The most usual demand made on the re ceiver for new financing arises out of the general physical condition of the property. Ordinarily this is seriously depleted by the time it comes into the receiver's possession. The management of a corporation naturally pays interest at the expense of maintenance just as long as it can, until it is confronted with the fact that the cost of conducting operations has increased because of the bad condition of the property. The property may have reached such a state of deterioration that it would be impossible to continue oper ations, no matter how great the cost, without first spending substantial sums on mainte nance. If the receiver is to operate the prop erty, he must raise the funds to meet these necessary expenditures.
This brings up the problem of financing a business in a receivership. Since the business is in such a condition that it cannot meet its obligations to its existing creditors, obviously no one will advance funds to the business without some special assurance of payment. To meet the situation the law must allow any one who supplies new funds a preferred posi tion. To provide the funds the court author izes the receiver to issue receiver's certificates, and in its order gives them such priority as it considers necessary. It may, and usually does, give them a lien on the assets and earn ings of the business ahead of every other lien on the property except for taxes. The order of the court may, however, place the lien anywhere, and might place it only just ahead of that of the bonds in default. The court also determines the rate of interest the cer tificates may bear and the price at which they may be sold. If they should fall due before the receivership is terminated, they would ordinarily have to be refunded by an other issue of certificates. Those outstanding at the time of the adoption of a plan of reor• ganization have to be provided for in the. plan. Bondholders are entitled to notice of the application for the issuance of receiver's certificates and to appear in court and show that they are not necessary, or that it is not necessary to give them a lien ahead of the bonds.
Let us assume that in the case of the X. Y. Railway Company the general mortgage bondholders make application for the issu ance of $500,000 of receiver's certificates to put the property in condition, and that after a hearing the court grants the application and orders that they bear interest at the rate of 6 per cent and fall due in three years. The court authorizes the receiver to sell them at 981.
In discussing the receivership we have run a little ahead of the story. At the same time that the creditor's bill making the applica tion for the receivership was being prepared the management was also forming a bond holders' protective committee. To do this, they get four or five men whose names are likely to be favorably known to the bond holders to serve on a committee to take care of the interests of the bondholders during the receivership. The committee, it is antici pated, will also follow up the rights of the bondholders through the foreclosure. Pre
sumably they will supervise the work of drawing up the plan of reorganization. It is desirable from the standpoint of the manage ment to have the personnel of this committee all determined and ready to announce as soon as the application for the receivership is made. The prompt announcement of a pro tective committee may forestall the appear ance of another committee. For the forma tion of a protective committee is purely a volunteer matter. Any group of men may announce themselves as a protective commit tee for any of the issues of securities and ask holders of the issue to place their interests in its hands. If the management does not have a committee ready to be announced, other volunteers are sure to appear. Though the management does form a committee which announces itself promptly, it is still possible that other committees will appear. Even in that case the committee arranged by the man agement gains strength from the very fact of being the first. It stands in the posi tion of being the " official " committee. Later committees must assume the position of being in opposition. Of course the management hopes that if its committee is early in the field these opposition committees will not appear. No security-holder can be compelled to en trust his interests to any committee. But the influence of any committee depends on how large a proportion in holdings of owners of the issue it can win the adherence of. As one device for getting bonds deposited, the com mittee may offer to pay depositors the inter est installment immediately in default and take the deposited bonds as collateral for the advance. The present cash, the immediate continuance of income, may loom rather large in the eyes of the bondholder, and, seeing no special reason why he should not deposit, it may induce him to act. The mortgage secur ing the bonds may give to the holders of a majority of the bonds, or to the holders of seventy-five or of eighty-five per cent, certain powers, so that the action of the specified pro portion will be binding on the rest. If such provisions are in the mortgage they form part of the contract with all bondholders, and the minority have no legal right to complain if the specified majority exercise the authority the mortgage gives them. If the committee can get the required majority to entrust their affairs to it, then it can take advantage of such powers as the required majority may have. Quite apart from these special provi sions the weight of the committee in the pro ceedings looking toward reorganization will depend upon the ;number of security-holders it represents. Of course, in saying " number of security-holders " we mean the holders of a given number of bonds; that is, it is the num ber of securities held rather than the num ber of people holding them that counts. Be sides, there is a wide difference between not representing all the security-holders and hav ing those security-holders who have not chosen the "official" committee to ,represent them represented by another committee.