When a business is struggling due to insolvency, mismanagement, or fraud, a receivership can be a powerful remedy. It offers flexibility that traditional bankruptcy may lack and can help stabilize a critical situation quickly. This tool is especially effective when fast action is needed to preserve value and implement oversight while avoiding the longer and often more complex process of bankruptcy court.

As Rebecca DeMarb of Swanson Sweet LLP puts it, “Receivership stops the drain, resets control, and gives objective oversight, especially when insolvency means internal actors may take risks that creditors can’t afford.” In other words, receivership can serve as a neutral intervention to prevent additional financial harm and protect stakeholder interests when insiders may be too conflicted to act responsibly.

In federal cases, receiverships are typically used in the context of enforcement actions brought by agencies like the SEC or FTC. These federal receiverships often deal with matters of investor protection, fraud, and regulatory violations. In contrast, state court receiverships are more commonly used to settle disputes between creditors, business partners, or among members of closely held companies. While they serve different purposes depending on the jurisdiction, both forms aim to maintain the value of assets and ensure fair treatment of the affected parties. This article will focus specifically on state court commercial receiverships.

The Receiver

A receiver is a court-appointed neutral third party tasked with controlling assets or operations for the benefit of all stakeholders. This role involves stepping into the shoes of ownership or management, albeit temporarily, and acting with impartiality. Receivers often come from backgrounds in law, accounting, restructuring, or business operations.

As Martin Wasserman of Carlson Dash explains, “I step in not as a judge, but as a controlling person balancing neutrality and business decisions.” This distinction is important. While the receiver must act with fairness, they also need to lead, to make real-time decisions about business operations, contracts, employee matters, and financial management.

Receivership is an equitable remedy, which means courts are not bound by a rigid statute or code as in bankruptcy. Instead, judges have discretion to shape the receiver’s authority to fit the unique circumstances of the case. This flexibility allows for creative and efficient solutions, but also requires receivers to navigate each situation with care and clarity.

Though receivers are neutral, that doesn’t mean they’re immune to legal risk. They may be named in lawsuits or become involved in litigation surrounding the estate. When this happens, receivers must take special care to preserve attorney-client privilege, manage jurisdictional issues, and protect themselves from personal liability. Depending on the jurisdiction, receivers may receive indemnity from the court, but such protection is not automatic and must be carefully secured.

The Appointment Order

The appointment order is the legal foundation of every receivership. It sets out the scope of the receiver’s authority, specifies reporting duties, dictates compensation structure, and defines to whom and how often the receiver must report. This document is akin to an operations manual, i.e., it governs what the receiver can and cannot do.

Among other powers, an appointment order may authorize the receiver to:

• Freeze or seize assets
• Block financial transactions
• Access physical and digital records
• Suspend or terminate contracts
• Initiate or stay litigation
• Hire professionals to assist with legal, accounting, or operational tasks
• Sell assets (sometimes with additional court approval)

Depending on how the order is written, the receiver may have broad powers under a general receivership, which allows them to run the business, make day-to-day decisions, and oversee staff. In contrast, a limited receivership narrows the authority to specific assets or issues, such as managing a single property, account, or set of claims.

As Sandor Jacobson of Plante Moran puts it: “In a general receivership, you’re effectively managing the business.” That can mean hiring or firing staff, overseeing vendor relationships, and keeping the lights on while simultaneously preserving records for court reporting. The scope of authority granted in the order shapes everything the receiver does.

To support their work, receivers typically ‘fund the case’ using resources such as ongoing business income, cash on hand, secured advances, or third-party support. In some instances, the receiver may seek court permission to borrow or liquidate assets to pay necessary expenses.

Following Appointment

Once appointed, receivers must act fast. The earliest hours and days of a receivership are critical. In these early days, receivers often ask themselves questions like ‘can the business survive with sound management?’; ‘are there hidden liabilities that could derail recovery? ’; ‘what course of action best serves the creditor group as a whole?’

The receiver must quickly take control, within the limits defined by the appointment order, and begin stabilizing the situation. That means:

• Freezing bank accounts to prevent dissipation of funds
• Securing premises, inventory, and records (both physical and digital)
• Changing passwords and access credentials
• Notifying key stakeholders, including banks, employees, landlords, and vendors

Delays can lead to loss of value, whether through theft, destruction of records, or deteriorating creditor trust. Swift action is not just recommended, it is essential.

As Matthew Brash of Newpoint Advisors Corporation emphasizes, “You don’t get a second chance to make a first impression; those first days define your control over the estate and whether stakeholders will cooperate.”

Maximizing Recovery

A core function of the receiver is to maximize recovery, which often involves assessing:

• The timing and terms of any asset sales
• Potential for refinancing or reorganization
• Settlement of debts and negotiation with creditors
• Preservation of going-concern value versus orderly wind-down

As Wasserman notes, “If the ship can float, operate it. If it’s sinking, salvage what you can.”

Communication and Reporting

Good communication is central to a successful receivership. Receivers must keep all key stakeholders informed, while respecting confidentiality and not causing alarm.

Communication requirements are typically outlined in the appointment order and will often include formal reports to the court. These reports might cover:

• Financial updates
• Operational status and changes
• Requests for payment or court approval
• Claims administration and disputes

Jacobson observes that when stakeholders are kept in the loop, they are more likely to cooperate: “When people are informed, they cooperate, whereas silence can sow resistance.” Regular communication helps reduce surprises, manage expectations, and build trust between the receiver and interested parties.

A Powerful Alternative to Bankruptcy

Receivership can be a faster, more cost-effective, and less disruptive solution than formal bankruptcy. While bankruptcy may offer tools like the automatic stay or debtor-in-possession financing, receiverships provide streamlined oversight and often fewer procedural hurdles. When executed well, receivership can stop financial losses, restore confidence, and produce outcomes that benefit all stakeholders, particularly creditors.
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To learn more about this topic, view How to Administer a Receivership. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about state court receiverships.

This article was originally published here.

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