December 17, 2017

Receivership: North Carolina Bankruptcy Equivalent

While most people have some familiarity with the concept of bankruptcy under federal law, many people are unaware of the concept of receivership under North Carolina law.

What is receivership?

A federal bankruptcy judge oversees the bankruptcy case, with the help of the Bankruptcy Administrator.

In a receivership, the North Carolina court appoints a receiver who is an officer of the court and who is responsible two things:

  1. the liquidation of the assets
  2. determining the obligations of the person or firm who is subject of the receivership.

Generally firms such as limited liability companies (LLCs), partnerships and corporations are involved in receivership. The receivership insures that the assets and liabilities are liquidated by an impartial receiver and is subject to the oversight of the court. It is important to note that a discharge* can occur for an individual in a Chapter 7, 11, or 13 bankruptcy case and for a firm in a Chapter 11 reorganization. There can be no discharge in a receivership case.

*Discharge means that the debts cease to exist or are limited by the provisions of a plan of reorganization. There can be no discharge in a receivership case.

As a general proposition, a receivership will almost always end in with the liquidation of the debtor. Comparing a receivership of a debtor to Chapter 11 bankruptcy cases is like comparing apples and oranges. The apple is liquidation and the orange is Chapter 11 reorganization. In Chapter 11 the goal is almost always for the debtor to reorganize its financial affairs in such a way that allows it to:

  1. pay its creditors more than they would receive in a Chapter 7 liquidating bankruptcy) AND
  2. emerge from bankruptcy able to continue doing business.

Receivership is one of many tools

Receivership is one of the tools that should be considered when a business is in financial trouble.  In particular, it is generally easier for a creditor to convince a court to appoint a receiver for an insolvent business than it is to file an involuntary bankruptcy case against an insolvent business.  Minority shareholders/owners may find receiverships useful, too, when they have been “frozen out” of a business.

I wrote this primer on how businesses, especially small businesses can use Chapter 11 to reorganize.  Simply click the button below for this free guide. Chapter 11 Bankruptcy for Re-organization

When seeking legal advice as to a financially distressed business, consult an experienced attorney who practices in both bankruptcy court and state court, so that all options are on the table.