What Is a Distressed Business and How a Receivership Can Help

distressed-businessA failing business can be categorized as a distressed business when it is unable to fulfill its debt obligations to its creditors. Common causes of insolvency include high fixed costs, revenue that has been affected by economic fluctuations, partnership disputes and illiquid assets.

If you are the owner or co-owner of a distressed business, the reality of your financial situation can be overwhelming. With creditors calling, financial statements showing unresolvable debts, and business costs continuing to accrue, it can be difficult to know what steps to take next. 

The receivership remedy may be your next best step. This step can be initiated in court by a third party creditor, an aggrieved business partner or any other stakeholder in the business. A court-appointed receiver may take over the operations of the business and work to address the debts of the business as a neutral third party.

What is a Distressed Business?

Several financial circumstances can lead to a business being categorized as distressed. 

Some examples include:

  • A business that is no longer able to fulfill its financial obligations
  • A business that is unable to obtain payment deferrals
  • A business that is not eligible for refinancing 
  • A business that is preparing to file for bankruptcy 
  • A business that does not have access to the capital needed to continue to operate
  • A business facing claims of fraud/mismanagement by customers or stakeholders

There are many reasons why a business might end up in this situation. Poor management may be the root cause of the problem, but business owners may also be the victims of market changes, natural disasters, global supply chain issues, or new competition. 

There comes a time when business owners or stakeholders need to decide what to do next because maintaining the status quo is only worsening the situation. Creditors and vendors who may be flexible or lenient at first are unable to extend that leniency indefinitely. 

In addition to an increased amount of debt, businesses in this situation often accrue additional costs in the form of penalties, fines, and late fees. 

The Receivership Remedy for Distressed Businesses

In many situations, a receivership can address many of these stressful questions by removing the burden of responsibility from the business owners and placing it into the hands of a qualified and experienced receiver.

While no one hopes to find themselves facing court-ordered solutions to their business crises, there can be relief that comes with relinquishing responsibility to someone like a receiver. Additionally, the receiver has no emotional connection to the business, which means that it is easier for them to make difficult decisions about what should be done.

The California Code of Civil Procedure §564 governs the receivership process. According to this code, the court may appoint a receiver in situations where a corporation meets at least one of the following conditions:

  • The business has been dissolved
  • The business is insolvent
  • The business is in immediate danger of insolvency
  • The business has forfeited its corporate rights

A court-appointed receiver is a neutral third party whose role is to take possession of and manage either real property, corporate assets, or both. 

Court Rule 3.1179 states that a receiver holds those assets “for the benefit of all who may have interest in the receivership property.” This means that the receiver’s main responsibility is to manage the assets while working to address the business’s debts, operational integrity and stakeholder concerns. 

Responsibilities of a Receiver

Receivers may collect debts, receive rents from tenants, make transfers, distribute assets and income, manage business operations, and carry out any orders of the court. 

Receivers also have the authority to resolve conflicts between two or more partners or stakeholders who cannot agree on how to move the company forward or liquidate assets. 

In some circumstances, a distressed business needs to undergo a rapid wind-up and division of assets. The receivership remedy is ideal here because a receiver is able to manage this quickly and efficiently, all while aligning the business with the instructions of a judge.

Questions About the Receivership Remedy for Distressed Businesses? Griswold Law Has Answers.

Richardson “Red” Griswold has been appointed by the California courts as a neutral, third-party receiver in more than 150 cases over 16 counties, including those for distressed businesses and properties. 

Contact Griswold Law today with questions you have about the receivership remedy and how it may be used to address the looming threat of insolvency. 

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