When a business is in financial trouble and owes a lot of money to its creditors, bankruptcy may be one option to restructure the business and get ahead of the debt. However, before the business can file for bankruptcy, creditors may initiate a lawsuit to put the business into receivership in order to get their debts paid. Receivership is different from bankruptcy in its implementation and operation.

Creditors who have filed lawsuits against the business to collect business debts can use a variety of methods to collect on the judgement. One such way is to petition a court to appoint a receiver who is empowered to take various steps, including selling off business assets, in order to pay off the business debts. The creditors can propose the person to serve as a receiver, and the business has an opportunity to argue against the appointment.

There are certain people who cannot serve as receivers, mostly people who have worked in certain capacities at the business, and those who have interests that are adverse to the business such as the creditors and their representatives. There are exceptions to the prohibition on certain people serving as receivers if a court makes a determination that the person’s appointment is in the best interest of the business and that the issue that would otherwise disqualify the person as a receiver would not be materially adverse to the business.

A company can be placed into receivership for reasons other than to pay a judgement creditor. Sometimes, a business may seek receivership in order to turn the business around from the brink of financial disaster. In this case, the receivership can help the business make management changes and sell off property for the benefit of the business. A receiver in some cases can help a business avoid bankruptcy.

However, if a business owner would rather file for bankruptcy than have a receiver appointed to control the business and manage its assets, he or she may have the option to do so depending on when this is done. In some cases, in appointing a receiver, the court may empower the receiver with the authority to file for bankruptcy on behalf of the business. If this is what the business owner wants anyway, then he or she may not fight the receiver’s action in filing for bankruptcy. If the business owner wants to avoid receivership altogether, he or she has to file for bankruptcy on behalf of the business before a receivership action is begun.

Business owners should remember that filing for bankruptcy will not give them unfettered control over their businesses. Once a business files for bankruptcy, the court appoints a bankruptcy trustee who does many of the things an owner would have done, including selling off assets in order to pay creditors.

Contact a Business Attorney

If your business is in trouble and you are at risk of being sued by creditors on debts owed, you need to contact an experienced business attorney to help you determine your best way forward. For more information on bankruptcy and receivership, contact an experienced business attorney at Resnick Law, P.C., in Bloomfield Hills and Detroit, Michigan, to schedule a consultation. Our attorneys can assist you as you make your decision to seek a receivership or fight the appointment of a receiver.

(image courtesy of Lukas Blazek)