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When a company or a debtor defaults on their debt payments, secured lenders are in a very precarious position. At that point, both the company and the lenders have various options. The debtor can go through the bankruptcy process, or propose an out-of-court work-out or forbearance agreement to its lenders. Some lenders have opted for a receivership as an alternative to bankruptcy.
The lender and some creditors may be paid from the proceeds of property sales, liquidation of assets, and the process can be quicker and more efficient than bankruptcy. Usually, this is accomplished through a court-appointed receiver who handles the orderly liquidation or sale as a going concern subject to the supervision of the state court.
The receivership will last as long as necessary to achieve a sale as a going concern or orderly liquidation of the debtor’s assets. The purpose of a receivership is to maximize payments to creditors and those who have an interest in the property. The court-appointed receiver usually has broad authority to sell property and take other measures to sell the assets and wind down the business.
Usually, a creditor will begin the receivership process in Wisconsin.
The secured creditor must show the court that one of the following exists in order for a selfish receiver or a Chapter 128 receiver to be appointed:
The creditor would also propose a certain person to serve as the receiver and demonstrate their qualifications to the court.
When the court appoints a receiver, it will issue an order that sets forth the duties of the receiver and the scope of their authority. The receiver will need to make sure that they stay within the bounds of the court order.
Although the receiver is an officer of the court, they also owe a fiduciary duty to those who have an interest in the property, including creditors and potentially shareholders. These duties vary depending on whether the receiver is appointed as the “selfish receiver of a creditor” or after an “assignment for the benefit of all creditors.”
The receiver will take possession of all the debtor’s property and thereafter orderly sell the assets and wind down the business.
If a company is in receivership, the management of the receivership company would usually remain in place, although they have little power and authority. In some cases, the receiver may replace the company’s management if they believe that it is in the best interests of the creditors or anyone else who has an interest in the property.
There are three types of receiverships in Wisconsin:
A general receiver is appointed to administer all of the debtor’s property, with the authority to sell or otherwise wind down the business.
A receiver is appointed to collect a judgment for a judgment creditor. The receiver will sell enough property to satisfy the judgment, and then the receivership will end.
Receivers may be appointed while the litigation is pending to manage and preserve property in advance of the outcome of the litigation.
Receiverships have emerged as a popular alternative to bankruptcy. All the stakeholders have pros and cons, too many to mention here. Generally, a receivership may be less expensive than bankruptcy and faster.
However, there are reasons why a receivership may not be the best option
Property sales are common in a Wisconsin receivership. Courts are accepting of these sales as a means to liquidate the assets in an orderly fashion. Once the process is complete, the state court usually enters an order that the buyer will receive the property free and clear of any liens or encumbrances. These state court orders may not be absolutely enforceable, especially in other states or countries.
In selling the property, the receiver should use commercially reasonable procedures, and they should aim to maximize the return for the parties who have an interest in the property. They must be mindful of their fiduciary duties and the possibility that they could be personally liable if they fail to uphold their own duties.
All parties to a receivership should have legal representation in the process. The debtor who is subject to a receivership still has rights, and an attorney could help protect them throughout the process. In addition, the receiver themselves should consider getting legal advice when necessary in light of their own duties. Receivers sometimes sue insiders and other creditors to recover transfers made to them in the months leading up to the appointment of a receiver. These “targets” also benefit from legal representation.
Swanson Sweet LLP assists companies that are in financial distress. We have in-depth experience with receivership law through our decades of combined experience. To schedule an appointment to speak with a receivership attorney, contact us. We have offices in Madison, Milwaukee, and Oshkosh, WI.
