The number of global corporate defaults in 2008 has already surpassed the total for all of last year, and businesses in varied industries are suffering from the present economic downturn. As more and more companies default on their obligations, creditors of such companies should be aware of their rights and remedies in the face of continued default; and one of the most powerful tools in their collective arsenal may be the court-appointed receiver.
What (or Who) is a Receiver?
In general, a receiver is a person appointed by the court to take possession and charge of designated assets or property. The receiver is a fiduciary and officer of the court, and must administer the assets or property in accordance with the court's directives. A receivership can be an alternative to filing a bankruptcy case to liquidate a company's assets; or, a receiver can be appointed to operate a troubled company's business as a going concern. Whether a receivership's goals involve liquidation or continued business operations, the receiver is expected to maximize the value of the company, and has a further duty to protect all shareholders and creditors to the highest extent possible.
Once the receiver has completed his tasks, he files a final report and account summarizing the receivership's operations, total receipts and disbursements. Upon approval of the final report and account by the court, and evidence of payment of all administrative costs, which are generally paid at the highest priority, similar to administrative professionals' costs in a formal bankruptcy case, the receivership will be dismissed and the receiver discharged from his duties.
Why Appoint A Receiver?
Under state law, receivers may be appointed if a company is insolvent or is not paying its debts in a timely manner. Typically, a creditor or group of creditors petitions the court to take control of the business, and appoint a qualified, independent person to manage the company for the benefit of all interested parties. Generally, the appointment of a receiver requires, among other things, the filing of a complaint along with supporting declarations regarding the need for a receiver and the proposed receiver's qualifications. The payment of a receiver's bond to effect the receiver's discharge of his duties to the court must also be made at that time.
Petitioners may also seek appointment of a receiver on an ex parte basis; however, appointment of a receiver on an emergency basis may be extremely difficult, as the petitioning creditor or creditors must adequately evidence the probability of suffering irreparable injury in the event a receiver is not quickly appointed.
There are many different types of receivers, the authority for which is found throughout California statutory law. Generally, however, receivers may be placed into one of two nonexclusive categories: general receivers or custodial receivers.
General receivers are analogous to the bankruptcy trustee, and once appointed, assume control over all the assets of the troubled company with the intent to either sell the business as a going concern, or maximize the recovery to creditors after the company's orderly liquidation. For example, general receivers may be appointed to preserve property pending a corporate or partnership dissolution, which can be especially helpful where there may be infighting among partners or corporate directors.
A custodial receiver, on the other hand, takes possession of only a designated asset or assets, and operates and/or sells it for the benefit of the creditor or creditors secured by such assets. Custodial receivers may be appointed, for example, to dispose of certain property according to judgment, or preserve it during the pendency of an appeal.
Special Considerations For Creditors Secured By Real Property
Most instruments that confer a security interest in real property, such as mortgages or deeds of trust, also provide secured creditors with the authority to move for the appointment of a receiver. A creditor secured by real property collateral may wish to seek the appointment of a receiver if it believes the value of its security has been damaged and that the troubled company's management cannot protect the creditor from ongoing losses.
Receivers can take many actions to preserve the underlying value of the real property collateral and maximize the lender's overall recovery. For instance, receivers may collect and preserve rents for the benefit of the lender under the assignment of rents provisions typically included in most commercial real property security agreements. Receivers may also perform necessary maintenance and negotiate or extend leases for commercial properties, prevent waste by correcting health or safety issues, or even positively affect remediation liability by promptly investigating and assessing environmental issues concerning the real property at issue. The receiver can also help preserve attendant rights, such as operating permits, licenses and approvals, which further enhance the value of a lender's real estate collateral.
Importantly, a receiver may also be appointed to get neglected or delayed construction projects back on track, and provide the lender with objective and credible reporting on the projected value of a completed construction project—a very helpful service considering that many lenders today are facing record numbers of construction and development loan defaults, and are forced to rely on real property collateral to mitigate their losses on such loans.
Special Considerations For Creditors Secured By Personal Property
A creditor secured by personal property may have a right to have a receiver appointed where the creditor's personal property collateral is in danger of being lost, removed or materially injured. Such secured creditors may specifically seek a custodial receiver to prevent their collateral from being sold or encumbered, or to obtain possession of collateral owned by the receivership estate, but held by other parties. Additionally, a creditor with a claim that the owner fraudulently conveyed business assets to a third party may seek a receiver to hold the property pending resolution of the claim.
Conclusion
Receiverships may serve as viable alternatives to Chapter 11 bankruptcy filings for several reasons. First, Chapter 11 cases are costly, especially for smaller to mid-sized businesses, and the administrative costs of a receivership are typically lower than those inherent in most Chapter 11 cases.
Second, receiverships may have less negative impact on crucial relationships with the troubled company's trade creditors, and the preservation of goodwill, both with the company's customers and creditors, will serve to maximize the value of the company so that its assets or operations may be sold for a higher recovery.
Still, the Bankruptcy Code affords additional protections and powers that a state receivership may not entail, such as the ease of liquidation of a troubled company's assets when the assets are located in several different states, or the ability to assume and cure contracts vital to a company's continued operations. As such, creditors and lenders should take steps to educate themselves about the benefits and advantages of state receiverships, so that they may determine whether to seek appointment of a receiver as corporate defaults continue to rise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
