Since the passage of the Bankruptcy Reform Act of 1978, creditors have had the benefit of a clear road map in seeking the dissolution of insolvent businesses.
Rather than deal with laws that could vary from state to state, they could take advantage of the certainty that comes from having a uniform set of rules that would apply nationwide. Because the reach of a federal court extends beyond state lines, a bankruptcy judge in Delaware, for example, could make decisions involving a company's assets in areas as remote as Arizona or Alaska. In addition, the filing of a bankruptcy petition, in most situations, serves as an automatic stay that halts proceedings anywhere in the world against the debtor entity and its assets. That prevents authorities in other jurisdictions from taking actions that could deprive the creditor of access to company assets to which it has a legitimate claim.
But the uniformity of the federal bankruptcy system comes at a price: litigants lose flexibility, and they often lose time, a critical factor when an efficient dissolution of assets is desired.
For these reasons, the parties in dissolution matters are now returning to the state courts, such as Delaware's Court of Chancery, and are seeking the appointment of receivers to oversee the final months of an insolvent business or, in some cases, to perform enough short-term damage control to make the business appealing to new investors.
Working within a state court system to establish a receivership is especially appealing when virtually all of the insolvent company's assets are located within a single state, says attorney Kevin J. Mangan of the Wilmington office of Womble Carlyle Sandridge & Rice.
"According to leading practitioners, the principal reasons to file for a receiver in the Court of Chancery are speed, low cost, and the flexibility of the remedy," Delaware Vice Chancellor J. Travis Laster wrote in Delaware Lawyer magazine in 2010. Moreover, Vice Chancellor Laster suggests that receiverships have become a more common vehicle for creditors.
"It comes down to speed and flexibility, and that's a great benefit to the lender," Mangan says. "The lender has to weigh the cost," and a receivership is often the less expensive option, he says. And, he adds, a receivership arrangement likely permits disposal of real property in less time than it takes to go through a foreclosure proceeding.
Interestingly, the flexibility that state courts offer in receiverships is now making it an attractive option in certain other situations. Attorney Samuel Guzik, writing on the Corporate Securities Lawyer blog, pointed to a pair of cases decided in March 2013 in which Chancery judges appointed receivers to handle the affairs of solvent companies because of evidence of extreme corporate misconduct. READ MORE
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