Projects: Before & After
WHAT IS A RECEIVERSHIP?
A receivership is an alternative to bankruptcy and tends to be appointed when the company is under immediate circumstances that threaten to cause damage to their creditors.
WHAT IS A RECEIVER?
Typically seen in legal cases arising out of business disputes or foreclosures, a receiver is a court appointed individual or entity that acts as a neutral party to take control over the business or property and manage the property during the pendency of the underlying lawsuit. The receiver’s role is to facilitate a favorable outcome for the parties involved in the case. He acts as a neutral third party and establishes himself in control of the property that is the subject of the dispute and works to maximize the value of any assets that he has received. Generally, the receiver stands in the place of the owners of the property and acts on their behalf with the interests of all creditors in mind. To that end, a receivership is often termed as a Receivership for the Benefit of Creditors, however, the benefit to owners of companies or property cannot be understated.
WHAT CAUSES RECEIVERSHIP?
Generally, Receiverships are caused by one of three things:
- Creditor-Debtor Relations: In the event that the debtor company or an individual is unable to service its payment of debt obligations to a secured creditor or general unsecured creditor, the creditor may move the court for the appointment of a Receiver. Typically this process is achieved after all workout options between the creditor and the debtor have been extinguished.
- Disputes Between Company Owners: At times, there are disputes between the owners of companies that go beyond anything that is manageable and may eventually detract from the business operations. In that instance, there are cases where one owner may, provided the company By-Laws or Membership Agreements provide for it, move for the appointment of a Receiver to act as a neutral third party to operate the company while any disputes are resolved between the owners.
- Self-Initiated: There are times in which an owner of a company understands that the company will no longer be able to maintain its operations and seeks to dissolve the company in an organized and diligent wind down effort. The owner may file a Petition for Dissolution of the company which will allow the court to appoint a Receiver to liquidate the assets and take what measures need to be taken in order to wind down the company completely.
WHAT DOES A RECEIVER DO WITH REAL PROPERTY?
A receiver will act as the landlord of the property and will facilitate the liquidation of the property. Serving as the landlord, the receiver is required to keep up the property and manage the selling or leasing process.
HOW ARE THE EFFORTS OF THE RECEIVER TRACKED?
A receiver is required to periodically provide reports to the court updating all parties involved with the current status of the case.
CAN A COMPANY RECOVER FROM RECEIVERSHIP?
The Receiver can offer new operations management strategies and is entrusted by the court to carry out the implementation of these strategies. By law, the receiver is to use their best efforts to preserve the viability of the company. Sometimes, a property can be turned around but the company is still liquidated to pay off creditors.
WHAT ARE THE QUALIFICATIONS A RECEIVER MUST HOLD AND WHAT ARE THEIR DUTIES?
A receiver must be a resident of the state and act in conformity with state and local laws. The appointed receiver must avoid conflict of interest and must act in the best interest of the estate. Once a receiver has taken control of a company’s assets, they must provide notice to all known creditors and give said creditors the opportunity to present their claims. A receiver must preserve and appraise all inventory and assets and manage their recovery in a timely manner and in a way that maximizes the benefit of the creditors. It is the receiver’s responsibility to make recommendations for appropriate distributions to the creditors.
WHAT ARE THE BENEFITS OF RECEIVERSHIP VS. BANKRUPTCY?
When a company is faced with problems associated with debt or internal conflicts, there is often a choice between filing a bankruptcy and filing a receivership. First it must be noted that there are various types of bankruptcy. In a Chapter 7 bankruptcy, a business that files a bankruptcy does not receive any sort of discharge. The bankruptcy serves as notice to the world that the business operations have ceased and the company is liquidated by a Bankruptcy Trustee. Often, when a Chapter 7 bankruptcy is filed for a company, the bankruptcy is completed without any corresponding wind down of corporate obligations, including the filing of certain governmental documents and the official wind down of the business under Ohio law. In a dissolution receivership, on the other hand, the Receiver takes care of the final wind down within the case.
There is also Chapter 11 bankruptcy. Chapter 11 provides the ability for a company or an individual to restructure their debts according to the Bankruptcy Code. Chapter 11 is a cumbersome and expensive proposition. The fees for a Chapter 11 bankruptcy case are generally many times larger than fees for a Receivership. While there are advantages to filing a Chapter 11 bankruptcy in terms of the Bankruptcy Code controlling the ability of a debtor to restructure its business, it is a process that is not right for all companies.
The main benefit to filing a bankruptcy is that in a bankruptcy, generally speaking, the owners and principles of a company or property generally retain some more control than they would if a Receiver is appointed. In a Chapter 11 bankruptcy, the owners of a company operate the company as debtors in possession and are able to propose a plan of reorganization that will affect all creditors. In a Chapter 7 bankruptcy, the owners temporarily lose control as the Chapter 7 Trustee evaluates whether or not to liquidate the company, but if there are no assets to liquidate or all assets are liquidated and the Trustee completes his work, the responsibilities of the company revert back to the former owners. The issue, however, is that a bankruptcy does not offer the same flexibility that a Receivership offers. Receivership statutes under Ohio law do not place limited powers on the Receiver and do not limit the ability of courts to grant relief to creditors in the method of the Receivership. The Bankruptcy Code, by contrast, is a very rigid and structured rule book that establishes exactly what a debtor can and cannot do in a bankruptcy. So in this light, a Receivership has multiple benefits over and above a bankruptcy.
The cost of a Receivership is generally contained to the actual challenges facing a company. In a Chapter 11 bankruptcy, there are numerous reporting and motion requirements that require legal expense outlays. In a Receivership, while you do need court approval to take many actions, approval can be obtained in a more efficient manner, and the Receiver has more freedom in how he goes about restructuring the company. Those same processes are much more expensive in bankruptcy. Thus, a receivership can lead to substantial legal cost savings.