Businesses attempting to collect money from individuals have numerous options. They can file lawsuits seeking to place liens against property or garnish the wages of debtors. The legal process is usually straightforward, as the courts care more about financial compliance and the validity of the contract between the parties than the debtor’s explanation for why they fell behind on their financial obligations.
When the debtor that defaults on an obligation is a business, not an individual, the options for collecting on a debt shift significantly. Wage garnishment isn’t typically possible. However, legal action could still be possible. Corporate creditors trying to hold other businesses accountable for defaulting on financial obligations can potentially take the matter to court and ask for a judge to initiate receivership.
What is receivership?
Receivership is a special business management arrangement that can potentially help prevent a business bankruptcy. In some cases, receivership begins with a business announcing a plan to restructure. In other cases, the courts establish a receivership in response to creditor lawsuits. Ideally, the process helps the company address its financial issues and become profitable again.
During receivership, the courts appoint an outside professional, called a receiver, to review company operations and financial records. They take control of financial decisions, reallocate resources and attempt to resolve the company’s financial issues. Executives and owners retain their positions within the organization during receivership, but their authority is subject to limitations.
Receivership can result in drastic shifts in how a company operates. The actions of the court-appointed receiver can help creditors recoup losses and start collecting on a major business debt. A receiver has a duty to the organization to make decisions that benefit the company and help it regain financial solvency.
Receivers can make decisions about shareholder dividends and asset liquidation. They can review employee performance and even make plans to close unprofitable locations or departments. Their decisions can help resolve a company’s financial obligations and help the company become more efficient and profitable in the long run.
Requesting receivership and taking other aggressive business-to-business collection efforts are challenging steps. Business leaders may need assistance evaluating their options and taking appropriate steps to hold corporate debtors accountable. Receivership is one of many options that can help force a company into financial compliance.