Asking a Court to Appoint a Receiver or Dissolve a Texas Company

Four orders, not one

Owners say 'put the company in receivership' as if it were a single thing. The Business Organizations Code gives a court four distinct tools, and the one you ask for should match the problem.

A fifth, gentler option exists: section 11.054 lets an owner ask the court to supervise a winding up that is already under way and to appoint someone to carry it out.

Which court, and who can ask

Section 11.402 places the power to appoint a receiver over an entity's business, or to order liquidation, in the district court of the county where the entity's registered office or principal place of business is located. The same court hears a section 11.314 petition. An owner or member applies; for the rehabilitation receiver, section 11.404(a)(1) requires an action by an owner, while creditors have their own, narrower ground when the entity is insolvent and a judgment has gone unsatisfied. Where the dispute is about governance or an owner's duties and more than $5 million is in controversy, the Texas Business Court has concurrent jurisdiction and the same receivership powers (Government Code section 25A.004); most closely held company fights stay in district court.

Grounds for a receiver to rehabilitate the business

Section 11.404(a)(1) lists what an owner must show. Any one is enough:

• The entity is insolvent or in imminent danger of insolvency.
• The governing persons are deadlocked, the owners cannot break the deadlock, and the entity is suffering or threatened with irreparable injury.
• The acts of the governing persons are illegal, oppressive or fraudulent.
• The entity's property is being misapplied or wasted.
• For a corporation, the shareholders are deadlocked in voting power and have failed for at least two years to elect successors to directors whose terms have expired.

Then comes the part applicants underestimate. Under section 11.404(b) the court may appoint a receiver only if circumstances require one to conserve the property and business and avoid harm to the interested parties, every other legal requirement is met, and the court finds that other available remedies, including a receiver for specific property, are inadequate. Section 11.405 imposes the same last-resort test before liquidation. A judge who can protect you with an injunction, a records order or a receiver over one account is expected to do that instead.

Grounds for judicial winding up of a partnership or LLC

Section 11.314 does not require insolvency or fraud. The court may order a partnership or LLC wound up and terminated if it finds that the entity's economic purpose is likely to be unreasonably frustrated, that another owner has engaged in conduct relating to the business that makes it not reasonably practicable to carry on the business with that owner, or that it is not reasonably practicable to carry on the business in conformity with the governing documents. The second ground is the one most often pleaded between partners: a co-owner who has diverted the business, abandoned it, or made working together impossible. Evidence of a mere falling-out is rarely enough; evidence that the company cannot function, cannot make decisions its agreement requires, or exists only to serve one owner can be.

What a receiver does

A receiver is an officer of the court, not the applicant's agent. The order defines the powers, which typically include taking control of accounts and books, operating or preserving the business, hiring and firing, suing and being sued, and reporting to the court. Management's authority is suspended to the extent the order says. The receiver is paid from the entity's assets, with court approval, which is one of the real costs owners weigh. Under section 11.404(c), if the condition that required the receivership is remedied the receivership ends, control returns to the managerial officials, and the receiver hands back the remaining property. A liquidating receiver instead sells the assets, pays creditors in the order the law sets, and distributes what is left to owners.

Example

Suppose two equal members of a Garland commercial cleaning LLC stop speaking. One controls the bank account and payroll; the other controls the client relationships. Payroll taxes go unpaid for two quarters, a key contract lapses because neither will sign the renewal, and the account-holding member begins paying himself 'back wages' the other disputes. The deadlock ground is met: the governing persons are deadlocked, the members cannot break it, and the lost contract and tax exposure are irreparable injury. The misapplication ground is arguably met too. A court would still ask whether a narrower order would do: a two-signature requirement on the account, an order to sign the renewal, a receiver over the account alone. If the members cannot even cooperate with that, a rehabilitation receiver who runs the company while a buyout or sale is arranged becomes realistic.

What a judge wants to see

1. Specific facts, with documents. Bank statements, tax notices, minutes showing failed votes, the contract that lapsed. Affidavits that say 'mismanagement' without exhibits do not carry a receivership.
2. Why lesser remedies fail. Address section 11.404(b) directly: what injunction or limited order you considered and why it would not protect the business.
3. A plan. Who the proposed receiver is, what powers are needed, how the receiver will be paid and for how long. Courts are reluctant to install an open-ended administrator.
4. Clean hands. The applicant's own conduct will be examined. An owner who also took money or abandoned duties weakens the request.

How the request usually fits into the case

A receivership is rarely the whole lawsuit. It is pleaded alongside claims for breach of fiduciary duty, breach of the agreement, an accounting and a buyout or dissolution, and it is often preceded by a temporary restraining order that freezes the immediate danger; see TROs and temporary injunctions in Texas business cases. The appointment hearing functions as an early trial of the facts. Many cases settle after it, because the ruling tells both sides what the court believes about who is at fault and what the company is worth. Where the owners simply cannot continue, the alternative to a receiver is one of them buying the other out, discussed in whether one partner can dissolve the company.

What it costs the business

A receiver's fees, the loss of management control, the signal sent to customers, lenders and employees, and the time the owners spend in court instead of in the business. Lenders often treat a receivership as a default. These costs are why the statute makes it a last resort and why experienced counsel ask for the narrowest order that protects the asset at risk, then widen it only if the other side forces the issue.

When to involve a litigator

As soon as money is leaving or decisions the business needs cannot be made. The evidence that carries a receivership motion is gathered early: records demands, account statements, a record of the failed votes. Tina Wysk represents owners seeking and resisting receiverships and judicial dissolution in Dallas state and federal courts and in arbitration.