Chapter 11 Filings
From the biggest companies down to the tiniest, everyone is fighting to stay afloat during this crisis. Several of the biggest companies around have filed for bankruptcy protection in recent weeks. We are likely to see a tidal wave of Chapter 11 filings in the coming months. Most every industry is or will be affected - retail, energy, hospitality, manufacturing and more.
A Chapter 11 is a highly effective means of fixing up a company’s finances in an economy such as this one. Once the company files, the automatic stay kicks in and the creditors have to stop trying to collect the debts. A Chapter 11 allows the company to slim down the debts. A Chapter 11 gives the company breathing room to make financial and operational adjustments, but in today’s climate, the company probably has a limited amount of time in which it can do so. Chapter 11 also allows the company to sell assets free of liens and claims.
However, Chapter 11 is not always the cure. It is expensive, it is slow, and it involves heavy oversight and reporting requirements. It also involves debtor-in-possession (DIP) financing, and often a viable core business. Without the financing and viable business, it rarely works.
An Alternative to Bankruptcy
A distressed company has options in this economy besides filing for bankruptcy. A “free fall” involves dissolving and leaving the creditors to fight over what remains. It is chaotic and can expose key stakeholders to liability. An organized liquidation maximizes the value of the company’s assets.
An assignment for the benefit of creditors (ABC) is one such alternative, and in many states a very effective one. It’s an insolvency procedure under state law, not federal bankruptcy law. Depending on the state, the right to conduct an ABC comes either from the common law (cases and precedents) or from a statute.
In a nut shell, this is how an ABC works: The company (assignor) transfers all its ownership of its assets to an independent fiduciary (assignee), who then sells them and pays the creditors the net proceeds. In most states, board and shareholder approval is required. In some states, the ABC must be registered with a state court. The process varies by state.
Are you wondering what the advantages of an ABC are compared to Chapter 11 or Chapter 7 liquidation? Good question, and here are some of the answers.
The first and most obvious advantage of an ABC is that it costs less than a Chapter 11 or a Chapter 7. An ABC is simpler, and therefore requires fewer administrative duties. There is no court supervision, or in some jurisdictions, very little.
A second advantage of the ABC is speed. One of the reasons the ABC costs less than the Chapter 11 or the Chapter 7 is that it is faster.
The third point on our list is flexibility. In an ABC, the company itself names the assignee who will oversee the liquidation. In a Chapter 7 or a state receivership, it has no control over who the fiduciary is.
The fourth benefit of the ABC is expedited sales. An ABC has no sale rules (such as Section 363 of the Bankruptcy Code) to follow, and so the assignee can sell assets more quickly.
Fifth on our list is less oversight.
On the other hand, and as with so many things, an ABC is not the answer to every problem. The reason for that has to do with lawsuits. An ABC, unlike a Chapter 11 or a Chapter 7, does not have an automatic stay. The result is that pending litigation can continue against the company, and new litigation can be filed. By contrast, most receivership appointment orders include some sort of stay on litigation against the company.
A Receivership or a Workout
A second option is a receivership, either in federal or in state court. The court appoints a receiver to oversee and often run or liquidate the business. The receiver is a neutral, independent third party, and acts for the benefit of all interested parties. Secured lenders will often seek a receivership over bankruptcy.
The order from the supervising court defines the receiver’s duties. The order can, for example, direct the receiver to turn assets into cash and to distribute the cash to the creditors. The receiver’s role is similar to a trustee’s in bankruptcy, but the receiver usually has more flexibility under a simpler and streamlined framework.
A receivership may be your best choice if you can’t afford a bankruptcy, and you still want to deal with creditors in a predictable, orderly manner. One downside to a receivership is that there is no statutory method to claw back preferential transfers, as there is in bankruptcy.
The last alternative is an out-of-court workout negotiated with the company’s creditors. The workout option suits a viable company weighed down by too much debt, secured or unsecured or both. It does not require a court filing, and leaves the owners in control.
A lender that sees a solid business plan may be persuaded to grant a forbearance. This means the lender gives the borrower some flexibility on the amount and timing of loan payments. This is often a better option for the lender than foreclosing on the collateral and liquidating it.
With trade creditors like landlords and suppliers, the same logic applies as it does with lenders. Many would rather negotiate an accommodation than sue, but each fears being the last creditor paid, and so rushes to be the first to file suit. The company needs one deal that includes everyone.
The right workout strategy - pursued early and aggressively - buys the company some time and whittles down the debt enough that it can see its way to the other side of the storm.
In short, there are several alternatives to a Chapter 11, depending on the circumstances, including an ABC or a receivership or a workout. The right choice depends on the specific facts. Be sure to consult knowledgeable counsel.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
