For those of you that don't know me.
My name is Ira Smith,
president of Ira Smith Trustee & Receiver Inc.
Firstly, the Ira Smith Team hopes that you and your family are safe,
healthy and secure during this COVID-19 pandemic. Ira Smith Trustee & Receiver Inc.
is fully operational.
Both myself and Brandon Smith are available to answer any questions you
might have, either by telephone or video meeting.
We are holding all meetings that way in order to keep everyone safe and healthy.
Today's Brandon's Blog is about the meaning of receivership.
He provides his checklist of things you should know.
He's not trying to make you an insolvency expert, but to give you the main
highlights so that whenever the topic of receivership might come up,
you will know what everyone is talking
about and you will be able to hold your own in any conversation.
So I hope you can watch until the end of this video.
I know you will get value from it.
What does it mean when a receiver is
appointed? Receivership is a remedy for secured creditors.
A chartered bank or another lender loans money to a company
and takes back security against the assets of the company as collateral for the loan.
If the loan goes into default under the security agreement,
there will be various events of default and upon one or more of those events
of default, the secured lender has the right
to appoint a receiver. Receiverships are part of the Bankruptcy and Insolvency
Act in Canada. Only a licensed insolvency trustee can be a receiver.
There are two kinds of receivership appointments, either a private appointment
or a court appointment. In a private appointment,
the secured creditor retains the receiver and appoints the receiver in writing.
And the receivership begins.
Actually, before the secured lender can do
that, they have to give a written notice of default
to the borrower, the company,
and make demand on the company for full repayment of the loan.
And the secured creditor must give
at least 10 days written notice before enforcing its security.
Now the company, the borrower can waive
the 10 day notice, but the secured creditor cannot.
The second kind of appointment is a court appointment.
That's where the secured creditor
believes that the supervision powers and the authority of the court and approval
of the court in making the necessary decisions will be required.
There may be contentious issues,
legal issues, practical issues where the authority of the court is
required. In that case, after the secured creditor demands
and the 10 day notice expires, the secured creditor can make a motion
to the court for the appointment of the receiver.
When the receiver is appointed,
the first thing the receiver must do is go into possession and control
of all the assets of the company covered by the lender's security.
The receiver must make an inventory of all the assets, make sure they're safeguarded,
make sure they're adequately insured no matter where they may be located.
As well,
the receiver must identify are there any third party goods on the premises
or any goods where suppliers still have the right of revindication.
Now, keep in mind that the business was
probably operating right up until the time of the appointment of the receiver.
So the receiver also very quickly has
to make other decisions, such as was the business shut down
before the receiver was appointed or was it still running and therefore,
if it was still running, does it make sense for the receiver
to continue the business operations? Are there any experienced employees
willing to work for the receiver in order to keep running the business? Will
the assets of the company be worth more if they're sold on an operating business
basis rather than on a shut down liquidation basis?
Can the receiver operate the business cash flow positive?
If the receiver believes that the assets will be worth more on an operating
business basis but cannot operate on a cash flow positive
basis, then the receiver has to know where it can
borrow the money from in order to cover the negative cash flow.
And in pretty well every case,
the only place that the receiver will be able to borrow from,
the only place, the only person anyone will be willing to lend money is
the secured creditor that appointed the receiver.
The secured creditor in that case would have to be willing to fund the losses.
Are there any legal,
regulatory or environmental issues that would preclude the receiver
from operating the business, for the business to be run safely?
These are just some of the considerations for the receiver.
The receiver has to answer those questions
very quickly in order to get a game plan set up,
get the approval of the appointing creditor,
and if it's a court appointment,
to write a report to court, serve all the parties and get court
authority for the tasks, the steps that the receiver wishes
to carry out. A question we are always asked is what is
the difference between receivership, insolvency and liquidation?
So I hope by now, from what I've already spoken about,
you have a very basic but good understanding of what receivership is.
So what is insolvency or insolvent?
That is the financial condition.
The insolvent company cannot pay its debts as they normally come due.
And perhaps also if you had to liquidate all the assets,
you would not get enough cash to pay off all of the company's liabilities.
It is a financial condition that is the definition of insolvency
Liquidation.
I've already spoken briefly on what a liquidation sale is.
That is when the assets of the company are being sold off because the business is not
being run anymore, the assets are being liquidated.
That's the first example.
There's also something called a statutory
liquidation. That happens when the shareholders
of a solvent company, a financially healthy company, decide
that they're not going to run the business anymore.
The assets are collected in terms of receivables.
The assets are sold off in terms
of inventory and equipment, intangibles, patents, trademarks,
and then you're left with the cash. Because the business is solvent.
The company is not only able to pay off all of its liabilities with the cash,
but they are also potentially able to provide a return to the shareholders.
That is what a statutory liquidation is all about.
Another question we're asked is how does a receiver get paid?
A receiver has a legal right to have a first charge on all the assets
of the company, subject only to any trust fund
claims that there may be against the assets. As well,
the receiver will get the guarantee of the appointing creditor to fund
the costs of the receivership,
including the fee and disbursements of the receiver.
If there are sufficient assets
to have a realization that will pay back
the secured creditor in full, including all the costs
of the receivership, then the secured creditor does not suffer any loss.
However, if the assets are insufficient,
then the secured creditor will suffer a shortfall.
So I hope that you have gained a basic yet
good, thorough understanding of what the meaning of receivership is.
The Ira Smith Team is very experienced
in advising companies that are in financial trouble,
advising lenders of companies in financial trouble and in acting as a receiver.
We understand the concerns
and issues facing the entrepreneur of an insolvent, troubled company.
We understand how to restructure those kinds of companies.
So hopefully they will stay far away from receivership or bankruptcy.
We know that it is not the entrepreneur's fault.
There are many conditions today that have caused business interruption
that are well beyond the control of the entrepreneur.
So I hope you've enjoyed this video.
If you have any questions at all or need any help or assistance at all,
give either Brandon Smith or myself a phone call.
Shoot us an email message.
We would love to hear from you and we would love to speak with you.
So the Ira Smith Team hopes that you
and your family remain healthy, safe and secure.