Spring 2003 • Issue 9, page 12
Do the Benefits of a Receiver Outweigh Expenses of Administration?
By Wilson, Douglas & Richley, Robert*
At the expense of waxing philosophic, life often hands people situations
in which there are only two kinds of choices: bad or worse. It is
certainly the case in business when hard times or internal disputes
threaten the viability and even the survival of a company.
The choices facing companies in financial or organizational crises are not
pleasant and, therefore, not easy to make. One recurring problem is that
companies wait far too long to seek an effective means to deal with
whatever the problem is, preferring instead to plod along in denial. Then,
when this deferred attention takes the company to the brink of insolvency,
business owners often conclude they have no choice but to rush into
bankruptcy court, ignoring other options such as a receivership.
It is not a case of ignorance as much as it is a common belief among
business owners that a receivership is a very expensive process and that
the owners whose business is being affected loses all control during the
term of a receivership. True or not?
It depends. Actually, there are many receivership cases that can be cost
effective for a troubled company, and where management continues to play a
meaningful role during the process.
For example, a receivership is a cost- effective alternative to bankruptcy
where there is a true conflict or dispute between or among the business’s
partners. Economics may be the core of their dispute, but not necessarily.
It may well be a control squabble, or, just as likely, differences over
the strategic direction the business should take in any number of
situations.
Whatever the reason, these conflicts have at least two things in common:
If the conflicts are not resolved, the company’s viability will be
negatively impacted, and the conflicts can only be resolved through
outside intervention in order to assure the company’s assets aren’t
jeopardized.
A third-party receiver can come in and, based on the scope of the
receivership order, bring about a resolution. While the receiver is a
neutral party, under the direction of the court and not beholden to the
individual owners, a good receiver communicates openly and proactively
with all the parties in order to bring about an effective solution through
collaboration. The objective here is that all parties will be able to
stipulate to the actions taken by the receiver. Under this scenario, with
cooperation from the antagonistic parties, the receiver can accomplish the
objectives of the receivership at a reasonable cost.
Receiverships also are less disruptive than bankruptcies since the
company continues to operate during the process without any formal
announcement, and the expenses of the receivership are funded during its
term with completion of the payments handled at the time the receiver
files the final accounting with the court.
Since the company is still operating on a day-to-day basis, its creditor
issues are handled in the regular course of business. In some respects,
creditors are just as important a group of stakeholders as the business
owners. It is not only the business owners who may put the business into
bankruptcy: creditors also have the option to file an involuntary
bankruptcy in cases where the company’s economics are upside down and
creditors aren’t being paid.
It is important to keep in mind that the receiver is a single-source
solution to the problems the subject company has. Once a bankruptcy
proceeding is initiated, voluntarily or otherwise, all receivership
activities that were in place to keep the company operating day to day
cease immediately. This can have a tremendous cost impact, a fact many
owners don’t take into account in deciding whether to pursue a receiver-
ship or the bankruptcy process.
On the other hand, a bankruptcy filing immediately freezes the company’s
debt structure, to allow management time to attempt to develop a
reorganization plan. Such proposed plan is then presented to the creditors
and court for approval. If approved and feasible, the plan may allow the
company to emerge from bankruptcy and continue its business operations.
A great deal of cooperation from the creditors is usually essential in a
bankruptcy case, depending on the company’s financial condition. Along
with existing company management, there is a bankruptcy creditors’
committee that has a direct influence in determining the future of the
company.
In bankruptcies, there is the dreaded issue of liquidation and the
resultant situation in which creditors will opt for the best current value
they can achieve. That well may not be in the best interests of the
company’s owners and management.
So, what does all this mean?
Company owners need to think long-term, and in both the best interests of
the company and of themselves, as partners. Bankruptcies are all too often
a knee-jerk “let’s-put-it-out-of-its- misery” response on the part of
owners, wearied by all the business’s problems and disputes. Owners need
to take into account and seriously consider all available options to solve
partnership disputes and financial problems.
Nor should the initial cost be the sole deciding factor. A receivership
may appear at first to be a more costly approach, but it often is more
cost effective in the long term. This is especially true where the use of
a receiver keeps in place all the vision, all the hard work, and the
financial commitments that built the company into a successful-enough
enterprise to give rise to such disputes and conflicts. The value of this
continuity in the life of the business needs to be taken into account when
selecting the right tool to resolve business control or financial
difficulties.
*Douglas Wilson is president and CEO and Robert Richley
is COO and general counsel of the Douglas Wilson Companies, a diversified
real estate and business services firm specializing in problem resolution,
receivership, and conflict resolution. With headquarters in San Diego, and
offices in San Francisco, Los Angeles and Denver, the company has handled
more than 400 matters and over $3 billion in assets throughout the Western
United States. They may be contacted at
dwilson@douglaswilson.com
and rrichley@douglaswilson.com.
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