Chancery Grants Expedited Proceedings To Consider Appointment of Receiver or Custodian for Insolvent Company

Balch Hill Partners, L.P. v. Shocking Technologies, Inc., C.A. No. 8249-VCN (Del. Ch. Feb. 7, 2013).

Issue addressed: Whether expedited proceedings should be granted to consider the appointment of a receiver or custodian for an allegedly insolvent company pursuant to DGCL Sections 291 and 226? Short answer: Yes

Brief Overview

This letter ruling was in the context of a motion to expedite that was filed in connection with a petition to appoint a receiver or custodian pursuant to DGCL Section 226 (relating to a director deadlock) or DGCL Section 291 (relating to an insolvent company).  The parties could not muster a majority of the board to agree on the terms of a loan that apparently was necessary to keep the company afloat, and thus were confronted with a stalemate. (See clip art below of a “custodian”).

The Court recited the familiar standard applicable to a motion for expedited proceedings:

“The standard for expediting a proceeding is not a difficult one to meet. BHP need only ‘articulate a suffficiently colorable claim and show a sufficient possibility of a threatened irreparable injury, as would justify imposing on [defendant] and the public the extra (and sometimes substantial) costs of an expedited proceeding.’” See footnotes 3 and 4.

In its analysis regarding whether to grant expedited proceedings the court reviewed the statutory standard under Section 226(a)(2) for appointing a receiver or custodian when there is a deadlock among directors of the board, and whether there was demonstrated in this case a “colorable claim” for relief pursuant to that statute. Notably, the statutory prerequisites for relief under Section 226 include the same irreparable harm that must be shown for expedited proceedings.

The court referred to cases that support the proposition that a “director’s refusal to attend board meetings, and thereby exercise ‘negative control’ over the board, is sufficient to find that the board is hopelessly divided.” See footnote 6. In this case that showing was sufficient to make out a “colorable claim”.

Various useful definitions of insolvency for purposes of Section 291 were cited at footnote 8, but the court underscored the additional requirement for relief under Section 291 that the appointment of a receiver “would serve a beneficial purpose” and would help rather than harm the company. That is, one must demonstrate: “some benefit that an appointment would produce or some harm it could avoid.” A colorable claim was shown on this point, and in addition the court noted that: “the threat of insolvency is sufficient to raise a possibility of irreparable harm.”

The court also observed that a Section 226 proceeding is summary in nature, thus providing a supplemental reason to order an expedited hearing in this matter on the issue of whether a custodian or receiver should be appointed.

See prior Chancery opinions in this matter highlighted on these pages here and here.