CRO vs. Receiver

Independent Third-Party

The engagement of a chief restructuring officer (CRO) or a court appointed receiver is typically used when trust between a lender and borrower 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 guide the borrower/debtor through the workout process.

Receiver

Receivers can be agreed to by the parties or simply appointed by a state court. 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 state 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. Because a receiver is an arm of the court, they have certain powers that a CRO does not. For example, a receiver can claw back fraudulent transfers. They can also pause foreclosures and other recovery actions by other creditors.

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 or vague at the outset 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.

CRO

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 guide a business entity and/or protect the assets of an estate in dispute. It is interesting to note that the borrower can appoint a CRO without the agreement or involvement of the lender. This can be done as a sign of good faith by the borrower when trust has been lost. Although, a CRO is typically appointed as a result of negotiations between a senior lender and a borrower as an alternative to receivership or bankruptcy. 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 generally much less expensive because the parties do not have to litigate in court. When the situation allows, I prefer the CRO route simply because the costs are lower, and the process is less cumbersome. It is important to note that all of the parties must agree in order to engage a CRO. Typically, the borrower/debtor, the lender/creditor and the CRO are all parties to the agreement. Obviously in some cases, this may prove difficult. If a lenders’ attempt to appoint a CRO is unsuccessful, the lender can move to appoint a receiver in court. The Borrower can also choose to file bankruptcy in order to avoid a receiver and gain some breathing room, if only for a short time. Of course, the cost of a bankruptcy is significantly greater for all parties. Another interesting fact is that a debtor in a Chapter 11 Bankruptcy can choose to employ a CRO (subject to the court’s approval) to help guide them through the rather complicated process of managing their business through the bankruptcy and bring additional credibility and professionalism to the bankruptcy forum.

Choosing the Right Professional

Let us talk about qualifications. Many if not most CRO’s are professional turnaround practitioners who generally have thousands of hours of experience and training. Receivers are often turnaround professionals, CPA’s or attorneys who perform as receivers as part of their practice. Some are “professional receivers” who have made being a receiver or property manager their full-time profession. Whatever their background is, my personal opinion is that a CRO/receiver professional should be an expert in managing and improving the business generated by the assets of the estate. There is rarely a good reason for engaging a professional who does not meet this requirement. If the business or project is in distress or headed in that direction, it is vital that the professional 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. Some of the important things in particular to look for in a professional are:

• Significant time in the practice of working with and improving distressed businesses and/or assets.
• Professional training and certification.
• A thorough understanding of both the lender’s side and borrower’s side of the transaction.
• Experience managing their own business.
• The ability to work with individuals in dispute and manage conflict.
• A thorough knowledge of business management.

As mentioned, the ability to work with parties in dispute and achieve consensus is essential. 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 high-quality professional. The Michigan Receivership Act requires at least quarterly reports to the court and the parties. I have found that monthly written reports, often supplemented with weekly verbal updates as the situation dictates do a better job of keeping all of the parties in sync. All parties have a good deal at stake and deserve to be kept up to speed on new developments.

The hourly rate of the professional and their ability to perform their job efficiently can also have a significant effect upon the cost of the workout. If a professional can increase the value of the assets, it may result in a greater recovery and a lower net cost of the workout.

If managed correctly, the appointment of a qualified CRO or a receiver can be a very effective tool for working out of a non-performing loan situation and achieving an efficient resolution to business conflict. It can even be used as a lower cost alternative to bankruptcy.

Kevin M. Burke, CTP

Burke Advisory Services

March 8, 2021

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.