Receivership and bankruptcy are two legal options used to address business financial distress, but they are different in their nature, purpose, and scope.

Receivership vs. Bankruptcy: Differences in Nature

Receivership is a legal process in which a court-appointed receiver takes control of a company's assets or operations to protect the interests of creditors, shareholders, or other stakeholders. The receiver acts as a neutral third party and has the authority to manage, operate, and sell the company's assets—potentially for the purpose of satisfying debts owed to creditors. 

Alternatively, bankruptcy is a legal process in which a debtor, either an individual or a company, seeks relief from its debts through a federal court. Bankruptcy can involve liquidation of assets (Chapter 7 bankruptcy) or reorganization of debts and operations (Chapter 11 bankruptcy).

Differences in Purpose

The purpose of a receivership is typically to protect and preserve the value of a company's assets, ensure that they are used in the best interests of stakeholders, and maximize recovery for creditors. 

Receivership is often used as a temporary measure to address specific issues such as financial mismanagement, fraud, or partner/shareholder disputes. 

On the other hand, the purpose of bankruptcy is to provide a debtor with a fresh start by discharging or reorganizing debts, and to ensure that creditors are treated fairly and receive their fair share of the debtor's assets.

Differences in Scope 

Receivership is typically a state court process, although it can also be implemented by a federal court in certain circumstances. It is generally limited to the specific assets or operations that are subject to the receivership order, and the receiver's powers and authority are defined by the court order. 

Bankruptcy is exclusively a federal court process governed by the U.S. Bankruptcy Code. It is generally broader in scope, encompassing all of the debtor's assets and liabilities. Bankruptcy can involve complex legal proceedings, including automatic stays on creditor actions, debtor-in-possession financing, and court-approved reorganization plans.

Understanding the Differences

Although both receivership and bankruptcy are legal processes used often to address financial distress, they differ in their nature, purpose, and scope. The receivership remedy is typically a state court process focused on protecting specific assets or operations, while bankruptcy is a federal court process aimed at providing relief to debtors and ensuring fair treatment of creditors on a broader scale.

Griswold Law: California Receivership Firm

Richardson “Red” Griswold has been appointed by California courts more than 150 times. At Griswold Law, we know the ins and outs of receiverships and how the remedy is best applied. 

If you want to learn more about business receiverships, contact us today.