Whilst a business having the legal status of a corporation gives it many advantages and protections under commercial law, that does not mean it is entirely immune from problems and difficulties. One of the most common areas where disputes can arise concerning the finances of a corporation is how its assets are distributed to its shareholders and its secured creditors.
These decisions are usually made by the board, but if there is a disagreement between how the board wish to distribute a corporation’s assets, and its shareholders, then under commercial law a shareholder or group of shareholders can request that the corporation be placed into receivership.
What Is Corporate Receivership?
Receivership means that the legal status of a corporation has been changed by a court. Its effect is to place the assets of a corporation under court-appointed control to ensure assets are not misused or misappropriated by its directors. Receivership is often requested by shareholders or secured creditors when they believe that the assets of a company in which they own shares or are owed money are going to be sold off cheaply or to parties with which they do not agree.
Who Controls A Receivership?
Unsurprisingly the person who is appointed to be in control of receivership is called a receiver. They are appointed by a court via court order and this court order issues them with formal rights and obligations which they must perform during the period of receivership. Apart from them being obliged to use due diligence and act in good faith at all times, specific examples of the main rights and obligations of a receiver include:
- Protection of all the assets and properties owned by investors and the corporation
- Management of all assets owned by the corporation
- Protection of all funds owned by investors of the corporation
- Prevent profiteering by anyone who has undertaken fraudulent or illegal activity against the corporation
- Power to sue on behalf of any party who has suffered loss
- Power to liquidate any assets to satisfy debts owed by the corporation
- Purchasing of goods and services that will enable the corporation to continue operating and trading normally
7 Examples Of When Receivership Might Be Deemed Necessary
There is more than one scenario when shareholders or secured creditors can request corporate receivership as you can see below.
- Disagreement between a corporation’s shareholders and its board over the fundamental operations of the business
- Where the board are in major disagreement and failure to resolve it is causing mismanagement of the business
- If an individual board member is failing in their duties, but the board are unable to agree on the remedial action necessary to address this
- Where important business information is withheld from board members and shareholders resulting in them being unable to fulfil their roles
- Company assets being misused
- Company assets being used fraudulently including the corporation’s funds being used for personal gain
- Theft, leaking of, or unauthorised sharing of the corporation’s technology, methods and strategies constituting a breach of corporate security
Who Pays The Receiver?
There is a cost to placing a corporation in receivership, and this is mainly the payment to the receivers for controlling the receivership. The receiver must itemise all the costs and fees via an invoice and if the court is satisfied they are reasonable, the payment will come from the corporation’s assets.
How Do Receiverships End?
Protection of corporate assets for shareholders and secured creditors is its primary function, and once achieved, a receivership can end in several ways.
- Voiding of the corporate entity and its dissolution
- Distribution of corporate assets including funds, properties, stock, and equipment.
- Return of corporate control to its board and shareholders
Even though all assets might be deemed protected, a further option to continue the receivership may be chosen until all disputes within it come to a resolution.