What Does It Mean When a Company Is Forced Into Receivership?

If bankruptcy court is the last place you want your business to end up, then receivership may well be next to last, because it means losing control of your company. When a company is forced into receivership, a court takes away the owners' authority to run the business and puts it in the hands of an outsider.

Companies typically go into receivership because of a lawsuit over how the company is being managed. If plaintiffs in such cases believe that their interest in the company is being damaged by its management, they can ask a judge to temporarily remove the owners from active oversight of the firm while the case is being litigated. If their request is granted, the judge appoints a neutral outside party to run the company. That outsider is called a receiver.

Creditors of a company or people who have won legal judgments against it may attempt to force it into receivership if they believe it's being so poorly managed that they won't get what they're owed. Getting a receiver appointed in such a case might be an attempt to head off a bankruptcy that might wipe out the company's debts entirely. Partial owners of a company also might seek to force the business into receivership if they allege mismanagement, theft or other illegal activity by the managing partner.

Plaintiffs can recommend to the judge that a particular person or entity be appointed receiver. Final say rests with the judge, though. There are no specific requirements to be a receiver, although in general, the receiver cannot be a party to the legal dispute, an attorney for anyone involved in the dispute, someone with a financial interest in the case, or a relative of the judge. Lawyers are often called in as receivers, and there are even businesses that specialize in providing receiver services. Once in place, the receiver's job is to serve as a caretaker -- keeping the business running and protecting its assets while the case is playing out in court.

In some cases, when a lawsuit pits owners of a company against each other, the owners might jointly request receivership to put the business in neutral hands until their dispute can be resolved. In these cases, the company is entering receivership voluntarily, rather than being "forced" into it. Nevertheless, once the receiver takes over, the same rules apply as for involuntary receivership: The receiver is in charge of the business and has final say over all operating decisions until relieved by the judge.