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.