Picture two children arguing over the same toy. They both have their hands on it, each pulling it towards themselves and away from the other. If they keep at it, they’ll tear the toy in two and destroy it, rendering it worthless. But a parent or teacher intervenes, takes the toy out of both their hands and holds onto it for safekeeping until the two kids can work out their differences.
That is what it’s like when a court appoints a receiver to manage a business when conflicts between the owners or operators – whether due to malfeasance by one party or if the business’ assets or continued financial viability are at risk. A receiver is the neutral “grown-up” charged with preserving the company’s property and managing its operations while the parties work to resolve their differences, whether in litigation or through other means of alternate dispute resolution.
Basis For Appointment of Receiver In Ownership/Operational Disputes
Illinois law sets the stage: aggrieved shareholders or others in control of a privately-held Illinois corporation and members or managers of an Illinois limited liability company (LLC) can petition a court to appoint a receiver to essentially manage the business and protect its assets during the pendency of a dispute involving the business. However, not every ownership dispute will justify the appointment of a receiver. In fact, courts are generally reluctant to intervene in the operations of a private business except in specific, emergent, or particularly egregious circumstances.
The Illinois Business Corporations Act (BCA) provides a host of possible remedies in cases of deadlock, when those in control of the corporation are engaged in illegal, oppressive, or fraudulent conduct, or when corporate assets are being misapplied or wasted, and “either irreparable injury to the corporation is thereby caused or threatened, or the business of the corporation can no longer be conducted to the general advantage of the shareholders.”
One of those remedies is “the appointment of a custodian to manage the business and affairs of the corporation to serve for the term and under the conditions prescribed by the court.” However, Illinois courts tend to see the appointment of a receiver/custodian as something of a “nuclear option” to be invoked only when other remedies are inadequate or irreparable harm is occurring or imminent.
As one court put it, a judge has the power to appoint a receiver of a corporation when “conditions of dissension, dispute, fraud, or mismanagement exist which make it impossible for the corporation to carry on its business or preserve its assets, but such power should only be exercised in cases of urgent necessity where there is a present peril to the interests of stockholders consisting of a suspension of corporate business and a threatened depreciation of corporate assets.”
While the Illinois Limited Liability Company Act does not have a parallel provision, the law of receivership equally applies to limited liability companies (“LLCs”) just as it would to other business entities (e.g., partnerships). Illinois courts have long held that the power to appoint a receiver to manage and preserve the assets and affairs of a business, regardless of form, during the pendency, or as part of a dispute is part of the court’s inherent power of equity, regardless of any statutory basis. Generally speaking, when evaluating a petition for a receiver in other cases, like an Illinois LLC governance dispute, a court will apply equally stringent standards – there must be a showing establishing a reasonable probability that the party seeking to install a receiver will ultimately prevail in the case and that there exists a compelling, urgent basis to do so.
Role and Duties Of a Court-Appointed Receiver
An interim receiver or custodian appointed by a court to manage the business and affairs of a corporation, LLC, or other business entity will do so under the conditions and for the term established by the court appointing the receiver. The receiver’s duties include preserving the corporate assets and carrying on the business until a full hearing regarding the underlying dispute can be held.
The bottom line is that the appointment of a receiver to take control of a company from controlling owners or factions accused of putting the company and its assets at risk is a tall order. But there are certainly some situations where a receiver is the appropriate, if not only, the remedy available to prevent a business’ imminent demise or the depreciation or loss of its assets. In fact, in some cases, the appointment of a receiver may be the best tool in the toolbox of the victim party or faction. But one must always remember that it is key to move quickly, as courts of equity do not favor litigants who “sit on their rights.”
If you have questions or concerns about or want to explore, the appointment of receivers in Illinois or other business governance disputes, don’t hesitate to get in touch with me at 312-840-7004 or fmendelsohn@burkelaw.com.
