This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
It is frequently the case that a corporation which becomes insolvent has for several years been running downhill, either because of incompetence or exploitation on the part of the management, or because the impaired credit of the company has not permitted it to raise new capital with which to bring its plant and equipment up to modern requirements. The appointment of a receiver, instead of being another step downward, may prove to be the company's salvation. That depends in part, of course, on the character and ability of the receiver. If he is a man of ideas and of executive talent, he may quickly rejuvenate the organization. As has just been noted, he has the power to issue receiver's certificates and thus secure funds which had previously been lacking. Sometimes a comparatively small amount of new capital will be enough to put a decaying corporation back into a moderately sound condition. The receiver has a free hand. If it is possible to do anything for the corporation and if he is the man to do it, the results of his activities may be a gratifying gain in efficiency and earning power. In any event, the receiver should be able to hold the organization and the property intact and to turn back, after his service is completed, a going and profit-making business.
Ordinarily the receiver takes some part also in an informal way in the negotiations for financial reorganization of the business and advises with the court as to the plan of reorganization that ought to be approved. It is an object of his efforts to bring about the reorganization and thus terminate the receivership at the earliest possible moment.
Very infrequently it happens that these customary results - maintenance of a going business and financial reorganization - are not attainable. And in that case the receivership may finally end in a forced winding up of the business. Although unusual, it is possible even for a railroad, like other business enterprises, actually and completely to go out of business. In October, 1914, the judge having jurisdiction signed an order directing the receivers of the Buffalo & Susquehanna Railroad to discontinue permanently the operation of trains, to take up the company's rails, and to dispose of its assets. It is stated that the total population served by this railway, which was 86 miles in length, was only about 17,000; consequently the railroad was wholly unable to pay its own operating expenses. At the time when the receiver wound up the business, all that was left to the owners of $6,000,000 par value outstanding bonds (to say nothing of outstanding preferred and common shares) was the scrap value of the rails and rolling stock, the right of way, and 23 acres of land fronting on Lake Erie.