The challenges are greater for receivers, but ACAs also face difficult hurdles when addressing the issues that put cannabis businesses in distress.
By Dotan Y. Melech
Distressed cannabis companies don’t have the option of using federal bankruptcy court to resolve debts. Instead, they can either turn to a court-ordered receivership or bring in an administrative collateral agent (ACA) to best address why the company is in distress. Receivers and ACAs assess the business across its operations and decide whether to liquidate assets or restructure while at the same time working to protect the collateral of creditors.
Although their goals are similar, if all parties involved agree on the use of an ACA instead of having to involve the courts and an appointed receiver, a great deal of money, time, resources and suffering will be saved. That is not to say that ACAs don’t face substantial challenges, but their pathway to an acceptable resolution is less rocky than the road receivers must take.
Distressed Cannabis Companies: Conflict and Complexity
When cannabis businesses are in distress, every party involved is pulling in its own direction. Conflict and complexity are measured side by side. One thing that presents a much greater conflict for receivers than ACAs is the ambiguity that comes with court involvement. In most state courts, there is a distinct lack of precedent surrounding cannabis receivership. In some cases, the laws that will inform judges on cannabis receivership are being written now. The court does not necessarily have extensive knowledge on cannabis issues. It mainly operates by citation—using previous rulings to inform how to handle the current situation.
But when there are no previous pertinent citations, courts have to improvise. Receivers must face the challenge of the court where the referee is the judge. The process will take a long time and it can be painful and unpredictable. The court can be reluctant to make rash decisions or issue rulings that favor one party or another. And when parties are fighting and spending a lot of money to push their interests, the conflict receivers face is how to protect and preserve the assets of the estate, when the assets are imperiled by the in-fighting over possession and the lengthy court process.
An ACA Needs the Timing to be Right
An ACA also deals with conflict in their work, but avoids the monumental strife that can exist in a receivership by essentially bringing all involved parties together one step before the court gets involved. They have the ability to structure a solution that is amicable, knowing that a receivership is the fallback option.
The ACA’s primary conflict is with timing. When do the involved parties acknowledge that the business needs assistance? An ACA is best utilized when people are looking for resolution or compromise prior to falling off the cliff. But what if an ACA comes in when it’s too late?
It is very difficult for everyone involved in a distressed cannabis business to take the time to consider the company’s health and begin a discussion on what to do next. Any delays in deciding to act on the problems of the business only serves to make the job of an ACA much more difficult—or impossible.
If the timing is right, an ACA can avoid much of the conflict receivers face. The goal is to tone down conflicts and find a compromise so people can walk away relatively satisfied. This is far easier said than done. Finding agreement amongst disgruntled parties looking out for themselves—even if they all want to avoid receivership—isn’t easy.
An ACA Needs the Timing to be Right
There will always be conflicts when the work of a receiver or an ACA is done, though they are far more substantial in a receivership. Even when a receivership is done well, everyone is equally dissatisfied. The receiver always goes in blind, not knowing how long or how expensive the process will be, and the hoped-for outcome by most parties is rarely the one that you get. Nobody wins.
With an ACA, the win is defined by the parties looking to resolve a specific issue and willing to work towards that goal in a mature manner. A legal framework can be built that allows for the amicable resolution of issues with a set, known and predictable budget. You can plan for that type of reorganization, transfer of license/ownership, or asset liquidation because the stakeholders control the situation, not the courts. They are guided by the ACA, but in the end, they are in control.
Interested in learning more about receivers and ACAs in the cannabis industry? Or, are you a receiver interested in guidance or support that can help save time and money while achieving the best possible result? Reach out to United CMC today.