5 Things To Know About Receiverships

Given the current crisis, many businesses, large and small, are struggling to stay afloat. A number of high-profile businesses have filed for bankruptcy protection in recent weeks, and a massive wave of Chapter 11 filings is almost certain to crash in the coming months. From retail to energy, hospitality to manufacturing, almost no industry has been or will be,  immune from financial distress.

A Receivership case is an insolvency proceeding, roughly akin to a bankruptcy.  However, the rules governing Receiverships are not as well-defined as in a bankruptcy proceeding.  It is possible for someone who has made an investment or purchased an interest in a company or property to be drawn into a Receivership case based on the conduct of other persons or entities.  A lender holding a lien on property may also be drawn into a Receivership case if the property is subject to a Receivership order.

What is the difference between a receiver and a liquidator?

Receivership and liquidation are similar processes in that their purpose is to recover monies for a creditor or creditors. Liquidators work on behalf of creditors as a whole, however, whereas a receiver’s principal responsibility is to a specific secured creditor.

#1. What is a court-appointed receiver 

A court appoints a receiver to protect property controlled by a person sued in a court case.  The SEC typically recommends the appointment of a receiver in cases in which the SEC fears a company or an individual may dissipate or waste corporate property and assets. 

A receiver is a neutral third-party custodian for the property who is granted certain powers by the court.  A receiver’s powers generally include taking legal control of and protecting assets, filing claims on behalf of an entity placed into a “receivership,” and, ultimately, distributing assets to defrauded investors, claimants or creditors through a court-approved plan.

 A receiver has a fiduciary duty to stakeholders and the court and typically has the discretion to marshal, manage, and liquidate the receivership company’s assets while accounting for all receipts and payments.  The SEC is more likely to appoint a receiver in frauds when there is a danger of property being lost, concealed, or squandered.

#2 What are a receiver’s responsibilities

A receiver’s duties and responsibilities, such as monetizing assets and distributing funds, are outlined in an order entered by the court overseeing the receivership. The receiver’s role is, in many ways, equivalent to that of a trustee in a bankruptcy proceeding. A receiver, however, typically has much greater flexibility to perform his or her duties under a more simplified and streamlined framework and process.

#3. Who chooses the receiver?  

A federal district court judge can appoint a receiver following the SEC’s filing of an application, or petition, with the court.  The SEC may provide the names of several qualified candidates for a court to consider in determining who should serve as a receiver in a particular case.  The receiver is an officer of the court, not an employee of the SEC, and ultimately answers to the judge.

#4. How is the receiver paid? 

Subject to court approval, a receiver has the right to reasonable compensation for services and reimbursement for costs and expenses. Generally, a court pays a receiver from the assets of the receivership estate.  To be paid, the receiver submits an itemized report to the court that details the receiver’s fees and expenses.  The SEC and other interested parties then have the opportunity to object to the money sought by a receiver.  Ultimately, the court determines the amount a receiver is entitled to be paid.

#5 Voluntary receivership

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.

Choosing What is Best for Your Business

A receivership can be an effective option to deal with the lender and other creditor claims in an organized fashion when funds are not available to pursue a bankruptcy proceeding. One major difference between a bankruptcy and receivership proceeding is that there is no statutory mechanism to recover preferential transfers in a receivership.

Final Thoughts

Upon appointment by the court, receivers often take exclusive possession of a company, a secured creditor’s collateral, or any other property in need of protection or liquidation. Receivers, as an arm of the court, can be empowered to investigate fraud, prevent waste, marshal assets, and liquidate the property as directed by the court. The receiver’s duties often present complex practical and legal challenges that test the boundaries of the court’s equity jurisdiction.

Limitless Investment & Capital has Practical Experience & Legal Knowledge

The Limitless Investment & Capital team has the practical experience and legal knowledge of receivership law necessary to achieve results despite the challenging circumstances. Call us today to schedule a free consultation.