This post is part 2 in a series about economic receivership. Catch up on the first part, “Receivership for Cannabis Businesses” for more information.
As we covered in previous posts, receivership is a financial process in which a trustee legally appointed by the courts restructures a company to attempt to avoid bankruptcy (or in the case of cannabis businesses, total illiquidity) . Federal regulations prohibit cannabis businesses from filing for bankruptcy protection.
As a result, receivership is the only option if your cannabis operation is in trouble. Through this process, a receiver will attempt to turn your business around or help liquidate assets to pay off obligations, including debt owed to investors.
COVID-19 has caused many cannabis businesses to start exploring receivership as an option. In this second part, we’ll dive into the role of the receiver, what powers this person has during the receivership process, as well as some of the benefits a cannabis operation can gain from filing for a receiver.
What is the role of a court-appointed receiver?
A receiver’s job is to oversee the recovery or closing of the business.
This may include liquidating property, paying creditors, and delivering any remaining value to shareholders. All management decisions are made by the receiver; any power held by directors or owners of the organization is reassigned to the receiver by court order.
The court may also allow the receiver to borrow funds to keep the organization running while trying to sort out any ongoing claims. A receiver may participate in legal proceedings “by or against” the company. The receiver can sell any of the organization’s assets and settle claims on behalf of the organization.
Critical to the role of the receiver is neutrality.
“A receiver must not have a relationship with any of the parties or court, or own any interest in the corporation. In addition, the receiver must avoid all possible conflicts of interest and disclose any potential conflicts at the time of the appointment,” writes one expert.
There can be no conflict of interest for a receiver, business or otherwise. A receiver is prohibited from financially gaining from their position or from using their position to benefit family, business associates, and other social relationships.
What powers does a receiver have?
The general role of a receiver is to wind down all business activities in a financially responsible way. The specific powers of a receiver include:
- Take on the role and exercise the powers of all chief officer and managing director positions; manage the company’s day-to-day operations along with the receivership process.
- Borrow funds to meet the ongoing administrative expenses and other cash flow needs.
- Pay amounts needed to preserve, conserve, protect, or improve the business’s assets and property.
- Pay off and discharge any liens, claims, or charges of any nature against the organization’s assets and property.
- Investigate any legal claims by and against the business, as well as take appropriate legal action in response to such claims.
- Represent in every way the business, its stockholders and creditors.
- Employ other professionals, such as attorneys, accountants and tax advisors to provide assistance throughout the receivership process; hire other employees to manage the organization during receivership as needed.
- Sell off a mortgage, deed of trust, stock, debt, or any property (tangible and intangible) for cash.
- “Purchase or lease office space, automobiles, furniture, equipment, and supplies, and purchase insurance, professional, and technical services necessary for the conduct of the receivership.”
- Settle claims against or in favor of the business; get rid of any assets or property that are considered “burdensome.”
- Use the organization’s assets to pay all expenses of the receivership.
These powers are wide-ranging and broad; the bottom line is that your receiver will basically have full control to dispense of your assets, settle legal claims, and run your cannabis operation as they see fit.
Top benefits of receivership
Why would you agree to a receivership?
While it might seem daunting to give a court-appointed trustee control of your assets and business, there are some great benefits to working with a receiver.
First, if you suspect your organization is the victim of fraud, you can get a receiver to safeguard and preserve your assets. “The primary role of court-appointed receivers is to protect and preserve assets in dispute. Loan default, waste, loss, deterioration, or impairment of the disputed asset are reasonable justifications for petitioning the court for a receivership appointment,” writes one expert.
Receivers have the power to quickly make changes to stabilize and operate your business in a way that makes it easy to sell. A receiver can even increase the market value of your assets with savvy management. “Inevitably, streamlining an operation that is bleeding cash results in quick savings. A good receiver is always looking for opportunities to improve the value of the asset in his hands,” says one receiver.
Receivers take control of all assets, books, and records to quickly evaluate the debtor’s finances. This helps secure your business and preserve the value that exists before any legal action takes place. The information can be shared with stakeholders to agree on a path forward as you right the ship.
Receivers also have the power of the court behind them. If you’re dealing with employees, customers, or vendors, the receiver has the authority to recover assets, investigate asset transfers, freeze debtor property, and more. “The receiver may use his most potent weapon when someone associated with the receivership refuses to comply with the receiver or creates mayhem in a business in receivership.”
Finally, receiverships are efficient and cost-effective. Receiverships do not cost nearly as much as bankruptcy – which isn’t an option for cannabis operators anyway. The entire process is streamlined as all decisions go through one central manager; there are fewer court hearings than bankruptcy and less publicity than a bankruptcy case. And, because receivership powers are so broadly defined, the entire process goes more smoothly than a bankruptcy.
If you are thinking about entering into receivership, then please reach out to us today.