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  • Writer's pictureRobert Stevens

Custodianship? Receivership?

Updated: Mar 23, 2020

Given the vast amount of incorrect information being purveyed and applied (some of it in violation of state statutes), Our firm wanted to outline a correct process and format to use NRS 78.630 (and related statutes) to effectuate a change of management and potentially perform cleanup activities.

The statute applies, emphasis added:

"Whenever any corporation becomes insolvent or suspends its ordinary business for want of money to carry on the business, or if its business has been and is being conducted at a great loss and greatly prejudicial to the interest of its creditors or stockholders, any creditors holding 10 percent of the outstanding indebtedness, or stockholders owning 10 percent of the outstanding stock entitled to vote, may, by petition setting forth the facts and circumstances of the case, apply to the district court of the county in which the principal office of the corporation is located or, if the principal office is not located in this State, to the district court in the county in which the corporation's registered office is located for a writ of injunction and the appointment of a receiver or receivers or trustee or trustees."

Practical application, in the case of our project companies, typically involves the consent of either:

1. Voting consent of more than 50% of the outstanding stock or

2. Voting and unanimous consent of more than 10% of the outstanding debt

When in possession of a majority of the voting shares the appointment is a slam-dunk, and removes any potential of some idiot later saying you "hijacked" the company - which is slang and not a legal term anyway.

If you have 50% control, why file for a Receiver anyway?

There are many advantages. In Nevada, for example, there is a proof of claim statute, (NRS 78.675) that can bar claims not presented in a timely manner on the company. Also, the Receiver as a limited judicial appointee has numerous other powers, including the power of subpoena.

So what's all the hub-bub? Sadly, many operators do not do it correctly, ethically, or legally.

One common tactic is to buy 100 shares of stock in a defunct company and file a proceeding to appoint a custodian. So, for $100 and a filing they effectively steal the company. They rarely ever notice the company of this action and never follow the legal requirements post custodian appointment:

NRS 78.347:

"Within 10 days after being appointed custodian of a Nevada publicly traded corporation, the custodian shall file with the Secretary of State an amendment to the articles of incorporation containing the following information:

(a) Disclosures of any previous criminal, administrative, civil or National Association of Securities Dealers, Inc., or Securities and Exchange Commission investigations, violations or convictions concerning the custodian and any affiliate of the custodian.

(b) A statement indicating that:

(1) Reasonable attempts were made to contact the officers or directors of the corporation to request that the corporation comply with corporate formalities and to continue its business.

(2) The custodian is in fact continuing the business and attempting to further the interests of the shareholders.

(3) The custodian will reinstate or maintain the corporate charter.

(c) Any other information required by regulation to be submitted to the Secretary of State."

They are required to list the names of all other companies they've pulled this on, all investigations, etc. I've yet to find one company that has complied with the Nevada SOS rules and filed this amendment AT ALL let alone within 10 days.

Next up, required steps and actions to effectively perform cleanup once appointed.

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