In the June 2024 edition of the American Bankruptcy Institute Journal the authors of “Why State Court Receiverships Are Becoming the Norm for Smaller Companies,” write that “state court receiverships are now poised to take center stage . . . as the preferred method for addressing financial distress of small companies.”
The authors assert that for smaller middle-market businesses, receiverships are rebounding in popularity due to the expense associated with bankruptcy proceedings. The authors conclude: “With the difficult choice of filing for bankruptcy increasingly becoming a nonviable alternative for smaller companies due to the cost and complexity of doing so, the spreading adoption of model receivership statutes is poised to increase receivership in popularity as a method by which companies can address underlying insolvency issues on a simplified, more cost-effective basis while retaining the best features of federal bankruptcy law.”
I agree that receiverships will increase in popularity. While the spreading adoption of model receivership statutes may increase the uniformity of receivership law and thereby make the remedy more popular, I believe several advantages of receivership proceedings are already driving an increase in the number of receivership proceedings. As mentioned in my prior article, “Receiverships provide many of the protections afforded by bankruptcy proceedings, while having the added benefit that: (a) a receivership can be commenced by a lender; (b) the costs associated with a receivership can be less than in a bankruptcy proceeding; (c) in a receivership a lender has more control over who will be operating the business and the timing of decisions related to the disposition of the lender’s collateral; and (d) recoveries can be enhanced by instituting improvements in the business operations and the pursuit of claims against third parties.”
Timing
Business owners may be reluctant to file a bankruptcy proceeding. While a business owner debates the merits of a bankruptcy filing or delays filing (whether the delay is strategic or not), the value of a secured lender’s collateral may be dissipating. Because a secured lender can commence a receivership proceeding on its own without the business owner’s permission, it can control the timing of initiating the receivership proceeding.
Cost
For secured lenders, receiverships can be a lower cost alternative to a bankruptcy proceeding. In a receivership proceeding there are no United States Trustee quarterly fees, no fees and expenses of the official committee of unsecured creditors and its professionals, and no patient care ombudsman fees and expenses (for healthcare bankruptcy proceedings). In a bankruptcy proceeding these costs are oftentimes paid from the proceeds of the lender’s collateral. In a receivership, these costs are avoided.
Control
In a bankruptcy proceeding the business owner’s management team generally remains in control of the borrower’s business operations. In a receivership proceeding, the party seeking the appointment of the receiver typically nominates the receiver. The nominating party can nominate a receiver with experience in both the operation and turnaround of distressed business and experience in the industry within which the business operates. The receivership process can be used to put in place a receiver who take control over the operation of the business from the current management team and who can provide the business with new strategic and operational guidance.
Bankruptcy-Like Sales
Many bankruptcy proceedings are used as a mechanism to sell assets free and clear of liens. Receiverships, both state and federal, can also convey property free and clear of liens, and receivership courts commonly approve sale processes similar to bankruptcy courts.
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