When a corporation is large enough to have a Board of Directors and Shareholders, issues can arise regarding proper distribution of assets to shareholders and secured creditors, alike. It is possible for the Board and the shareholders to disagree with regard to the use of the assets of a corporation, thereby putting the financial health of the company in jeopardy. When this happens, it is highly likely that a shareholder or creditor may apply for the corporation to be put into receivership.
What is a receivership?
A receivership is a court-appointed change of status of a corporation which is designed to protect the assets of a corporation for shareholders and secured creditors in the event that the assets are being misappropriated or misused. Placing a corporation in receivership protects the assets until the dispute is resolved.
Who is in control of a receivership?
The person in control of a receivership is called the receiver. The receiver is chosen via the Court and given specific rights and obligations via a court order. The types of responsibilities a receiver might be required to perform include;
- Preserve current funds of the investors and the corporation
- Protect the physical property and assets of the corporation
- Preclude profiting by those who may have committed an illegal or fraudulent act upon the corporation
- The power to sue on behalf of the injured parties
- To manage the current assets of the corporation
- Liquidate assets to pay outstanding debts of the corporation
- Purchases of goods and services that allow the corporation to continue to function successfully
A receiver will have specific legal obligations that must be carried out which include to act in good faith and to perform their due diligence in all aspects of their investigation.
When is a receivership/receiver necessary?
A court might put a corporation into receivership and appoint a receiver for the following reasons;
- When a disagreement arises between the Board and the Shareholders as to the basic operations of the corporation
- Where there is a significant disagreement amongst Board members that is causing the company to be mismanaged or improperly attended to
- If a Director is performing their duties in a subpar manner and the Board is unable to come to a consensus as to the type of action that need to be taken
- If business related information is being withheld from one or more Board members and/or Shareholders impeding their ability to perform their duties.
- Improper use of corporate assets
- The fraudulent use of corporate assets including using corporate funds for personal gain
- The stealing or leaking of corporate business strategies or technology to an outside source thereby jeopardizing corporate security.
How is a receiver financially compensated?
A court appointed receiver will be required to submit their fee for services in an itemized invoice. The court will review the invoice and award payment from the assets of the corporation.
What is the final outcome of a receivership?
The most important final outcome of any receivership is the protection of the corporate assets for the shareholders. However, there are other outcomes that can also come about during the course of a receivership including the following;
- The dissolution of the corporate entity
- The distribution of all assets including the value of owned commercial property and stocks
- The continued protected running of the company until the disputes are resolved
- The return of control of the corporation back to the Board and the Shareholders
While no corporation wants to find itself in a mandated receivership or in the hands of a receiver, sometimes that is the only way to come to reasonable resolutions pertaining to disputed business practices and to ensure the protection of a corporation’s assets. In the event that you or your business need the protections of a receivership, or the skills of a receiver, it is important to seek legal guidance and move intelligently and efficiently through the process of having a corporation designated into receivership.
If you find yourself in need of assistance with this, or any other legal issue, please contact the law offices of Owen Hodge Lawyers. At Owen Hodge, we are always happy to assist clients in understanding the full ramifications of any and all of your legal needs. Please feel free to call us at your earliest convenience to schedule a consultation at 1800 770 780.