Questions for Companies Considering Bankruptcy

The U.S. Bankruptcy Code, enacted in 1978, was not designed to handle today’s complex financial markets, credit and derivative products and corporate structures. Still, bankruptcy can be an effective tool for solving seemingly intractable business problems.

In a Chapter 11, the debtor’s management retains control of the company, but business decisions outside the ordinary course of operations must have court approval. In addition, the U.S. Trustee oversees the case and has standing to file motions and otherwise participate. Common concerns of management include the public nature of a Chapter 11 case and the enhanced oversight by the court, the U.S. Trustee, creditors and other involved parties. Given sufficient resources to fund a restructuring, Chapter 11 can be an excellent tool for solving certain problems. For example, if the company is burdened by numerous leases or mortgages for low-performing retail outlets, bankruptcy offers a procedure to assume and assign or reject leases with a statutory cap on damages.

Timing is crucial. A 2013 study suggests that Chapter 11 business filings are “influenced by rational calculations pertaining to debt obligations, cash flow and the availability of credit.” Related questions include timing of defaults under credit agreements, due dates for rent under leases, potential avoidance actions and availability of unencumbered cash.

The author provides a list of questions concerning credit, tax liabilities and the availability of funds that general counsel working with restructuring counsel should consider in determining a course of action.