Most business people and business owners have experienced issues associated with bankruptcy court. For many businesses which extend credit to their customers, they may find themselves involved as a creditor to a customer in bankruptcy. Certainly, learning the ins and outs of bankruptcy court as a creditor can be a challenging experience.
There is another process and procedure which is similar to bankruptcy which is called “Receivership”. Receivership is a state court process which provides an orderly process to preserve assets, prevent preferences, and to assure the equitable distribution of an insolvent debtor’s assets. Sometimes, a receiver may be appointed to preserve a specific property that is the subject of litigation or subject to being collateral for a debt, or to enforce a decree of a court of equity.
When Might A Receiver Be Appointed?
If an individual, partnership, or corporation is in financial distress, a receiver may be appointed upon application by one or more creditors. Although there is statutory authority for appointment of receivers, the court’s power to appoint a receiver is not limited to these provisions. Courts of equity have inherent power to appoint a receiver. In North Carolina, receivers may be appointed by both the district and superior courts. Any judge having authority to grant restraining orders and injunctions has jurisdiction to appoint receivers, though only superior court judges may appoint corporate receivers. If a creditor is concerned about the long term financial stability of a customer/debtor and the customer/debtor is financially in trouble, seeking to have the debtor and the debtor’s assets placed into Receivership could be a possibility.
State law provides that a receiver may be appointed in the following circumstances:
- Before a creditor obtains a judgment, if the creditor establishes that they have an apparent right to the property and that the property is in danger of being lost or materially injured;
- If a judgment has already been rendered, a receiver may be appointed to effectuate the judgment;
- To preserve property pending appeal or to dispose of property when an execution is returned unsatisfied and the debtor refuses to satisfy the judgment;
- To preserve property within the state owned by foreign corporations; and
- If the creditor is seeking restitution for violation of the North Carolina Unfair Trade Act.
The Insolvency Test
The word insolvent is used in the receivership statutes as a criterion for the appointment of a receiver. North Carolina’s test for insolvency is “whether or not the entire assets of the person or entity in question equal or exceed in value the total indebtedness of such person or entity”. This is essentially the same definition used by the Federal Bankruptcy Reform Act.
Even if one is unable to establish that a debtor is actually insolvent, a receiver still may be appointed if the creditor can show that a danger of insolvency exists. Therefore, in North Carolina, one who seeks appointment of a receiver need not satisfy the test for insolvency so long as they can establish facts sufficient to indicate a danger of insolvency.
Procedure for Obtaining Appointment of a Receiver
A prerequisite to the appointment of a receiver is the filing of a lawsuit. This may be a lawsuit by a creditor who has an unsatisfied judgment or can produce the written admission of a corporation that it cannot pay its debts. It may also be an action in which one or more creditors seek to have the court take charge of the debtor’s property, ascertain the debts, and apply the funds to the payment of all creditors according to their rights. After the principal action has been commenced by issuing a summons and filing a complaint, the plaintiff may then apply to a judge for an order appointing a receiver.
The judge hears the application for receivership and may order appointment of the receiver after notice to the parties. If the judge determines that receivership is justified, the Judge then decides whom to appoint as receiver. In addition to individuals, both corporations and banks may act as receivers. The courts will usually not appoint any person interested in the controversy, and the appointment of one involved in the action, such as an attorney for one party, is discouraged. In fact, the North Carolina State Bar has held that it is unethical for an attorney both to serve as a receiver and to represent the judgment creditor. This holding is a reflection that the receiver is an officer of the court and does not directly represent the interest of either party; the judgment creditor’s attorney must act as an advocate for his client. Finally, the judge is not limited to the appointment of a single receiver.
Powers and Duties of the Receiver
The receiver in North Carolina is given specific powers by statute and case law so the receiver may properly control, preserve, and settle the property and assets of the insolvent debtor. Before assuming these powers, however, the receiver must post a bond, conditioned upon the faithful discharge of their duties, in an amount fixed by the appointing judge. After posting bond, the receiver can take into possession all assets of the insolvent debtor. The receiver’s title, however, extends only to the property located within North Carolina. To reach assets located outside this state, creditors can seek attachment or obtain receivership there.
Receivership can be a very effective way to preserve and distribute assets of an insolvent business. It can be a very effective tool for creditors in an effort to collect past due accounts and preserve and protect assets from being wasted by the debtor. If you have any questions, please feel free to contact us.