Core Benefits of Cannabis Receivership: Transparency and Accountability

A receiver’s focus on cannabis business accountability and transparency benefits all involved parties.

Dotan Y. Melech, President and Executive Director of Corporate Monitoring & Consulting Services, United CMC

With cannabis still listed as a Schedule I controlled substance at the federal level, the ability for cannabis businesses to file for bankruptcy protection remains off the table. However, receivership is a viable option that offers many benefits for an enterprise in distress.

In cannabis receivership conducted through the courts, debts can be resolved, asset values maximized and operational issues identified and addressed to stabilize revenue generation.

A court-appointed receiver’s primary responsibility is to determine what needs to be done in the interest of the distressed business, and their strategy starts with accountability and transparency—two foundational aspects of receivership. Both are necessary, but do not always transpire as one might expect. I wanted to share some of my perspective as a receiver who has worked with cannabis enterprises both large and small.

Transparency in Cannabis Receivership

When a court appointed receiver takes over operational control of the enterprise and begins to analyze the issues facing the business, he or she is beholden to the court to determine the best way for the cannabis business to move forward.

The receiver does hold some discretionary power, though, because the order from the court can be designed and customized to determine the level and frequency of transparency reporting in a receivership. Documentation produced after research and investigation into financial issues, business relationships and activities, as well as asset analysis, can be scheduled according to the objectives of the receiver pursuant to the receivership order.

Similarly, some of those reports do not have to be filed publicly. Receivership is performed in the best interest of the company and its creditors, and the ability to file either under seal or publicly is an important tool that the receiver can use, subject to court approval, to control the degree of (public) transparency throughout the receivership process.

Publicly disclosing certain information is not always in the best interest of the receivership estate, and of the involved parties. An example of an instance where filing under seal would be the proper strategy: There are proprietary holdings or intellectual property that if made public would cause the company to lose competitive advantage and put it in even more distress, to the detriment of creditors and investors. Likewise, the distressed cannabis business might benefit from certain information technology data remaining confidential. The receiver must remain mindful that some reports in the public record could be harmful to the company and carefully manage the level of transparency.

Receivership transparency works best when the receiver has the ability to make judgment calls, use common sense, and be sensitive to potentially dangerous information. This must always be done with the goal of keeping the court satisfied that the process is moving forward in a clear-cut manner and information is disclosed in a way that will satisfy the creditors and investors.

Achieving Accountability in a Cannabis Receivership

The receiver is accountable to the court and ultimately reports to the judge. And in order to best satisfy his or her responsibilities, the receiver must be able to mitigate risk from potential regulatory investigation and enforcement in the early stages of receivership as all the facts about the distressed cannabis business are gathered.

This means that ideally, as receivers, we need to be granted the time and access to create the right environment for research and discovery into the distressed cannabis business in order to best provide accountability to the courts. If business operations are interrupted by regulatory impediments shortly after the appointment of the receiver, the process can not proceed in an efficient manner and may create an environment that impedes the receiver’s responsibilities to the court.

Without some type of established grace period by the regulatory authority that allows a receiver to dig into the raw data and work with unfiltered information, true business accountability is very difficult to achieve.

Any audits or enforcement of pre-receivership violations by regulators, in the first 90 days of the receivership, will interrupt the receiver’s work. To achieve optimal results, regulators must trust and allow the receiver the necessary time to address issues discovered during the first critical months of the receivership. This will also ensure that reports are not influenced by outside oversight and can be objectively maintained to protect the entire estate while the property, assets and financial records are organized and assessed.

If you are looking for cannabis receivership guidance, reach out to United CMC today. Our experienced team is here to help you.