Litigation

Court of Chancery Explains When It Will Appoint A Receiver

By Edward M. McNally

Pope Investments LLC v. Benda Pharmaceutical Inc. ,C.A. 5171-VCP ( December 15, 2010)

When a Delaware corporation becomes insolvent, it is possible to have the Court of Chancery appoint a receiver to take over its management.  Possible, but not easy as this decision shows.  Assuming that insolvency is proved, a receiver will be appointed when it will serve a "beneficial purpose".  What that translates into is when there is no real alternative to protect creditors effectively.

When it is possible to use the usual methods of enforcing a judgment or there are other, less dramatic remedies available, a receiver is not warranted.  For example, if the plaintiff has the right to appoint directors, then it should use the statutory remedy to force a stockholder meeting and the election of those directors.

Finally, to the extent the plainitff's case is based on what it alleges to be corporate abuses by current management, it needs to first prove those abuses before the court will appoint a receiver. After all, the extent of the abuse has to be determined before the remedy may be crafted.

Behind all this cautionary approach is the natural reluctance of any court to be dragged into the everyday management of a business.  For once a receiver is appointed, the court knows that every dispute over what the receiver does is probably going to end up before the court for resolution.  That is not fun.

Full post as published by Delaware Business Litigation Report on December 15, 2010 (boomark / email).