The Use of Financial Experts

January 23, 2019
business paperwork

By Gil A. Miller CPA, CFE, CIRA, CDBV

The use of both federal and state receiverships is becoming a more common tool during the litigation process. From securing and watching over real and personal property to liquidating the assets of a business venture, receiverships can many times be a very efficient and effective alternative to bankruptcy or protracted litigation. This article focuses on the use of financial experts in the receivership process.

Selection Process: Selecting an independent and qualified receiver is important, especially considering the receiver’s duty to report to the court. Generally, receivers are attorneys, accountants, turnaround professionals or industry experts. In cases where the focus of the dispute has many legal aspects, an attorney receiver may be preferred. In other settings, it may be advantageous that the receiver have an accounting or troubled company background, especially when a business may still be conducting operations. An industry expert may also be an excellent choice for a receiver when the business operations are very specialized and the financial outcome will be impacted should a less experienced receiver take over.

There are two types of receivers: A general or liquidating receiver is usually charged with selling all the assets of the business, either as a going concern or piecemeal. A limited receiver generally takes possession and usually liquidates only specific assets of the business or person. This type of limited receiver does not take control of the business operations that are not subject to the receivership. Whether as the receiver or as the receiver’s expert, a financial adviser can assist the court and parties with various aspects of a successful receivership.

Operations and Valuation: If the receiver is operating a business, the financial expert can advise the receiver as to the advantages and disadvantageous of continuing operations. In addition to determining cash flow needs for operations, the financial expert can assist the general receiver in estimating the going concern value of the business and comparing that value with liquidation value scenarios. In analyzing the financial results of the business, the financial adviser may be able to recommend ways to increase revenues and/or decrease costs to not only keep the business operating, but to increase the eventual liquidation value of the business. Once an independent receiver is in place, the financial adviser can often find and eliminate unnecessary expenses. These types of expenses are often the very cause of the main case dispute and can immediately add value to the receivership estate.

Investigation: A general receiver may also need to use the financial expert to help determine the nature of pre-receivership cash disbursements and other asset transfers which may be considered inappropriate. Insolvency and adequate consideration issues are also areas in which the financial expert can assist the receiver in educating the court and other parties as necessary. In many cases, a transfer may have certain elements that suggest it to be of a fraudulent nature. These findings are often best explained to the court through the use of the financial expert. A limited receiver may need help investigating which assets are assets of the receivership and which are not. It is not uncommon for a receivership order to include this type of investigation. The financial adviser can often determine the source of funds used to purchase assets, which very often is a dispute in the main case, especially when collateral or assets of the receivership are not adequately defined in the receivership order.

Financial Reporting: Most receivership orders require the receiver to prepare certain financial reports for the court and parties to the case. Timely and accurate reporting is critical in maintaining the credibility of the receivership. A financial expert can aid in drafting this portion of an order to make sure the language and deadlines are both clear and reasonable.

Claims and Distribution Plan: Hopefully, there will be assets in a general receivership to sell and reduce to cash. A financial adviser can provide a claims process to track and eventually pay claims through an approved distribution plan.

Taxes: A tax professional can assist in determining if a qualified settlement fund (QSF) should be established with the Internal Revenue Service (IRS). Furthermore, because each state varies, he or she can determine the manner in which state taxing authorities require a QSF or other type of return to be reported. For an operating entity, payroll taxes are not only important, but potentially a personal liability of the receiver. Assistance with this type of fiduciary tax is critical (and helps the receiver sleep at night). At year-end, a tax professional is able to evaluate the nature of claim distributions and receivership disbursements in order to accurately issue required IRS Forms 1099, if necessary. A financial expert can also assist in making sure appropriate tax requirement language is included in the receivership order. For example, a limited receivership order often will include language stating that tax returns are not the responsibility of the receiver.

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