Pending final disposition of the debtor's estate the receiver assumes full jurisdiction over it. The receiver derives his power from the court and his function is to conserve the assets and protect them in the interests of all parties involved. He is in no sense a representative of the interests of creditors even though they have brought about his appointment by their actions. Since the public welfare may be involved directly or indirectly the receiver is often charged with operating the corporation, e.g., a railway company. And incident to the power granted by the court to operate the company, the receiver was sometimes given the power to borrow money through the sale of securities known as receiver's certificates. During his incumbency the receiver is charged with operating the property efficiently and collecting the revenues therefrom in the interests of all parties concerned.
Since, theoretically at least, the purpose of the receiver is to protect creditors' rights and not nullify them permanently, he must ultimately dispose of the property by sale for the benefit of creditors. And here an important point emerges. It will be recalled that one of the prime reasons for appointing a receiver initially was to prevent the dissipation of asset values through dismemberment and piecemeal sale. Now if the same end result of dismemberment is not to follow, the receiver must dispose of the corporate assets as a unit. But if the corporation be large, the number of possible purchasers at the receiver's sale will be rather narrowly restricted; for few individuals, obviously, will be able to tender a very large sum in payment for the assets as a unit. As the practice has developed it has been only the parties already in interest in the debtor's estate that offer a bid. During the interim of the receivership the various parties in interest usually would have worked out a scheme of compromise between them, the so-called plan of reorganization, and the receiver's sale was a mere step in carrying this plan into effect. Just what the reorganization plan would be was determined in each case by a multitude of considerations: ordinarily, however, the strict letter of the applicable creditors' claims was modified.
Before the receiver's sale actually took place the court fixed a minimum price, called the "upset" price, below which it would refuse to confirm the sale of the assets. From the point of view of the reorganization committee this was an advantage since it indicated roughly how much cash would have to be provided for those claim-holders against the corporation who did not assent to the reorganization plan. The payment of the upset price (or occasionally something more) was not made by the reorganization committee mainly in cash, but in the form of the claims the committee already held against the corporation. Cash was only provided in the amount necessary to pay off the non-assenters their proportionate amount of the sale price of the assets of the corporation. Thus, finally, through the receiver's sale, the creditors were able to levy their claims against the corporate assets that had been temporarily restrained from enforcement by the appointment of the receiver.
Showing posts with label Corporate Creditors. Show all posts
Showing posts with label Corporate Creditors. Show all posts
The granting of preferences
Where a debtor has more than one creditor an important matter is his right to grant preferences between them. The common law procedure and the ancillary relief afforded by courts of equity for the collection of debts do not pretend to restrain debtors from preferring one creditor to another. And subject to whatever modifications the individual states may have introduced by statute, a corporate debtor as any other may allow one or more creditors a preferred position over others.
Hence, so far as the law and equity courts are concerned, the general rule is "first come, first served" and creditors are entitled to payment according to their finishing positions in what has been called the "race of diligence."
To leave them [debtors] to the rude methods of common law debt collections would mean financial death to them and, because of the frightful waste which accompanies these methods, loss to creditors as well. More than this, creditors were forced by self-interest into a race to be first in at the death. Many a debtor was thus pushed into insolvency which might have been averted.
In other words, the ordinary procedures for the collection of debts do not prevent corporate debtors from preferring creditors one to another. And it has been stated that corporate assets do not form a "trust fund" for the benefit of creditors to be equitably divided among them unless proceedings for the "winding up" of the corporation have been undertaken.
The Inherent Rights of Corporate Creditors
Creditors' procedure in law and equity to obtain payment
A creditor, qua creditor, is entitled merely to collect from the debtor the sum of money owed to him. In the broad and general sense his status as a creditor in nowise confers upon him any right to the specific property of the debtor. He is entitled to the payment of the sum of money owed him, to be sure; but in the absence of default the mode by which the debtor comes into funds with which to pay the claim is not his concern. Thus, the simple existence of a debt does not in and of itself set in motion any legal machinery. Although there is the familiar distinction between secured and unsecured creditors, it must be emphasized that the security is in reality "but an incident to the debt it secures, and a mortgagee is nothing more than a creditor secured by a mortgage." In other words, secured creditors are not a class entirely apart, but simply creditors who have definable rights against some of the debtor's assets over and above those possessed by simple creditors.
In the ordinary run of events, of course, debts are paid when due and the inherent rights of creditors have no occasion for exercise. In the case of non-payment, however, by what procedure does the creditor seek the enforcement of his claim?
If a debt is due and unpaid then the creditor may sue at common law for its payment. If the case be clear, i.e., there is no question of the money being owed, then the suit at law will result in a judgment. Now the importance of the judgment is notable. In the first place the judgment gives the creditor a "claim upon the debtor" which, in the legal sense, he did not possess previously, i.e., the debt is determined at law to be owing and unpaid. That is, for legal purposes, there is no longer any question of the validity of the debt, of the fact that its due date has arrived, and that it has not been paid. In the second place, the judgment sets in motion certain machinery which will presumably lead to the payment of the creditor's claim. For a creditor who has had his claim reduced to a judgment, a "judgment creditor," is entitled, by means of a "writ of execution" which accompanies the judgment, to secure payment of his claim from the sale proceeds of whatever property of the debtor the sheriff finds it necessary to sell in order to meet the claim. The creditor's claim at law upon the debtor's property grows out of the judgment in an important sense: the judgment gives the creditor the right of realization upon his debt. Armed with his judgment and the writ of execution the creditor's position is greatly strengthened.
The judgment and the ensuing writ of execution, however, only extend to those assets of the debtor which a common law court may recognize as property It must be emphasized, though, that not everything of value which a person would regard as an asset falls within the category of property at common law. For instance, a person's interest in a trust estate or an equity of redemption in a mortgage would not be property at common law. The usual practice among legal writers is to refer to such assets as "equitable assets," meaning thereby that jurisdiction over them resides in courts of equity as opposed to courts of law. Sometimes equitable assets are also called "choses in action." A recent writer describes these as follows:
This is the nondescript remainder -- the choses in action. They consist of all less than present possessory rights which are nevertheless recognized at law. They are rights (and therefore "things") of a most highly incorporeal nature because no present possession is conceived to adhere to them. Thus in actual fact they represent little more than a right to bring an action. On the other hand the very reason for the right of action is itself the basis of their status as "things" -- incorporeal "things" -- for, as a class, they are all conceived to represent the right of the dispossessed to be repossessed-his persisting property in an object, possession of which he has temporarily surrendered or failed to gain. The recovery is of this object or its equivalent. Choses in action are thought of along somewhat the same lines as the future estates in land, which are at first included with them. They are slices of a right of possession which has been "protected upon the plane of time." In order for the sheriff to assume control over property by writ of execution that property would have to be "the subject matter of a common law possessory action."
Fortunately for our purposes it is not necessary to indicate all the various kinds of property which fall within the definition of equitable assets. It suffices to recognize that certain of the debtor's assets in the ordinary meaning of that term cannot be reached by a writ of execution at common law.
But if the creditor's claim remains unpaid despite the writ of execution and the debtor has other assets, his equitable assets, which the writ cannot reach, what further remedy is available to the creditor in order to obtain payment?
Until comparatively recently the creditor's further prosecution of his claim was via a creditor's bill in equity. That is, a judgment creditor whose judgment was returned unsatisfied, or, as frequently expressed, a "creditor who had exhausted his remedy at law," could invoke the assistance of a court of equity by means of a judgment creditor's bill which, in effect, asked that the court compel the debtor to turn over to a receiver (a court appointee) those assets, unreachable at common law proceedings, which would yet permit the payment of the creditor's claim. This somewhat circuitous procedure, however, has been shortened in recent times by statutory enactment so that the creditor may now achieve the same net result of filing a creditor's bill in equity by merely initiating so-called "supplementary proceedings" to his legal action.
In other words, the two proceedings are joined in a manner to expedite the relief available to the creditor. In this way, then, creditors are placed in a position to enforce their claims upon debtors by being able to reach out after both their common law and their equitable assets.
Still leaving special contractual relations for subsequent consideration, is there anything peculiar in the situation when the debtor is a corporation? Do creditors of a corporation hold any special rights which do not obtain against real persons?
A creditor, qua creditor, is entitled merely to collect from the debtor the sum of money owed to him. In the broad and general sense his status as a creditor in nowise confers upon him any right to the specific property of the debtor. He is entitled to the payment of the sum of money owed him, to be sure; but in the absence of default the mode by which the debtor comes into funds with which to pay the claim is not his concern. Thus, the simple existence of a debt does not in and of itself set in motion any legal machinery. Although there is the familiar distinction between secured and unsecured creditors, it must be emphasized that the security is in reality "but an incident to the debt it secures, and a mortgagee is nothing more than a creditor secured by a mortgage." In other words, secured creditors are not a class entirely apart, but simply creditors who have definable rights against some of the debtor's assets over and above those possessed by simple creditors.
In the ordinary run of events, of course, debts are paid when due and the inherent rights of creditors have no occasion for exercise. In the case of non-payment, however, by what procedure does the creditor seek the enforcement of his claim?
If a debt is due and unpaid then the creditor may sue at common law for its payment. If the case be clear, i.e., there is no question of the money being owed, then the suit at law will result in a judgment. Now the importance of the judgment is notable. In the first place the judgment gives the creditor a "claim upon the debtor" which, in the legal sense, he did not possess previously, i.e., the debt is determined at law to be owing and unpaid. That is, for legal purposes, there is no longer any question of the validity of the debt, of the fact that its due date has arrived, and that it has not been paid. In the second place, the judgment sets in motion certain machinery which will presumably lead to the payment of the creditor's claim. For a creditor who has had his claim reduced to a judgment, a "judgment creditor," is entitled, by means of a "writ of execution" which accompanies the judgment, to secure payment of his claim from the sale proceeds of whatever property of the debtor the sheriff finds it necessary to sell in order to meet the claim. The creditor's claim at law upon the debtor's property grows out of the judgment in an important sense: the judgment gives the creditor the right of realization upon his debt. Armed with his judgment and the writ of execution the creditor's position is greatly strengthened.
The judgment and the ensuing writ of execution, however, only extend to those assets of the debtor which a common law court may recognize as property It must be emphasized, though, that not everything of value which a person would regard as an asset falls within the category of property at common law. For instance, a person's interest in a trust estate or an equity of redemption in a mortgage would not be property at common law. The usual practice among legal writers is to refer to such assets as "equitable assets," meaning thereby that jurisdiction over them resides in courts of equity as opposed to courts of law. Sometimes equitable assets are also called "choses in action." A recent writer describes these as follows:
This is the nondescript remainder -- the choses in action. They consist of all less than present possessory rights which are nevertheless recognized at law. They are rights (and therefore "things") of a most highly incorporeal nature because no present possession is conceived to adhere to them. Thus in actual fact they represent little more than a right to bring an action. On the other hand the very reason for the right of action is itself the basis of their status as "things" -- incorporeal "things" -- for, as a class, they are all conceived to represent the right of the dispossessed to be repossessed-his persisting property in an object, possession of which he has temporarily surrendered or failed to gain. The recovery is of this object or its equivalent. Choses in action are thought of along somewhat the same lines as the future estates in land, which are at first included with them. They are slices of a right of possession which has been "protected upon the plane of time." In order for the sheriff to assume control over property by writ of execution that property would have to be "the subject matter of a common law possessory action."
Fortunately for our purposes it is not necessary to indicate all the various kinds of property which fall within the definition of equitable assets. It suffices to recognize that certain of the debtor's assets in the ordinary meaning of that term cannot be reached by a writ of execution at common law.
But if the creditor's claim remains unpaid despite the writ of execution and the debtor has other assets, his equitable assets, which the writ cannot reach, what further remedy is available to the creditor in order to obtain payment?
Until comparatively recently the creditor's further prosecution of his claim was via a creditor's bill in equity. That is, a judgment creditor whose judgment was returned unsatisfied, or, as frequently expressed, a "creditor who had exhausted his remedy at law," could invoke the assistance of a court of equity by means of a judgment creditor's bill which, in effect, asked that the court compel the debtor to turn over to a receiver (a court appointee) those assets, unreachable at common law proceedings, which would yet permit the payment of the creditor's claim. This somewhat circuitous procedure, however, has been shortened in recent times by statutory enactment so that the creditor may now achieve the same net result of filing a creditor's bill in equity by merely initiating so-called "supplementary proceedings" to his legal action.
In other words, the two proceedings are joined in a manner to expedite the relief available to the creditor. In this way, then, creditors are placed in a position to enforce their claims upon debtors by being able to reach out after both their common law and their equitable assets.
Still leaving special contractual relations for subsequent consideration, is there anything peculiar in the situation when the debtor is a corporation? Do creditors of a corporation hold any special rights which do not obtain against real persons?
The Rights and the Remedies of Corporate Creditors
While both shareholders and creditors provide capital for corporate enterprises the relation of creditors to the corporation and its assets is different in many important respects from that of shareholders. Creditors possess certain general rights and remedies which may be invoked in pursuit of their claims. And likewise these too may be refined and extended by contract. There is one notable difference, however: creditor-debtor relations between persons in the absence of special contract are, in general, not unique simply because one (or both) of the "persons" happens to be a corporation.
That is to say, creditor-debtor relations in no sense spring from the existence of the corporate form; they would exist, at least in their simpler forms, had the corporation as we know it never developed. The concept and implications of stock ownership, on the other hand, are, in a very real sense, directly associated with and dependent upon the presence of the corporate form. If only the ordinary rights of creditors were involved there would be no reason to include here a special chapter dealing with creditors' rights. It so happens, however, that the application of the time-honored principles of creditor-debtor relations to corporations has brought about important extensions of the basic ideas and practices commensurate with the marked complexity of the modern business corporation. While the underlying philosophy has persisted, its application to involved situations has led to forms and procedures that are unique in important respects: the idea of receivership, for instance, is simple enough; but an understanding of the basic idea itself gives but a faint suggestion of what receivership may mean for a large corporation.
Again, since corporations, unlike real persons, may attain perennial existence, there are not the same obstacles to very long-time creditordebtor relations. It would be unusual for real persons to draft a contract calling for the repayment of a large principal sum a century hence, yet such distant due dates are a commonplace among corporate debtors. Furthermore, legal ingenuity has developed a means whereby a corporation through a bond indenture may deal with a number of identically situated creditors as if they were one. Indeed, the relative permanency of corporate existence and its associative character have permitted an enormous ramification and elaboration of the simpler creditor-debtor relations between real persons. And it is mainly these which give corporate creditor relations the status of a special study within the broader field.
It is helpful, notwithstanding, first to take cognizance of the underlying position of creditors respecting debtors' property in the absence of special contract.
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