When a company cannot balance its budget, drastic action may be necessary. Some organizations face such significant financial challenges that the only options available are either bankruptcy or dissolution of the organization. The company has too many obligations and insufficient assets to create a reasonable plan to pay them.
Other times, restructuring might be an option. Restructuring involves making substantial changes to an organization’s operations and finances to improve the company’s solvency. Companies reduce their workforce, close lower-performing locations and may streamline what goods or services they provide. Sometimes, the courts may initiate a receivership as part of a restructuring effort. That receivership can cause challenges within the company but may help the organization regain financial equilibrium.
What does a receivership involve?
A trustee operates a company during receivership
When an organization has not been able to balance its budget, restructuring can be a way to improve company finances. However, if all of the same people continue to play leadership roles in the organization, some of the same issues might recur.
Therefore, the courts sometimes decide to assign a receiver or trustee to oversee business operations. That party has a fiduciary duty to act in the best interest of the company and help it become profitable again. They may take drastic steps to achieve that goal.
A receivership involves a court-appointed professional managing the company’s operations during the restructuring process. They may be more open to significant changes than entrenched leadership. They may also have experience helping companies with workout plans and other attempts to balance a complex business budget. They can stop paying dividends to shareholders, renegotiate certain contracts and even liquidate certain business assets.
When receivership is successful, it may eventually end, allowing prior leadership at the company to regain control or giving shareholders an opportunity to bring in new leadership. Although those who have invested in and helped run an organization may initially oppose a receivership, people sometimes reach the eventual conclusion that the receivership was overall beneficial for the company.
Knowing what may happen during a restructuring effort can help investors and executives plan for the difficult path ahead. Receivership is one of many aspects of restructuring that can be both difficult and beneficial for a company.