A condition of bankruptcy does not necessarily exist in order to secure the appointment of an officer of the court or a representative of a business for the purpose of taking possession and disposing of the property and applying the proceeds to the liquidation of some or all of the debts. The titles given to the various capacities of the representative of the business or the court are assignee, receiver, and trustee. An assignee is a party to whom the owner of a business makes a general assignment of his business, usually for the benefit of his creditors. The owner is usually bankrupt or verging on bankruptcy at such a time. The assignee becomes a representative of the owner, appointed by him, and to that extent the owner is able to regulate the distribution of his estate. As a usual thing the creditors must consent to the appointment of the assignee if the estate is to be liquidated and distributed under his control. If such consent is not given or if the appointment of the assignee and his conduct of the liquidation prove unsatisfactory, it is possible for certain creditors to bring bankruptcy proceedings against the owner and secure the settlement of the estate under bankruptcy procedure. It is usually held, however, that no creditor who has given active approval of the liquidation under assignment can become a party to an application in bankruptcy. The procedure of the assignee in winding up the affairs of the owner does not differ in any essential respect, so far as the accounting is concerned, from that of the receiver or trustee. The accounting features, therefore, will be treated under the later heads of “Receiver” and “Trustee.”
If everything is satisfactory to both parties, a complete settlement of the estate will be effected by the assignee and the affairs of the owner will thus be wound up. In case of dissatisfaction, or in the absence of a general assignment in favor of creditors, proceedings in bankruptcy may be brought against the owner. As was pointed out in Chapter XXVIII, a receiver as an agent of the court may act in two capacities, he may be either a receiver in bankruptcy or a receiver in equity.
The receiver in bankruptcy takes possession of all the property of the bankrupt with the expectation of its ultimate disposal and the application of the amounts realized therefrom to the liquidation of the debts of the bankrupt. The receiver in equity, however, usually comes into possession of only a part of the property, which he is to use in whatever way seems best for the liquidation of the more pressing current claims of creditors. In this latter case a condition of insolvency cannot be said to exist because usually the assets exceed the liabilities. Simply because the management has allowed the current assets to become tied up in a more or less unrealizable form which is inapplicable to payment of liabilities, the business finds itself in difficulty. It becomes necessary temporarily to turn the property over to a representative of the owner and his creditors in order to satisfy their claims and at the same time to preserve the property from needless dissipation until such time as a satisfactory settlement with creditors can be made and the business placed on a sound footing once again. In case, however, a condition of insolvency exists, i.e., a condition in which the liabilities exceed the assets, a receiver in bankruptcy may be appointed by the court upon application of the creditors or at the request of the owner.
Appointment of Trustee
If the owner makes a voluntary application for settlement in bankruptcy there is usually no need to appoint a receiver. The creditors may come together almost immediately and elect a trustee who takes charge of the property and applies it to settlement with the creditors. If the bankruptcy is involuntary, it is frequently necessary for the court to appoint a receiver to whom the property of the proposed bankrupt is turned over for safe-keeping until the exact status of the owner can be determined and a trustee appointed. The primary duty of the receiver and the purpose of his appointment is to prevent the dissipation of the owner’s property and to maintain its integrity, thus insuring its full application to the claims of creditors. Hence, whether the procedure is one in voluntary or in involuntary bankruptcy, the receiver may be appointed if the court deems that the conditions so warrant. A receiver will almost always be appointed in case any of the properties of the proposed bankrupt are of a perishable nature and must be disposed of immediately to secure any return from them. In the absence of a receiver, sometimes the marshal in bankruptcy is called upon to take possession of the property and preserve it.
The receiver holds the property until the first meeting of the creditors which must be called by the court within 30 days after the owner has been adjudged a bankrupt by the court. Creditors are entitled to 10 days’ notice of the meeting in order to make their plans to attend. The chief business of this first meeting of creditors is the appointment of a trustee who takes over the property from the receiver in case one has been appointed, or from the bankrupt in the absence of the intermediary receiver. It is the duty of the trustee to take charge of the entire property, to turn it into cash as quickly and advantageously as possible, and to apply the proceeds to the liquidation of all claims against it.
It is purposed now to discuss some of the accounting phases of the receiver’s and trustee’s activities and to present also some more or less academic theories with regard to such accounting.
Accounts and Reports of a Receiver in Equity
When a receiver in equity is appointed by the court, he is entrusted with property for a specific purpose and must render a full accounting of his stewardship. It becomes necessary, therefore, for him to keep full record of all his activities. In simple situations where his activities are not complex, the keeping of a record of cash receipts and disbursements is sometimes deemed all that is required. Usually, however, it is much better for the receiver to keep a complete set of books showing the detail of his operation of the business, thus enabling him to furnish any desired information. The receiver generally acts under the somewhat specific orders of the court and must be careful to follow out those instructions in all matters. The opening up of the accounts of the receiver will depend somewhat on the court’s order specifying the property to be taken over.
It frequently happens that only a portion of the property passes into the possession and control of the receiver. As a usual thing he does not take onto his records the liabilities of the corporation incurred prior to his appointment, although he may be ordered by the court to pay those liabilities or some portion of them. His books will show, however, the liabilities incurred by him in his conduct of the business. Sometimes this requires a nice distinction and care must be exercised in making it—as in the case of goods ordered prior to the appointment of the receiver but not received until after his appointment. At the time the receiver takes over the properties, an account is opened with him on the books of the corporation, in which he is charged with all properties turned over to him and credited with all valuation reserves applicable to those properties. But, as stated above, no credit for liabilities is entered. The offsetting entries to the receiver’s account are credits and debits respectively to the accounts of the assets taken over and the valuation reserve accounts. On the books of the receiver these entries are reversed, i.e., the various asset accounts will be charged and their valuation reserves credited and a credit will be made to the corporation in receivership for the net values taken over. In case he is required by the order of the court to pay any of the prior liabilities of the corporation, the entry for such becomes a debit to an account called Debts Paid for the Corporation, or other similar title, and a credit to his cash.