-appointed receiverships are common in significant commercial matters because the court order defines the receiver’s powers, imposes a stay of proceedings, and provides a supervised process for dealing with the debtor’s business and assets.

Impact on Payment Obligations and Commercial Relationships:

A few key aspects of receivership proceedings are:

1. Control of Assets: Once appointed, the receiver may take possession or control of the debtor’s property, accounts receivable, inventory, records, and business operations, depending on the appointment order or security documents. Company management’s authority over the affected assets is usually displaced or restricted.
2. Stay and Claims Process: A receivership order often stays proceedings against the debtor and its property. Creditors may need leave of the court to continue litigation, enforce judgments, or take other steps to protect their interests.
3. Sales and Realizations: Receivers frequently run sale processes for assets or businesses. A sale approved by the court can transfer assets free and clear of many claims and encumbrances, with affected interests attaching to the proceeds according to priority.
4. Suppliers, Customers, and Contract Counterparties: Commercial counterparties should confirm whether the receiver is continuing the business, adopting or performing specific contracts, paying for post-appointment goods and services, or terminating operations. Post-appointment supply should be documented carefully, including payment terms and purchase authorizations.
5. Secured and Unsecured Recoveries: Since receiverships are often driven by secured creditors, unsecured creditors may have limited recovery unless there is surplus value after secured claims, receivership costs, and priority claims are paid. Creditors should still monitor the process, review reports, and file claims if a claims process is established.

When a receiver is appointed over a counterparty’s business or assets, creditors should act promptly to review the receivership order and the receiver’s reports, determine how the stay affects any pending dispute or enforcement rights, and confirm whether contracts and post-appointment supply arrangements will continue. Creditors should also preserve supporting records, monitor any sale or claims process, file claims by the applicable deadlines, and assess whether legal or court relief is required to protect their contractual, proprietary, secured, or priority rights.