What is receivership?

When running a business doesn’t quite go as intended, there can be a range of serious complications. In the case of serious financial hardship, creditors will often be concerned about how to recover their funds – one of the tools they might choose to use to do so is receivership.

Here, we explore what receivership is, when it could be useful, and some of the pros and cons for both business owners and creditors. 

Receivership defined

Receivership is a legal arrangement where a third party (the receiver) takes over the management of the business in question, generally in order to solve some kind of dispute.

Typically, this kind of solution will be used to protect a company, with a lender’s best interests in mind. You can think of it a bit like a protective bubble, where the receiver will aim to make sure that no inappropriate decisions are made.

Receivership can thus be thought of as a condition that needs to be met to be eligible for additional sources of credit. Receiverships can also be used for a range of other reasons, including in some cases to optimise tax benefits. 

Benefits of a receivership

The main benefits of a receivership are that you’ll likely have access to additional capital, and potentially invaluable advice and direction. Directors have the additional benefit, in that they’ll likely be at less risk of being accused of making bad decisions.

Disadvantages of a receivership

Receiverships aren’t all plane sailing, however. If the company in question does make it through this period of instability, it likely won’t do so in the same form. In order to repay debts, the receiver may have to sell off a range of assets and let a lot of employees go.

The end result on long-term financial health can be devastating, and unsecured creditors might not receive any of what’s owed to them. 

It’s not a decision that should be taken likely, and it’s important to speak with an expert such as the team at Chamberlain & Co before starting a process with such serious implications.

Receivership appointment process

There is a pretty standard process behind appointing a receiver, which will go as follows:

• The lender (likely a bank) will look to minimise the risks surrounding its capital, through plans from the directors to weather the storm, and additional capital from other shareholders. 

• If the lender is still unsure that the company is able to run itself properly, then they will possibly appoint a receiver and an insolvency practitioner (IP) to make sure that everything is being run properly, and take the actions mentioned above if need be. 

Receivership is just one of a range of different options for businesses that are facing financial hardship, and it’s important that you pick the right one. There are plenty of experts in the field who will be able to provide you with specialist advice and help to guide you in the right direction.

In these kinds of circumstances, it’s always best to reach out for help sooner rather than later. The earlier you start to enact changes, the higher the probability is that you’ll be able to save the business.