Bar Bulletin

Bar Bulletin

When the Role of Receiver Takes Center Stage

February 2022 Bar Bulletin

By Al Davis

As we enter 2022, we realize that many of the sources of cash that companies relied on over the past year have come to an end. The SBA’s EIDL loan program is no longer available to new applicants. PPP loans are either forgiven or in that process. And while there is a large amount of money in the system, we recognize that banks and other lenders are going to be in the process of reviewing questionable loans. This article explains the role of a receivership for companies in financial or other types of distress.

Receivership is often a form of debt or other business restructuring that is ordered by a state court to resolve disputes related to financial or other types of difficulties. A receiver is a neutral, legally-appointed professional who is entrusted to manage a company’s operations, finances, and property under the supervision of the court.

The main goals of receivership are (i) to repay debt to creditors; (ii) to maximize value of an operating company or its assets; (iii) to enforce compliance with government regulations; and if necessary (iv) to retain new management to operate the business.

A receiver’s role is to assess the company’s viability, investments, and existing creditor debt in order to develop a strategy to repay what is owed, if possible, without completely liquidating the company. The ultimate goal is to bring the business into a period of business or financial recovery. However, the receiver may have the right to take possession of and sell property or other assets as a way to pay creditors and reduce debt, as well as to collect company income from profits for disbursement to creditors and shareholders.

Other powers include maintaining a bank account, entering into leases, deeds, and contracts, and engaging in any other business activity that is deemed necessary and reasonable to ensure the maintenance of the property during the pendency of the case.

A receivership can be initiated through the action of the court or, in Washington, through an assignment for the benefit of creditors. A receivership through the court may be in the case of a viable company where there are non-financial difficulties or in the case of a secured creditor requesting such a court action.

An assignment for the benefit of creditors generally occurs where a company cannot pay its debts and wants to relieve the pressure on the owners or management. Following an assignment for the benefit of creditors, the assignee immediately applies to the court for a receivership, converting the assignment into a court-supervised receivership.

There are a number of advantages to a receivership, especially where a viable company is concerned. In cases where there are not enough funds or assets available for an insolvent company to afford filing for bankruptcy, creditors and lenders often seek receivership. Although the receiver charges a fee for managing the debt payment process, pursuing receivership is considerably less expensive than funding a bankruptcy proceeding. Receivership requires fewer hearings, filing requirements, and fees, which translates into lower court costs and expenses for each party.

In the case of a viable company, our experience has demonstrated that a court-appointed receiver offers professional suggestions and a fresh perspective that all of the parties are more likely to trust and respect. Because a court-appointed receiver works as a mediator to preserve the company’s property and other assets while restructuring the company to repay creditors and other parties at interest, all parties’ interests are represented, and a favorable outcome can often be reached much more quickly and easily than through litigation or bankruptcy.

When managing the assets and liabilities of a company in litigation, receivership may be preferred over bankruptcy. A receiver can develop and implement strategies for operating a company with a simpler process that is typically unavailable in bankruptcy. Debt restructuring and improved asset management can secure more money for creditors, lenders, and stockholders, which can potentially save the company from liquidation

A company in bankruptcy is required to file schedules of their assets, liabilities, and finances with the court. Under receivership, however, since state court pleadings are typically filed in a less publicly searched format, they are less readily available to the public. Receivership therefore minimizes negative publicity and avoids the stigma associated with bankruptcy that could tarnish a company’s reputation and result in a loss of customers.

It is important to note that there are receivers where most of their assignments are in the restructuring and sale of operating companies as a “going concern” and others where most of their assignments are in the rapid liquidation of assets. When considering a receivership, it is important to understand which approach provides the best return to the various stakeholders. 

Al Davis serves as Principal at Revitalization Partners LLC, a corporate and board advisory firm that specializes in restructuring and receiverships. He is a Court Appointed General Receiver in the State of Washington as well as an interim CEO and advisor to middle market companies. He can be reached at adavis@revitalizationpartners.com or (206) 903-1855.

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