When a lawsuit is brought against a business that is facing severe financial difficulties, has defaulted on a loan or has committed fraud, the court may appoint a receiver to manage the business assets. As an officer of the court, the receiver takes over control of the business operations. The goal is to attempt to recover the amount of the loan or ensure that stockholders receive as much money as possible from the sale of business assets.
Becoming a Receiver
A receiver is appointed by the judge involved in the case. Almost anyone can become a receiver, except for individuals who are a party to a lawsuit against the company, attorneys of such a party or relatives of the judge. An individual with a business interest in the organization is also not eligible to become a receiver. The National Association of Federal Equity Receivers, or NAFER, notes that receivers should be individuals of integrity who can balance the interests of all parties. They are obligated to be honest, respect the court and provide full disclosure or their findings and actions.
A receiver is a trustee who must complete all actions necessary to wind up business affairs, liquidate property, pay creditors and distribute what remains to stockholders. Any powers previously conferred on directors or officers of an organization are delegated to the receiver by the court. Among other actions, the receiver can borrow funds to keep the corporation going while its affairs are liquidated, and pay liens and claims. A receiver may investigate the previous business conduct of the organization; participate in legal proceedings by or against the corporation; and hire agents to discharge the corporation’s business. The receiver also has the authority to sell any of the corporation’s assets and to settle claims against the organization.
Neutrality is the Key
Although the court might designate any individual to be a receiver and the position does not have any educational, licensing or certification requirements, NAFER notes that there should be no question about the receiver’s impartiality. A receiver must not have a relationship with any of the parties or court, or own any interest in the corporation. In addition, the receiver must avoid all possible conflicts of interest and disclose any potential conflicts at the time of the appointment. Finally, the receiver must not allow family, business or social relationships to affect the performance of her duties; be swayed by outside pressures; or use her position for private gain or to advance other people’s interests.
Competence and Performance
NAFER also notes that a receiver should not accept an assignment unless she has the necessary education, training and experience. A receiver handling a mortgage lender liquidation, for example, should have real estate and mortgage loan experience. The receiver should not take on an assignment unless she is physically and mentally able to handle the responsibility, and able to devote the necessary time. She must ensure that the process goes forward smoothly and prevent unnecessary delays or harassment of parties involved.