In many business law cases, there are allegations of fraud or mismanagement of companies that are thrown about during the course of the lawsuit. That may even be the subject of the lawsuit, such as with shareholder derivative cases, or cases where partners feel they have been cheated out of profits or distributions or dividends.
When those allegations happen, there is usually a motion to appoint a receiver that is filed. But what is a receiver, and when are they used in commercial litigation cases? Read on as the Chicago business litigation lawyer at Ellis Legal explains more.
What or Who is a Receiver?
A receiver is a neutral third party, unassociated with the business, the lawsuit, or the parties to the lawsuit. The receiver’s job is to run the company—the receiver basically “takes over” the company from the owners, under the direction of the court, during the course of the lawsuit.
The receiver will consult with the owners of the business, and the business owners will work with the receiver, but the receiver has ultimate control over the final decisions that are made by the company (often with permission from the court for major decisions) while he or she is in that role.
Good or Bad?
If you are the business owner, this can be bad; you are losing control over your own company, and employees can lose faith in the company. Compensation of owners can be affected, as can business creditors, as the receiver must determine who gets paid what and when. The receiver may not know the ins and outs of the business, again, weakening the business financially and morally.
If you are the other side, someone who feels he or she has been cheated by the business, the receiver is a good thing; the receiver is someone who accounts to nobody but the court, and you will get to see what the company has been doing financially, and you have the security of knowing that while litigation is going on, no corporate assets are being wasted, or funneled out of the business.
When are they Appointed?
Appointing a receiver is a drastic remedy, and an expensive one—the parties have to pay the receiver, but sometimes the receiver will be paid out of profits of the business itself, if there is any. So, courts don’t agree to appoint one unless absolutely necessary.
This can be where there is tangible evidence of fraud, mismanagement, waste, or questionable accounting practices.
Receivers are often used to wind down or dissolve a company when there is concern that creditors or shareholders may not be paid.
Business contracts may also say that the parties agree to the appointment of a receiver if needed.
When a creditor has a security in property, a receiver can be appointed to protect the security and make sure it retains its value. This often happens in disputes over real estate. The receiver will act as the landlord, or ensure that the physical property is not damaged.
Is a receivership right for you, in your case? Ask us. Speak with a Chicago business litigation attorney at Ellis Legal at (312) 967-7629 today.