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What Is Receivership And How Do Insolvent Companies Deal With Them?

Companies that find themselves in a financial slump and therefore, unable to pay off their debts could be placed under receivership by their creditors. What is this process and what does it lead to?

Receivership involves the appointment of an Official Receiver by a company creditor in an attempt to collect payments for the company’s debts. Receivership is thus essentially an effort to regain payments.

What does an Official Receiver do and what is the extent of his or her power?

An Official Receiver is appointed to take control of some or in other cases all of the company’s assets. A Receiver’s powers is stated in terms of a debenture.

What is a debenture?

The debenture is an official document stating the terms of the loan and the creditor’s rights to appoint a receiver should the company find itself unable to pay.

There are, however, certain conditions that delineate everything: first, not all creditors have the right to appoint receivers. Second, in case a receiver is indeed appointed, he or she can only control portions of the company according to what the debenture stipulates. In some cases, complete control of properties is allowed. In other cases, only some assets can be put under the receiver’s control.

What happens to a company under a receivership?

First, a company’s directors would lose all their control over the company’s assets once a receiver is appointed. However, they are still expected to fulfill their duties such as holding the Annual General Meeting (AGM) and filing of annual returns on time following the AGM.

Being put under receivership does not mean, however, that a company is pending closure. Unlike liquidation where the company would have stopped all operations beforehand-receivership would allow the continuous operations pending the collection of all payments. Should a company find itself able to pay its creditors under the receivership and still have enough resources to continue operations, it is free to do so.