Duties of Receiver

The affairs of private corporations are frequently wound up under the control of a receiver, who is appointed upon the application of some interested party by a court, usually in the county where the corporation has its principal place of business, or where some of its property is situated. There are many grounds for the appointment of a receiver. Chief among them is the doing of some illegal act by the corporation or its agents, which would subject the corporation to a forfeiture of its charter, or when the corporation refuses or fails to pay a judgment or decree for money, or otherwise is unable to meet its obligations. A receiver is an officer of the court. He acts under the direction of the court and must report all of his doings to the court. His chief duty is the conservation of the company's property until it can be determined whether the business is to be continued or must be wound up, and if the latter, then to dispose of the assets and distribute the net proceeds to the proper persons as the court may direct.

The function of a receiver is often, therefore, a very important one. It frequently happens that the interest of all concerned requires the business to be continued while proceedings are pending, and in such cases the receiver is usually given the necessary authority. An illustration of this would be in the case of the financial embarrassment of a manufacturing concern having on hand a large quantity of partly finished goods of little value in that condition, but which by the expenditure of a small amount of money could be finished and marketed at a fair price. The receiver thereupon runs the factory under the supervision of the court, long enough to complete the product then under construction, which is sold by the receiver when completed, and the creditors thereby receive a much larger percentage on their claims than would be the case if the product were sold by the receiver before its completion. The chief reason for the appointment of a receiver, however, is to enforce a ratable distribution of the corporate assets among the creditors.

A corporation is said to be insolvent when its assets at a fair valuation are insufficient, if sold, to discharge the existing obligations to corporate creditors. It is possible that a corporation may be solvent, yet its stock practically worthless. Such would be the case of a corporation having just enough assets when sold to pay corporate creditors, leaving nothing for distribution to the stockholders in return for the sum invested by them in their stock. ' When a corporation becomes insolvent or unable to pay its debts, or has exceeded its corporate powers, a court of equity will, generally upon the application of a creditor or stockholder, take charge of the affairs of the corporation and appoint a receiver to either continue or close up the business, subject to the court's direction. The directors of a corporation formerly had no power to commence proceedings for a dissolution of the corporation and appointment of a receiver or for the distribution of its assets among the stockholders, but the Supreme Court of the United States in the Wabash Railway cases laid down the doctrine that a company could itself ask for the protection of the court if such was for the best interests of all concerned. Under this doctrine many corporations are placed in the hands of "friendly" receivers, by means of proceedings and without notice to other creditors and the public, thus opening the door to great abuses of corporate privileges and no doubt in many instances inflicting serious loss and injury on innocent stockholders. Directors sometimes mismanage corporations in order to get them into trouble and then by defaulting on the interest or other obligations of the company bring about a receivership and reorganization in order to "freeze out" and get rid of the stockholders and acquire the assets, after which the business is continued prosperously. Corporations sometimes procure the appointment of friendly receivers and effect a reorganization in order to get rid of certain bonds, guarantees, leases or other contracts which have proven unprofitable. Such proceedings, however, cannot be justified on grounds of business honor.

Only stockholders and creditors of an insolvent corporation are concerned in the settlement and distribution of the estate. The public generally has no interest in the matter. But in the failure of large corporations upon which the public is accustomed to depend for a particular service, like a railroad company, and especially one having subsidiary companies, the public is interested and the matter brings up a multitude of complications. The road must be kept running. It cannot be shut down, the property sold, creditors paid and assets distributed among stockholders, as in the case of an ordinary private business. Salaries and other running expenses must be paid and the business tided along until the entire property can be sold in bulk or a reorganization of the corporation is effected. When entering upon his duties the receiver will usually find many debts unpaid and pressing repairs needed, with a constant deficit in cash to meet current expenses. The court will then authorize the issuance of receiver's certificates for the purpose of raising the necessary funds to carry on the business. These certificates are a first lien upon the property of the corporation, coming in before first mortgage bonds. Sometimes the cash requirements of the receiver are met by an assessment upon the stock and bonds of the company. The stockholders and boldholders may as well submit to an assessReceiverships ment as have receiver's certificates issued, which are a first claim upon the assets.

Having the immediate necessities of the corporation provided for in cash, the receiver usually finds it necessary to have the accounts of the company gone over carefully in order to ascertain what the actual earnings of the business are. The prospects of the future business of the company are also taken into consideration, and with these at hand a reorganization committee* or banking firm is able to determine what the earning power of the company after the reorganization will be, and hence what its capital may be. If the capital must be reduced in order to bring it within the earning limits, then the bondholders and stockholders must suffer this loss in just proportions. Frequently the stockholders are required to bear the entire shrinkage, upon the principal that to them belong all the gains if the enterprise is successful, and therefore they should be willing to stand the losses. The stockholders, or bondholders, as the case may be, pay in their assessments to aid in the continuation of the business and usually are given additional stock (preferred) or bonds to cover the amount of the assessment so that in case the company in future years should become prosperous, they may bring forward their claims for recognition and payment.

To adjust the respective interests, the reorganization committee may have recourse to the issuance of stock in several classes, some of the shares being preferred as to the payment of dividends, the remaining, or "common," shares not being entitled to participate until the preferred stock has received a certain percentage, which may or may not be cumulative.* Likewise there may be an issue of bonds, called "income bonds," upon which interest will be paid only in the event of its being earned. As in the case of dividends on preferred stock, the interest on such bonds may or may not be cumulative.

♦The reorganization committee consists of representatives of the creditors, stockholders and bondholders.

Cumulative dividends are such as. if not paid, are added to future dividends, and thus accumulate until they are paid.

Methods of Reorganization

Reorganization