By Daniel Bowman, Director in MelCap Partners, LLC, and Clifford W. Croley, Partner in Croley, Martell & Associates, Ltd.
Daniel Bowman, Director at MelCap Partners, provided insight into the receivership process in TMA’s October-November newsletter. The Turnaround Management Association (TMA) is the most professionally diverse organization in the corporate restructuring and renewal and corporate health space. Established in 1988, TMA has nearly 10,000 members in 54 chapters worldwide, including 34 North American chapters. Members include turnaround practitioners, attorneys, accountants, advisors, liquidators, consultants, as well as academic, government employees, and members of the judiciary.
In certain distressed business situations, a state-appointed receivership may serve as the framework for selling a company or its assets. A receivership is a court-supervised process in which a neutral third party — the receiver — is appointed to take control of the business and its property in order to preserve value, protect creditors, and oversee operations during financial or legal turmoil. Unlike bankruptcy, receivership is generally initiated under state law, often at the request of a secured creditor, investor, or other stakeholder concerned with the company’s financial condition or management. The use of the receivership process is on the rise in jurisdictions around the country (including Ohio) due to the speed and often reduced expense to commence the proceeding.
MelCap recently completed a sale transaction where the equity holder over-leveraged the balance sheet and defaulted on its senior indebtedness, driving the senior secured creditor to file an emergency motion seeking the appointment of a receiver.
When a sale is contemplated within a receivership, the receiver is charged with maximizing recovery for all creditors and other stakeholders. This often involves marketing the business or its assets through a structured sale process that usually is materially similar to a bankruptcy Section 363 sale. However, the sale in this instance is governed by state statutes and court directives. The case law for receiverships generally, and specifically for receiver-conducted asset sales, is less well defined than in a federal bankruptcy court, leaving individual county or municipal judges with wide discretion, which can be used to generate value.
The receiver typically engages investment bankers, brokers, or other advisors to identify potential buyers, solicit bids, and manage due diligence. In the transaction referenced above, the receiver, Mr. Clifford Croley, engaged MelCap as investment banker to run the sale process.
Because the receiver is a fiduciary acting as an officer of the Court, the process requires transparency and fairness. All interested parties must be given a reasonable opportunity to participate. It is paramount that the investment banker be able to navigate the process efficiently, while also demonstrating, for all stakeholders, including the Court, that a thorough marketing of the business was performed. In its most recent transaction, MelCap reached out to a broad set of buyers, both strategic and financial in nature, over the course of 3-4 weeks to identify the optimal buyer.
A receivership sale can involve the transfer of substantially all assets, specific business units, or discrete property. Buyers are often attracted to these transactions because the receivership statute provides that Buyers shall acquire assets free and clear of liens, claims, and encumbrances, subject to court approval. However, unlike bankruptcy, the exact scope of protections afforded to buyers depends on state law and the specific court order.
In many cases, the assets are being sold in more of a liquidation proceeding, however the business can also be sold as a going concern. While the sale of a business as a going concern can yield greater value than the sale of individual assets, it is more complicated than liquidating discrete assets and may require additional communication with the judge and other involved parties. In these cases, MelCap always makes sure that the respective documents filed with the court to clearly outline and articulate that the value received by the receivership estate is greater than any other offers received and also greater than the liquidation value of the assets being conveyed.
The receivership sale process begins with a motion presented to the supervising Court, which evaluates the proposed transaction, invites objections (if any), and ultimately determines whether the sale serves the best interests of creditors and other stakeholders. If there are any objections by any stakeholder or group, all parties then present arguments and may be subject to examination and cross-examination in the Court. Once approved, the transaction is executed by the receiver under the Court’s authority. Then, finally proceeds are distributed according to statutory priorities and court direction.
Selling a company through receivership may be cumbersome due to the court approvals required, as compared to a typical business sale, but less so than that required under Chapter 11.
Overall, a business sale in a state-appointed receivership offers an alternative pathway to monetize and transition distressed assets. While often faster and less costly than federal bankruptcy, receivership sales require careful navigation of state law, active court involvement, and clear communication with stakeholders to achieve a successful outcome.
For more information about a state-appointed receivership process or any recent transactions, please contact MelCap Partners and we would be happy to discuss with you.
