Businesses fail. It happens all the time for many different reasons. Painful tax laws, lack of experience of the owners, insufficient capital, and many other triggers can lead to a business’s downfall. Due in large measure to the newness of the marijuana industry this is a fairly stressful time for marijuana business owners, particularly those facing decisions about whether to make additional capital contributions, seek rescue financing, or just let the thing fail. And even letting the thing fail is not so easy, as the business likely has creditors on its doorstep demanding they get paid. State tax agencies, employees, vendors, landlords, and consultants all will likely be pushing to get paid, and they will push more forcefully as soon as they think the business is on the precipice.
For those in other industries, filing for bankruptcy is always an option. The problem, as we have discussed before, is that bankruptcy is administered exclusively by federal courts that have so far barred marijuana businesses from participating.
So, how should a marijuana business handle winding down? A first option is to liquidate without any type of court supervision. This can actually be beneficial, as there are certain benefits to maintaining control during an asset distribution in liquidation. Business owners are generally able to fetch higher prices for assets than bankruptcy trustees are. Also, and more importantly, it is nice to be able to choose which creditors get paid. If you personally guaranteed lease payments, for example, you would likely want to pay those before paying off other unsecured debts that you did not personally guarantee. Similarly, state sales tax is a trust tax that comes with automatic personal guarantees and so it would be good to make sure those payments are given full priority.
Going it alone can lead to problems though. Secured creditors will be reasonably worried that their secured assets will be sold without them receiving a payment, and unsecured creditors will worry about being left out entirely. These creditors may move to have a state-court receiver appointed.
State court receivers act much like bankruptcy trustees. They manage a business through liquidation, and they are granted rights to dispose of property to further the needs of the court. Courts will generally appoint receivers only when a party has shown that the appointment is reasonably necessary and that other available remedies are not available or are inadequate. Receivership can be a good thing when there are many creditors all pounding on the door at once, as appointment often comes with an all-powerful automatic stay similar to that of bankruptcy. All actions by creditors against the company are stayed while the receiver gathers information and makes a reasonable plan for disposing of the assets, and creditors with claims are forced to deal with the receiver as opposed to harassing the failing business.
Licensing can be an issue in the receivership context, but luckily state marijuana laws in regulated business jurisdictions generally give receivers some right to distribute property, including regulated marijuana. Washington, for instance, allows receivers and executors of estates to take over a business in case of insolvency or death.
So though it is not great when your marijuana business fails, it is important for you to see the process through. As long as there are debts in place, marijuana business owners need to understand that if they do not distribute assets properly, they may be subjecting themselves to individual liability or asset clawbacks or various other problems. If you can formulate a plan that works with your state laws, you are making the first step towards making your winding down process as painless as possible.