INTRODUCTION TO RECEIVERSHIP - A CANADIAN PERSPECTIVE
Receivership is a term used to describe a formal legal state of an insolvent debtor when a III party called a Receiver gets appointed over the assets of the insolvent debtor to realise the assets or manage the business of the insolvent debtor generally for the benefit of a secured creditor. In essence, the assets are realised by the Receiver for the benefit of that one secured creditor who makes the appointment of the Receiver.
There are two types of Appointments: 1. Privately Appointed Receiver and 2. Court Appointed Receiver
1. Privately Appointed Receiver
Privately Appointed Receiver: Typically at the time of getting a loan from a creditor (let's say a Bank), a debtor signs a security agreement with the creditor (the Bank). This makes the bank a secured creditor and the loan becomes a secured loan. The secured creditor may in this security agreement include the right to appoint a Receiver in the event that the debtor defaults. Thus, Receivership becomes a remedy available to secured creditor to recover the amounts outstanding under a secured loan in the event that a debtor defaults on its loan payments. In such a case the appointment is called a 'Privately appointed Receiver'. Such Receiver will generally only act on behalf of the secured creditor that appointed them and will realize on the assets specifically covered by the secured loan agreement .
It is the responsibility of the Receiver to get the best price for the debtor's assets when maximizing recoveries and to act in good faith.
A secured creditor may appoint a 'Receiver and Manager' to operate and manage the business until it is sold as a going concern.
Under the Canadian Bankruptcy & Insolvency Act (BIA) s.244 The secured creditor is mandated to provide a statutory 10 day notice, to creditors, of its intention to enforce its security and appoint a receiver, if such receiver is appointed over all or substantially all of the inventory, accounts receivables or other property of an insolvent debtor, to the extent acquired for, or used in the business carried on by the insolvent debtor. During receivership the Receiver reports regularly to the Official Receiver (a representative of the Office of the Superintendent of Bankruptcy). Also, a receiver appointed over all or substantially all of the assets in the categories set out in Section 244 of the BIA must be a Licensed Insolvency Trustee in Bankruptcy. Typically Insolvency Trustees are accountants. An Interim Receiver may be appointed prior to the expiry of the 10 day notice period.
Receivership and Bankruptcy are not mutually exclusive. They can run concurrently and the same appointee may act as Trustee and Receiver at the same time (But generally different firms are appointed to assume these roles.)or a Receivership can occur without a debtor being Bankrupt.
The proceeds from the sale of assets are distributed by the Receiver to the creditors on a priority basis. If the proceeds from the sale of assets are insufficient to repay the secured creditors then unsecured creditors, who are low on the priority list, will receive nothing from the realizations.
2. Court Appointed Receiver
Typically on application by a secured creditor a Receiver gets appointed by a court order. The powers and rights of Court Appointed Receivers are included in the Court order that appoints them and they are officers of the Court. Court appointment of Receivers usually occurs in complicated cases, where there may be disagreements among creditors or between the creditor and the debtor or there is an anticipation of dispute in the case from the very outset. The court appointed receiver is an officer of the court and has duties to all creditors of the debtor. It takes directions and instructions from the court, not the creditor that first sought its appointment and acts on behalf of all creditors.
In Canada, when the Court is satisfied that it is “just or convenient” to do so, a 'Court Appointed Receiver' is appointed under the provincial 'Rules of Court' of the province where the debtor’s business is based or under 'BIA', a federal statute, with authority all across Canada. A court-appointed receiver can also borrow on a super priority basis which is along the lines of Debtor In Possession financing in a Companies' Creditors Arrangement Act (commonly referred to as the "CCAA") case.