Entities, such as corporations, partnerships, and limited liability companies are sometimes involved in a court process to wind up their affairs and dissolve their existence. A voluntary wind up and dissolution may be the vehicle of choice for an entity when there are concerns about the ability to identify and liquidate assets without the assistance of a court order. On the other hand, an involuntary wind up and dissolution of may occur where there is deadlock between the owners of an entity.
Whether the entity wind-up and dissolution proceeding is a voluntary or involuntary one, it is often helpful to the owners and creditors of an entity to seek the appointment of a receiver. In the circumstances of an involuntary petition for the wind up and dissolution of an entity, often one or more shareholders control the entity to the detriment or over the opposition of other shareholders. The appointment of a receiver “levels the playing field” between the shareholders in control of the entity and those who are not. The receiver is appointed to take charge of all of the assets of the entity and to operate the entity or liquidate the assets of the entity as appropriate, in the best interests of all parties, including creditors. Most frequently, the appointment of a receiver in a voluntary wind up and dissolution results in a settlement between the shareholders.
In a voluntary petition for wind up and dissolution the corporate entity, by a majority vote of its shareholders and directors, elects to file a petition seeking the wind up and dissolution of the entity under court supervision because the process may not be controlled absent court orders. Many times the shareholders and officers of an entity seek the appointment of a receiver because they wish to engage in their own business opportunities or simply want to disengage from their activities with the entity. To resolve conflicts of interest or to allow the existing shareholders who were officers to continue in a different, but similar, business enterprise, a receiver is sought in order to avoid any appearance of usurpation of corporate opportunity or conflict of interest in the process of liquidating the entity’s assets.
During the dissolution and wind the process, the receiver obtains court orders staying actions by creditors so that the assets may be liquidated in an orderly fashion and distributed, in cash, in a fair and equitable manner. Absent an order staying actions by creditors, the assets of the corporation would be taken by creditors on a first-come first served basis thus resulting in a race to the courthouse by creditors. Moreover, since many of the creditor claims may be subject to dispute, the assets of the entity are further burdened by legal expenses to defend the many claims. The imposition by the court of a stay of creditor actions enables the receiver to assemble the assets, liquidate them, and ultimately distribute them pursuant to a plan of distribution approved by the Court. Additionally, the court will issue orders, at the request of the receiver, setting deadlines by which claim should be filed.
Receiverships for the wind up and dissolution of an entity provide an ordered and stable format for the equitable distribution of the assets of the corporation to its creditors, and sometimes, to its equity holders. Receiverships allow existing ownership to disassociate themselves from the entity during its dissolution and wind-up thereby enabling them to continue in competing businesses without concerns about breaching their fiduciary duties or usurping the entity of its business opportunities.
