Cannabis receivers need guidance to successfully navigate the unknowns of the process
By Dotan Y. Melech
In the eyes of the federal government, cannabis remains illegal due to its status as a Schedule I narcotic, so cannabis businesses cannot currently declare bankruptcy. A court-appointed receivership is often the only option for companies in distress to turn things around or distribute assets. For those interested in becoming a cannabis receiver, there are several things to consider and prepare for that determine how successful the receivership process will be.
Cannabis in Constant Change
The legal cannabis industry lacks consistency in both regulatory and business practices throughout markets across the country. It is not a coordinated or cooperative industry; there is little transparency or sharing of data, and new rules and regulations are continuously being implemented. Receivers must be agile and have an open mind in the cannabis space, one that is far more unpredictable than other industries. This can make the receiver’s work very difficult if they do not have experience—most do not—in the relatively new cannabis space. I like to describe the receivership process as chaos on top of chaos. It is the receiver’s job to try to manage and organize that chaos (square) as best as possible.
Understand the Task at Hand
If you are considering acting as a receiver, you need to know exactly what receivership is. Receivers are officers appointed by the court at the request of a party(s) to a lawsuit—mainly creditors seeking protection or recovery on their investment. Much like the FDIC, which acts as a receiver on behalf of the government to close down and liquidate failing banks, receivers are tasked with overseeing the complete affairs of a failing cannabis business. Unlike the FDIC, receivers are a disparate group of individuals who all operate in different ways. There is no school or formal education for people who want to be receivers. Most come from the accounting sector or the legal world and become receivers by effort, not training.
With different backgrounds and training, receivers may develop specialization in the practice based on their individual experiences, education and skills. Some receivers may be more proficient at restructuring and turnarounds to save a business, while others might excel at liquidation strategies, and others with forensic accounting. For cannabis receivers, it is imperative that they understand the complexities of cannabis law and regulations, including compliance. It is also important to understand the facts of why a receivership is needed or being requested so that you may gain a better idea of what skills will be most beneficial to the project. At the end of the day, the cannabis receiver’s work should result in one of the following:
- Transfer of interest (privileged licenses)
- Restructure and turnaround of the company to solvency
- Liquidation of some assets, turnaround of others and a pursuit of claims on behalf of the estate for the benefit of all creditors
- Complete liquidation of assets and a pursuit of claims on the behalf of the estate for the benefit of all creditors
Before Becoming a Cannabis Receiver
It is important to remember that receivership is an extreme remedy and a last resort. It is also critical to be aware that the requesting party(s) of the receivership might have ulterior motives that are not evident to the receiver or the other creditors involved in the case. Receivership cases are litigious by design and emotions run high. You will be challenged and multiple forces will be pulling you in different directions. Be aware that receiverships are almost always very expensive and time consuming. For a cannabis receiver in particular, the tools you’ve developed or the work you’ve accomplished in other lines of work may not be applicable in the cannabis industry. It would be a mistake to enter into a cannabis receivership thinking that you will use all the same tools and remedies you are familiar with.
Before deciding to take on a cannabis receivership, it is important to research the stakeholders and management who are running the business. Take the time to do the due diligence and understand the marketplace and (preliminary) value of the assets, remembering that values are specific to each legal market and can vary widely.
Know the objective of the receivership. What is/are the desired outcome/s? As a receiver, you will not be a party in the lawsuit, but rather a fiduciary of the estate as a whole. You must look at all the moving parts (which will be mainly negative and ugly). What assets are worth preserving? Is there a strategy? Before you become engaged, determine what the problems are that you will be trying to solve. What are the issues that took the business to receivership? Take the time to do those things up front. If possible, review the company records, get to know the employees and gauge the objectives and goals by meeting with the creditors. This will allow you to get a handle on how bad the scenario really is. As soon as the court signs off on the receivership you will be working for the court, as a fiduciary for the benefit of the estate (not any of the parties), in the most stressful environment a company can be in.
There are no guarantees in receivership. You can plan and make estimates on how the process will proceed, but if you have never worked in cannabis, it can be close to impossible to have an idea of how things will play out. The industry exists in an environment that can still be controversial politically and socially in ways that other industries are not. Having the right tools and right people with industry specific expertise to join your team is critical to your success.
Remember that there is no way for a cannabis receiver to successfully handle every aspect of the project on their own. Receivership is a Pandora’s Box filled with unknowns and you need to juggle and manage expectations carefully. United CMC is your go to source for industry specific expertise and we can empower you with the knowledge that will allow you to be agile and resourceful, and ultimately, successful in your receivership work.
Interested in learning more about becoming a receiver in the cannabis industry? Expert guidance is here. Reach out to United CMC today.