The owner of a construction business shakes his head after putting down the company’s latest financial statements. Business was going great, and the company was flush with cash – until it wasn’t. What changed? Nothing has changed in the operations of the business, which leads him to the next, more difficult question. Is someone stealing from the company? He has worked with the same partner for 20 years – they’re family, it couldn’t be him! They’ve cared for each other’s children and dined together on Thanksgiving. He doesn’t want to ask the hard questions, but after looking at the company’s financial statements, he feels he must.

He begins to investigate what could be happening. The more he investigates, the more suspicious of his partner he becomes. After gathering the facts and discovering the smoking gun, it is time to bring in his attorney and take his partner of 20 years to court. He and his attorney describe all of the allegations against his partner in his complaint, which is soon filed with the court. Just when he thinks things can finally get back to normal, his partner has the audacity to make allegations that he was the one stealing! The dispute just got much more complicated and lengthy.

That brings him to his next most important concern – who gets to keep his business running while he and his partner are embroiled in the dispute? They each own 50% of the business, so neither has majority ownership. He refuses to let his crook of a partner anywhere near the business, and his partner feels the same way about him. Neither of them wants the other near the business – at least they can agree on something. Litigation proceedings can last months, sometimes even longer, which is a lifetime in the construction business.

They can’t agree on who should run the business, so they figure their attorneys will advise them on what should be done, right? The attorneys have indeed seen it all before and know exactly what to do: They draft a joint consent order for the appointment of a receiver, which is subsequently granted by the court.

Fundamentals of a Receivership: What is a receiver?

A receiver is an independent fiduciary appointed by the court who is typically engaged to run a business or manage assets when the owners/beneficiaries are involved in some form of litigation/dispute or when the owner/manager is failing to appropriately manage the assets or company. The receiver’s roles and responsibilities are outlined in the court’s order appointing the receiver (the “Receiver Order”). In general terms, the receiver becomes “New Management” with a responsibility to marshal, manage and maintain the property that is subject to the Receiver Order. Receivers generally have the authority and duty to help preserve, protect, maintain and liquidate valuable assets of all types with a duty to the court and stakeholders. Thus, the receiver must remain impartial when dealing with all interested parties. Receivers don’t take sides – but instead investigate financial affairs, report the facts, and stabilize and operate the business or manage assets until the dispute is resolved.

When is a receiver a good option? 

Is there a lack of trust between parties? Are there implications of fraud? Did Aunt Betty act improperly as Trustee of mom’s estate? Is the business suffering because the owners are in the throes of a business divorce or family divorce? Is the business still viable but key stakeholders have lost faith in management’s ability to handle the situation? Do the interested parties need someone to collect rents during a foreclosure?

A receiver is a good option for entities with property, assets or any form of cash flow where fear of the erosion of value or loss of the property exists, whether it be a Trust, Estate, commercial or rental property or any type of operating business.

The benefits and advantages of a receiver

In general, appointing a receiver can have many benefits:

• 1) The appointing court has exclusive jurisdiction, and the receiver is a neutral officer of the court reporting to the Judge.
• 2) A Receivership provides a court-appointed layer between the parties, which removes the emotional aspect of the relationship, especially if it has been a long one.
• 3) A receiver is often seen by third parties as a stabilizing force; thus these parties are more likely to reinstate normal business relationships.
• 4) Appointment of a receiver can be initiated very quickly, which can help preserve assets that might otherwise be misdirected.
• 5) A receiver takes control of the books and records of the entity and can promptly investigate the financial affairs. 
• 6) The receiver is in control, yet can utilize management’s expertise as needed to enhance efficiency and ensure that its legitimate claims are being protected.
• 7) A receiver has subpoena power and the ability to prevent interference with, and prosecution against, the receivership estate.

The top 4 qualities of a good receiver

Here are four important qualities to look for in a receiver and the questions you should ask to ensure they are a good match for your needs and situation:

• 1) Experience: How many Receiverships have they handled that match your needs? How many businesses or estates have they actively managed in the past?
• 2) Capabilities: Does the receiver have the specialized experience (e.g., tax, human resources, accounting, investigative) and capacity to handle anything that might arise during the Receivership without hiring third parties (other than counsel)?
• 3) Reputation: What courts have appointed them in the past and what other entities (e.g., banks, government agencies) have petitioned for their appointment?
• 4) Flexibility: Can they staff the engagement as needed when issues arise and are they willing to provide flexible fee arrangements that align your success with theirs?

The bottom line

The dispute process can be intense and messy. Sometimes the entity suffers during the process, but it doesn’t have to be that way. A receiver protects the assets and ensures there is value remaining after the dispute is resolved – he or she remains impartial during the process and can help stabilize, manage, maintain, liquidate and operate an entity in the meantime. At the end of the day, a receiver makes sure there is something left worth fighting over.

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Amanda Levesque, CPA, CFE, is a Manager in the firm’s Consulting Practice. Amanda primarily works on forensic accounting, litigation support, turnaround, receivership, bankruptcy and accounting reconciliation projects within a wide range of industries, including financial services, healthcare, pharmaceutical, automobile, construction, alternative energy and agriculture.

Tyler Wright, CPA/ABV/CFF, CFE, is a Director in the firm’s Consulting Practice. Drawing on over 13 years of experience as an external auditor, internal auditor, and forensic accountant, Tyler provides accounting and financial advice in forensic investigations and commercial disputes.