As just observed, the common law and equity procedures do not provide for any pro rata distribution of a debtor's assets among his creditors. The equity courts enter the picture merely as an aid to the achievement of justice at law, and since the law allows creditors to obtain preferences, the equity courts could scarcely alter the arrangement except on special showing. There is yet a further remedy, however, that is often invoked as an aid to the realization of creditors' rights and claims, namely, the appointment of a receiver. What is the purpose of receivership and under what circumstances may the court appoint a receiver for the assets of a debtor?
Particularly in the case of large corporate enterprises with durable and specialized assets, the pressure of creditors to secure payment of their claims may result in such a hurried dismemberment of the corporate assets that a substantial fraction of their value is destroyed. Under the circumstances, asset values tend to decline or disappear as a direct consequence of the procedure provided at law and equity for the payment of creditors. That is to say, the individualized actions of creditors defeat the common aims of creditors as individuals. In view of the purposes which equity courts are designed to serve -- namely, to promote justice in situations where the law leaves something to be desired -- it would be surprising if an equitable remedy had not been developed to obviate the bad result of creditors defeating their own ends. That remedy is the appointment of a receiver for the debtor's assets.
It must be emphasized that the appointment of a receiver for the debtor's assets is definitely regarded as a form of relief in aid of, and subsidiary to, the remedies of creditors already described. At least this is the general theory underlying the appointment of receivers. As a consequence the appointment of a receiver is discretionary with the court; and furthermore, a creditor requesting receivership must give evidence that he has exhausted his legal remedies. Although receivership is usually associated with insolvency a corporation need not be insolvent, in the sense of having an excess of liabilities over assets, before the court will appoint a receiver. It is sufficient if the debtor be unable to meet his obligations as they fall due.
Many states, however, have endeavored by statute to codify the conditions warranting the appointment of receivers; for the federal courts, however, there is no ruling statute and the historic principles governing the appointment of receiver hold.
From the point of view of creditors, the main consequence of placing the affairs of a debtor corporation in the hands of a receiver is that they are prevented from pursuing their ordinary remedies against it during the duration of the receivership. For the time being creditors may not dismember the property. And it is worth emphasizing that historically and in strict theory the appointment of a receiver was regarded as an action taken in the interests of creditors.
Receivership does not destroy any priorities or liens that may have been secured by particular creditors prior to receivership; it does, however, prevent the granting of additional preferences and restrain the exercise of priorities already ceded.
Since the appointment of a receiver for the assets of a debtor corporation is a creditors' remedy, not a mode of relief for hardpressed debtors, a petition for receivership must emanate from a creditor, at least formally. And furthermore a petition for the appointment of a receiver in the creditors' interests was always addressed to the discretion and wisdom of the court. This restriction led to the somewhat anomalous procedure called "friendly" or "consent" receiverships. Although now comparatively rare among ailing corporations because of the superiorities of reorganization in bankruptcy under the revised Bankruptcy Act, the consent receivership is yet worth describing briefly. In its fullest stage of development the consent receivership came to be more a form of relief for debtors than an ancillary remedy of creditors.
The procedure adopted was somewhat as follows. Let us assume that a corporation saw approaching difficulty in meeting creditors' obligations and feared the consequences of creditors' attachments. In the circumstances, the corporation would seek out a "friendly" creditor whose obligation was unpaid and have him request a court of equity to appoint a receiver for the corporation's assets. The creditor's "prayer" to the court would contend that the said corporation was unable to pay the debt and request that the court (in its discretion of course) appoint a receiver for the benefit of all interested parties. At the same time the corporation would file an answer to the creditor's contentions, admitting without argument his allegations, and urging likewise the necessity for the appointment of a receiver for its affairs. The court would then consider the creditor's petition and the corporation's answer, and unless it appeared that receivership would clearly not conserve the assets, or that the action was not bona fide, it would appoint a receiver. Thus, while the formalities of procedure still retained the fiction that receivership is wholly a form of creditors' relief, it cannot be denied that, in fact, a receivership came to operate as much in the interests of debtors as of creditors. To what degree this end result was achieved as a consequence of the almost inevitable necessity of receivership for embarrassed quasi-public corporations is hard to say.
But it must have been realized at an early date that the ordinary creditors' remedies were both inadequate and unsuitable for dealing with railroads or public utilities, for instance, in which the public welfare is superior to mere creditordebtor interests. To break up such corporations would be an empty remedy for creditors. At the same time cessation of operations and dismemberment of the property would be clearly intolerable from the point of view of the general welfare. When the basic philosophy of receivership had been developed with respect to corporations "vested with a public interest," its extension to other corporations of large size was probably an easy step; for their very size and ramifications implied semi-public considerations.
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