If you and your fellow corporate managers cannot agree on critical elements
of doing business or if an outsider thinks
that mismanagement is limiting your ability to pay bills — look out. There may be a
court-ordered receivership in your future.
“The receiver’s job is to literally operate
the business,” says John Mark Jennings, a
partner in the law firm of Shulman Hodges
& Bastian LLP. “A receivership is an action
brought against your company because it
is being operated to the detriment of shareholders or creditors.”
After a receiver is appointed, maintaining
the continuity of running the business may
not necessarily be his or her first objective.
“If the right thing is to keep the business
open, the receiver will do that,” Jennings
says. “If a business cannot pay its debts and
is a dying proposition, the receiver is more
apt to wind down his operations, rather
than spending his time attempting to resurrect the company.”
Smart Business talked to Jennings about
how managers should react to possible
receiverships.
How common are court-ordered receiver-ships?
They are becoming more common. With
the current state of the economy, there is
distrust in the marketplace. In the business
world, when consumer confidence is down,
so is the confidence in others being able to
repay debts. That lack of confidence sometimes requires a neutral third party to help
make decisions, to enforce existing agreements or to comply with the law.
Under what circumstances is a receivership
a good thing?
Often, members of company management are divided into factions. Their personalities might not mesh, and their overall
business judgment may be clouded by
infighting. In that case, one of the parties
can initiate litigation and ask the court to
insert a receiver to oversee the business.
That action establishes an internal decision-making mechanism to conduct business while owners or top-level managers
iron out their disputes.
Very often, a creditor will ask the court to
appoint a receiver over a company that
owes it money. Even if no internal strife
exists, the company may not be paying its
debts as they become due. In that case, the
receiver is charged with the task of making
sure that money flows where it should.
Tactically, it may be beneficial to be the
first person to request a receivership,
because courts are often inclined to follow
a party’s nomination for the receiver —
assuming he or she has proper credentials.
What impact does a receiver have?
A receiver, certainly, costs money, and
charges by the hour. If the company cannot
withstand that cost coupled with pre-existing financial troubles, the receivership
process can be disrupted.
There is also the chance that the receiver
will be talking to top managers about the
company’s future direction. Very often, one
of the parties can lose what control he or
she had, which can lead to a true intellectual/financial rift among company leaders.
The receiver’s job is to get past the acrimony and animosity and do what’s in the
company’s best interests.
In some cases, managers may agree that
they will never reach a decision or compromise. In that event, the receiver also
can provide a dispute resolution process.
What are a manager’s obligations under a
receivership?
The very threat of being placed in
receivership is a mission-critical turning
point. You have to immediately focus on
the problem, because you could be
approaching the last decision you ever
make as a corporate leader.
If my company were threatened with a
receivership, I would first turn to my in-house counsel or an experienced attorney.
You never want to go into a receivership
process without having someone protecting your rights and those of the company.
Once you have been sued and a receiver
has been appointed, you face a very large
uphill battle. At that point, there is a good
chance the court will keep the receiver in
place until either the litigation runs its
course or some kind of settlement is
reached.
Under a receivership, a temporary
restraining order is generally issued. Your
obligations are to (1) make sure that you do
not interfere with the receiver’s operation
in any way and (2) help the receiver make
decisions that are right for the company.
Initially, you have to determine whether
or not you are going to oppose a receiver-ship, but after one is appointed, do everything you can to make sure the receiver’s
job is easy and that you are not interfering.
What are the penalties for interfering with a
receiver’s actions?
The consequences for those who choose
to interfere with a receiver’s duties are predictable. Early orders and injunctions
restrain corporate officers from doing
something negative against the receiver’s
actions. They also give the court contempt
power over violations of its orders.
Contempt penalties include sanctions and
fines, which eventually can develop into
criminal contempt charges. Bottom line —
never interfere with a receiver’s duties.
JOHN MARK JENNINGS is a partner with Shulman Hodges & Bastian LLP. Reach him at [email protected] or (949) 340-3400.
