As the Governor and Legislature consider new ideas for reducing the costs and red tape of doing business and improving the economy, one idea whose time has come is to reform the laws and procedures in Massachusetts dealing with state court receiverships.
Massachusetts should consider following the lead of other states in which receivership for companies and real estate is commonly used as an alternative to traditional bankruptcy filings and out of court liquidations.
We don’t often think of bankruptcy as part of doing business, but when you consider that bankruptcy filings rose nearly 30 percent in the past year, it is part of the lifecycle of many firms and certainly part of the economic climate of the Commonwealth.
Whether a company winds up liquidating its assets, selling certain of its assets (such as intellectual property, real estate, equipment or inventory) to a business competitor or reorganizes and continues to exist as a going concern, debtors, creditors, sellers and buyers all have a strong interest in creating a more efficient, less costly and more predictable disposition process that maximizes value and still gives creditors the confidence that a court is available to protect their rights.
Although sometimes unavoidable, traditional bankruptcy is extremely expensive, very time-consuming and litigious. A lot of value can be squandered in administrative and legal fees and as assets depreciate.
Ad Hoc System
Receivership, while available in the statutes governing corporations in Massachusetts, is infrequently utilized due to the lack of clear-cut rules governing the process.
The concept is that a corporate or real estate receiver is appointed by the court and given full title to the assets of the company or real estate, including the right to operate the company or manage the property while a sale of the company or its assets or the real estate is completed. The receiver serves on behalf of creditors, and is not beholden to management or the board of the troubled company and is protected by court order from liability. The problem, however, is the ad hoc nature of the orders and procedure governing this process in Massachusetts.
Receivership Benefits
A well thought-out, uniformly enforced court receivership proceeding has several benefits, especially when there is an opportunity to salvage the underlying business of a troubled company if a sale can be arranged quickly:
Flexibility: The receivership eliminates a lot of red tape and does not get bogged down in process. For example, a receivership eliminates the need for creditors’ committees, equity security committees and other groups that end up costing creditors lots of money and adversely affecting the value of assets.
Efficiency: For troubled companies, time is of the essence. Time can erode the value of important assets. Delay can spell the difference between a viable and a failed company. The receiver has the freedom to act while still subject to court oversight. If we changed Massachusetts law to empower the Business Court to exclusively oversee receivership, judges with substantial business experience would develop consistent orders and procedures and give confidence to creditors.
Collaboration: Bankruptcy is frequently characterized by litigation within litigation, where receivership incents the parties to concentrate on determining innovative solutions to a company’s problems and leveraging opportunities, while retaining a court as final arbiter.
Receivership may not be the right tool for all companies in trouble or commercial real estate heading for foreclosure, but the Legislature and Governor should consider reforming the law in both areas to make it a viable option. Every lost company means lost jobs, investment and knowledge. And preserving the value of assets, including real property, is in the interest not only of creditors, but all business and real estate owners.
James F. Coffey is a partner and Richard S. Rosenstein is senior of counsel at Nutter McClennen & Fish LLP, Boston, specializing in bankruptcy, corporate restructuring and workouts.
