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Corporate Litigation: Receivership Actions

NJ Corporate Litigation Attorneys:  Receivership Actions

NJ Corporate Litigation AttorneysOur NJ corporate litigation attorneys represent shareholders in complex litigation matters that necessitate the appointment of a custodial receiver to continue business operations and prevent damage to the business until the lawsuit gets resolved.  Our representation in this context also extends to oppressed minority shareholders who have been “frozen out” of the company.

Disputes among shareholders of corporations or between shareholders and directors can often result in a stalemate or “dead lock” situation that threatens to cause financial or irreparable harm to the company’s ability to continue as a going concern. In these situations it may be necessary to seek the appointment of a receiver over the corporation.  Typically, these types of cases are brought by emergent application filed in the Superior Court of New Jersey, Chancery Division.

Depending on the circumstances, our courts in New Jersey possess the inherit power to appoint a custodial receiver to manage the subject corporation’s affairs during the pendency of the corporate lawsuit.

What powers does a corporate receiver have?

The New Jersey Business Corporation Act lists the powers entrusted to a receiver appointed by the court.  Specifically, N.J.S.A. 14A:14-5 indicates that:

Subject to the general supervision of the Superior Court and pursuant to specific order where appropriate, a receiver shall have power to:

(a) take into his possession all the property of the corporation, including its books, records and papers;

(b) institute and defend actions by or on behalf of the corporation;

(c) sell, assign, convey or otherwise dispose of all or any part of the property of the corporation;

(d) settle or compromise with any debtor or creditor of the corporation, including any taxing authority;

(e) summon and examine under oath, which he may administer, or by affirmation, any persons concerning any matter pertaining to the receivership or to the corporation, its property and its transactions, and require such person to produce books, records, papers and other tangible things and to be examined thereon;

(f) take testimony within or without the State, and, if without the State, apply to courts of other jurisdictions for compulsory process to obtain the attendance of witnesses;

(g) continue the business of the corporation, and, to that end, enter into contracts, borrow money, pledge, mortgage or otherwise encumber the property of the corporation as security for the repayment of the receiver’s loans;

(h) do all further acts as shall best fulfill the purposes of this chapter.

Can New Jersey Courts appoint a receiver because of the fraud or misconduct of its directors?

Yes. New Jersey courts have the power to appoint a receiver over corporations (with 25 or less shareholders) whose directors have engaged in fraud, mismanagement, or abused their authority, or have acted oppressively towards one or more minority shareholders acting in their capacity as shareholders, officers, directors, or employees. Pursuant to N.J.S.A. 14A:12-7(1)(c):

(1) The Superior Court, in an action brought under this section, may appoint a custodian, appoint a provisional director, order a sale of the corporation’s stock as provided below, or enter a judgment dissolving the corporation, upon proof that

* * *

(c) In the case of a corporation having 25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.

What other remedies are available in corporate deadlock and shareholder oppression situations?
        • Appointment of a provision director if in the best interests of the corporation and its shareholders – N.J.S.A. 14A:12-7(3)

        • Order the sale of any shares held by a shareholder who is a party to the action to the corporation or another shareholder upon a motion provided it is fair and equitable to all parties –  N.J.S.A 14A:12-7(8)

        • Order the dissolution of the corporation – N.J.S.A. 14A:12-7(6) and (9)
Are there any other parties besides shareholders who can seek the appointment of a corporate receiver
.

Yes. In addition to shareholders, other parties vested with legal standing to seek the appointment of a corporate receiver include the company’s board of directors by duly adopted resolution, and the company’s creditors.  This is spelled out in N.J.S.A. 14A:14-2, which also recites the reasons that would justify the court’s appointment of a receiver:

14A:14-2. Jurisdiction of the superior court; appointment of receiver.

(1) A receivership action may be brought in the Superior Court by

(a) a creditor whose claim is for a sum certain or for a sum which can by computation be made certain; or

(b) a shareholder or shareholders who individually or in combination own at least ten per cent of the outstanding shares of any class of the corporation; or

(c) the corporation, pursuant to resolution of its board.

(2) The action shall be based upon at least one of the following grounds:

(a) the corporation is insolvent;

(b) the corporation has suspended its ordinary business for lack of funds;

(c) the business of the corporation is being conducted at a great loss and greatly prejudicial to the interests of its creditors or shareholders.

(3) The court may proceed in the action in a summary manner or otherwise. It shall have power to appoint and remove one or more receivers of the corporation from time to time, and to enjoin the corporation, its officers and agents, from exercising any of its privileges and franchises, and from collecting or receiving any debts, or paying out, selling, assigning or transferring any of its property, except to a receiver, and except as the court may otherwise order. The court shall have such further powers as shall be appropriate for the fulfillment of the purposes of this chapter.

(4) Every receiver shall, before assuming his duties, execute and file a bond in the office of the Clerk of the Superior Court, with such sureties and in such form as the court shall approve.

Need assistance in a New Jersey business litigation dispute involving corporate deadlock or minority oppression? Contact our NJ corporate litigation attorneys today. One of our lawyers will respond to your inquiry within 24-48 hours.  If your matter is urgent, please contact us at (201) 498-0400.

Serving Northern, Central and Southern New Jersey including Bergen CountyEssex CountyHudson CountyMercer CountyMiddlesex CountyMorris CountyPassaic CountySomerset CountyUnion County, and elsewhere in the Garden State.

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