Receivership can be a valuable tool for lenders in loan workouts. A receiver is typically used when trust between the parties breaks down and the lender no longer has confidence in the borrower’s ability to manage a business or project. When this happens in a loan workout scenario, an unbiased third-party is selected to step into the shoes of the owner. Receivers can be agreed to by the parties or simply appointed by a judge. In any case the court must approve, and the receiver must meet certain standards of competency. The receiver’s powers are extensive and are controlled by law and the actual Order of Receivership. A court-appointed receiver acts as an arm of the court and is charged with preserving the status and the value of the debtor’s assets to the extent they are collateral for the defaulted loan. If possible, a good receiver will achieve this without any additional cash injection. Instead just using the cash generated by the project.
Often, the same results can be achieved out of court by using a CRO (Chief Restructuring Officer). This is when the parties agree by contract to appoint an unbiased third-party to step into the shoes of the owner. It is interesting to note that the borrower alone can appoint a CRO without the agreement of the lender. This can be done as a sign of good faith by the borrower when trust has been lost. A well-crafted and thorough CRO Agreement can look much the same as a thorough Receivership Order with many of the same terms and provisions. This alternative, if it can be achieved, is less expensive because the parties do not have to litigate in court. I prefer the CRO route simply because the costs are lower, and the process is less cumbersome.
During the Great Recession, receiverships were used extensively. And, while they were generally successful in terms of obtaining the desired results, many lenders found them to be expensive and cumbersome. This result often occurs when the receivership order is poorly crafted resulting in the need for extensive motion practice to obtain specific rulings and clarifications from the judge. I avoid this by beginning the receivership with a very detailed order covering most if not all eventualities. This eliminates the need to go back to court every time a question arises. The cost savings can be substantial.
The hourly rate of the receiver and their ability to perform their job efficiently can also have a dramatic effect upon the cost of the workout. For example, I have found that many receivers charge significantly more than I do while performing less work to preserve or increase the value of the collateral assets. Let’s talk about qualifications. Many receivers are CPA’s or attorneys who act as receivers to supplement their practice. Some are “professional receivers” who have made being a receiver or property manager their full-time profession. My personal opinion is that a receiver should be an expert in managing and improving the business generated by the receivership assets. While this might seem self-serving, given my personal business and lending background, I believe that there is rarely a good reason for engaging a receiver who does not meet this requirement. If the business or project is in distress or headed in that direction, it is vital that the receiver have the experience and skill set to quickly stop any cash burn and turn it around. Given the state of certain economic sectors today, their projected continuing erosion and how long it may take for those sectors to return to “normal”, the receivers ability to manage and rectify a troubled business or project can become paramount. It is ideal if the receiver has their own experience owning or operating similar businesses.
The ability to work with parties in dispute and achieve consensus is also a quality that a good receiver should have. While this may not seem important at first, this ability will certainly help to expedite the workout process and keep legal fees low. Transparent communications are also the hallmark of a good receiver. The Receivership Act requires quarterly reports to the Court and the parties. I have always provided monthly written reports, often supplemented with weekly verbal updates as the situation dictated. All parties have a good deal at stake and deserve to be kept up to speed on new developments.
If managed correctly, receivership can be a very effective tool for working out of a non-performing loan situation. It can even be a lower cost alternative to bankruptcy in certain circumstances. Workout lenders would be well advised to understand the subtleties between a CRO, a receiver and bankruptcy. A receivership in any form can be a valuable tool in achieving an efficient resolution to business conflict.
Burke Advisory Services
November 2, 2020
Kevin Burke is a member of the Turnaround Management Association and a Certified Turnaround Professional. A graduate of the Villanova School of Business, he has over 35 years of experience in banking and executive management. His management consulting practice is located in Troy, Michigan.