60 – Understanding Receivership vs Bankruptcy

Wayne Kay  0:04  

Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay. 

Today, we’re going to talk about understanding receivership in corporations versus Bankruptcy. What is receivership? It’s become popular when you listen to the media, you hear the term receivership, a company has gone into receivership. So what does that actually mean? Is it similar to Bankruptcy? And what is the role of a Licensed Insolvency Trustee in the receivership? And if you are in a company that is feeling like they’re having some financial trouble can you reach out to a Licensed Insolvency Trustee? 

My guest today to help me through this is Daniel Maksymchak from LCTaylor Licensed Insolvency Trustee with offices in Winnipeg in Kenora. Thanks for being here, Daniel.

DANIEL MAKSYMCHAK  0:57  

I’m happy to be here, Wayne. Thanks for having me.

Wayne Kay  0:58  

I’m actually looking forward to this topic today because we talk a lot about Bankruptcies for individuals and families that are going through a tough time financially. But today, we’re going to touch on helping out small business owners. And we’re going to talk about receiverships and Bankruptcies when it comes to business, which is the first time we’ve actually touched on it. I’m looking forward to that. So I’ve heard the term receivership. What does it mean?

DANIEL MAKSYMCHAK  1:28  

A receivership is a term that  people hear a lot in the media, and it gets a lot of press because oftentimes, it’s very large corporations or famous businesses that go into receivership. Businesses that many people know. So it becomes a term that is synonymous almost with Bankruptcy, but it is a different procedure. And it is done only for businesses, essentially, in business assets. It’s not something that an average person would do. 

What it is – is when a business isn’t meeting its obligations to a secured creditor. A secured creditor is someone who lends money to a business usually, and takes security against the assets of that business. Then if that secured creditor who lent that money is worried that this loan isn’t going to be repaid, or has some reason to believe that it needs to protect itself, it can essentially put the business into receivership by taking control of the assets that it holds as collateral. 

So if a business has certain assets, the bank says, Okay, if this debt isn’t repaid, I have the right to repossess that asset, and that asset is integral to the operation of the business. Then if that secured creditor repossesses that asset or takes control of it, then the business as a whole is affected by that. The secured creditor appoints a receiver to take control and try and maximize the return of those assets so that the secured creditor can be repaid as much as possible. 

When that process happens, that’s called a receivership. The business is in receivership. It’s essentially lost control of a significant portion of its business. And that is now under the control of the bank usually. 

Wayne Kay  3:20  

Okay, so all of a sudden, the bank steps in and they take over. wWhat happens to you, as the say, CEO? You’re the boss of this thing, all of a sudden, are you out? Or are you working alongside with the people that they put in place to help?

DANIEL MAKSYMCHAK  3:36  

Well, at the end of the day, the receiver works for the secured creditors in charge, but there can be  involvement of the former CFO or management staff of the company to assist the receiver. Obviously, the receiver is new to this operation. The receiver doesn’t have any prior experience with it, usually. So the management of the company can assist with the receivership as it all goes. 

The benefit to the company or the management of doing that is – there’s two potential benefits. The receiver can continue to pay the management of the business to work. It’s now not working for the business itself, it’s working for the receiver to assist with the receivership – or if the CEO or the management has guaranteed the debts of the company personally, then by acting with the receiver, it can ensure that the best possible return is realized on these assets. That means that more of the debt has been paid off from those assets, which means there’s less that the bank could be coming after those people for personally out of their own pockets to make up the shortfall on the business debt that wasn’t repaid.

Wayne Kay  4:47  

And when that happens – when they go after the person individually? That’s typically what we talk about when we talk about bankruptcies, correct? 

DANIEL MAKSYMCHAK  4:56  

Yes, that can very often precipitate a personal Bankruptcy, depending on the wealth and the finances of that individual. If the bank takes a loss on this business loan that it’s loaned to the business, and it has a guarantee from an individual that if there’s any shortfall in this loan, I’m going to cover it personally, which is fairly typical in small business loans.  

Then it can cause real hardship to the person who guaranteed that debt if they don’t have the ability to repay the bank the money that they lost on this loan. Then they might be forced into a personal Bankruptcy or have to file a proposal on that personal commitment that they have in order to protect certain assets that they have personally that they don’t want to lose.

Wayne Kay  4:56  

That company – when they’re having financial trouble, they don’t instigate a receivership, right? That’s actually instigated by the person who’s holding the loans.

DANIEL MAKSYMCHAK  5:51  

Yes, that’s correct. The lender, if they’re worried that the payments are not going to be made, or some payments have been missed, or they have reason to believe that the security that they hold as collateral is is plummeting in value – then they might use a receivership to step in and take control and try and minimize the loss that they’re going to suffer. 

It’s not something that the company itself says, Hey, we’re going to put ourselves into receivership. Sometimes it’s inevitable, right? If all of the assets of a company, which is somewhat typical, are secured by the primary lender of the business and the business isn’t viable anymore – the management recognizes that sometimes. It’s a call to the lender and saying, hey, you know, we’re this operation, it’s not going to continue successfully. And that prompts the bank to start the receivership to put those wheels in motion. 

But it’s up to the decision of the bank to start that receivership either through acting on powers that it has in its lending agreement with that business that permits it to hire a receiver and begin a receivership. Or it can seek a court order to have that business put into receivership in order to protect its interests.

Wayne Kay  7:01  

Does a Licensed Insolvency Trustee have a role in this receivership?

DANIEL MAKSYMCHAK  7:06  

It sure does. Licensed Insolvency Trustees under the Bankruptcy and Insolvency Act are the only people that can be receivers in an official capacity. So by being a receiver in the government’s eyes is that you’re a receiver taking control of a significant amount of the inventory or accounts receivable or property of a company of those assets. And in order to be appointed receiver in that manner, you have to be certified as a Licensed Insolvency Trustee. The government has decided that LIT’s have the necessary skills, ethics and the other qualities that are necessary to fulfill the mandate or receiver.

Wayne Kay  7:47  

Okay, so what does that look like when you walk into a company?

DANIEL MAKSYMCHAK  7:51  

Well, it’s different from company to company. Banks lend to all sorts of different companies. And therefore all sorts of different companies can be put into receiverships. As a receiver it depends on what the banks are looking for you to do that month, so to speak. 

Usually you go in and it’s a matter of assessing the situation quickly. You’re speaking with the bank, you’re meeting with the bank, you’re getting the information that they have. But that’s usually only part of the story. 

Then it’s a matter of going into the company reviewing the books and records, securing – taking control of those assets, meeting with the key managers or knowledge holders of that business, and trying to make the most of the situation to recover as much money as possible for the bank, primarily who has security on those those assets. 

Sometimes there’s even enough to – after that banks, there might be other creditors of the business who receive a payout as a result of the receivership towards their debts. And that minimizes, as we said earlier, the potential personal damages to the investors or guarantors of that business.

Wayne Kay  9:02  

As an LIT, you’re working for the lender as opposed to the actual individual.

DANIEL MAKSYMCHAK  9:10  

Yes, in this case. This is different from a lot of filings where you’re appointed or the LIT is selected by a debtor who walks into your office and says I need to file a Bankruptcy and I would like you to be the trustee of that Bankruptcy. 

In this case, it’s the lender who will call the trustee and say, Hey, I have this business. It’s run into difficulties. I think I might need to appoint a receiver. Would you like to act as receiver for this situation? So at the end of the day, whether you’re a receiver, in most cases under Court appointment or you’re a trustee, you’re what’s called an officer of the court. You’re more like a referee than working for one side or another typically to ensure that the legislations are being enforced. But at the same time your role is definitely different in a receivership than in a Bankruptcy.

Wayne Kay  10:03  

But I liked the way you mentioned that receivership is something we hear about in the news. And when a company does go into receivership, it doesn’t always mean that it’s come to an end. It does also sometimes turn around where the company becomes successful again, if it gets back on track.

DANIEL MAKSYMCHAK  10:25  

Usually, it’s under different ownership or management. So a receiver might come into a business and decide that the assets that are secured by this bank, on the whole, are a viable business. Maybe there’s something that’s happened or some circumstances that are preventing them from generating a lot of money at this point – enough to service the debt. But maybe in the right hands, that would be different. 

Then that business can be sold as a going concern and operating business to a different party, perhaps who then runs it and to outside consumers, they might never know the difference. There’s someone who bought the name, someone bought the store, let’s say or the assets. They’re still the same store with the same customers. But it’s a different entity. It’s rare, I think, in a receivership, where the entire structure of the business would remain the same post receivership.

Wayne Kay  11:19  

Okay. That’s good to know. Because I would think they would have to be very willing to be open to learning about what you’re sharing and what the bank wants.

DANIEL MAKSYMCHAK  11:30  

Yes, usually before it gets to the point of receivership, there’s been some discussion between the management and the bank to try and solve this without a receivership. Sometimes, there’s agreements or monitoring put in place where the bank is trying to satisfy itself that this loan is actually still viable, but we need to see – we need a closer look. So sometimes when it gets to the receivership point it is decided that these assets would be best in someone else’s hands, and are then going to be put into receivership so that they can be basically purchased. So then the bank loan can be repaid as much of what’s owed as possible,

Wayne Kay  12:11  

Can somebody reach out to you if they’re going through this situation?

DANIEL MAKSYMCHAK  12:15  

Sure. If they’re running into financial difficulties as a business, we’re certainly happy to speak with them. That’s part of the initial consultation when we sit down and we say, okay, you have this business, these are the difficulties that you’re facing – what are your options? Sometimes that conversation leads to okay, if you don’t want to operate this business anymore, all of your assets are secured by your lender. It may be that a receivership is what’s going to happen. 

You essentially give the keys back to the bank, and say, Okay, this whole business is secured by this loan, but I can’t pay this loan anymore. And I acknowledged the fact that you have the right to, realize upon these assets to try and recover as much as you can for your loan. And then when that conversation is added with the bank, oftentimes that necessitates the receivership when the bank takes action to try and realize on those assets,

Wayne Kay  13:09  

Oh, you’ve done a great job of explaining how this all works. I hear the terms, but not perfectly familiar with how it all works. So it’s making a lot more sense. What’s your final advice here regarding receiverships and Bankruptcies?

DANIEL MAKSYMCHAK  13:25  

Well, if your business is facing difficulties, definitely talk to a Licensed Insolvency Trustee. There’s complex situations, many LIT’s are Chartered Accountants or Chartered Professional Accountants as well. They understand how to review financial statements, review statements of assets, those kinds of things, and can go through your options and try and figure out what the best method is if you want to save the business. Then there are  ways to possibly look at that.

Sometimes business owners, they’re just done with that business, they want to move on to something else. And we can talk through the cleanest way to exit that business, minimize the personal damage to yourself and your own personal finances as well. So take that opportunity, have a free consultation and speak to a professional about your situation.

Wayne Kay  14:15  

That’s good to know. I didn’t know if it was still free for businesses as well.

DANIEL MAKSYMCHAK  14:19  

Most trustees, I’d say, would do that for free for a business as well, whether it’s a business  or an individual. If you’re getting into complex business consulting or multiple meetings and strategic planning and that kind of thing, then I’d say there’s a cost for that. But to pick up the phone and say that you’d like to meet with the trustee just to learn more, that’s certainly something that we do here at LCTaylor.

Wayne Kay  14:43  

Terrific. Daniel, thank you very much for being on the show. We’ll have you back again.

DANIEL MAKSYMCHAK  14:48  

Sounds good. Talk to you soon Wayne.

Wayne Kay  14:49  

My guest today, Daniel Maksymchak. You can learn more or schedule that free consultation we’ve been talking about with LCTaylor Licensed Insolvency Trustees. Just go to the website, LCTaylor.com.  

And that’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from and of course, for more information you can always check out debtmatters.ca. Thanks for listening.