Goulston & Storrs bankruptcy attorney Doug Rosner recently collaborated with Thomson Reuters to create a three-part video series regarding alternative solutions to the financial problems of distressed companies. This summary highlights the advantages and disadvantages of out-of-court restructuring as an alternative to Chapter 11 bankruptcy reorganization (part one of the series). Click here to watch the video.
Mid-market Companies. The out-of-court approach is becoming especially popular among mid-market companies that have finite and manageable numbers of creditors, as well as limited resources for paying the significant professional fees necessarily associated with bankruptcy proceedings.
Real Estate Enterprises. This approach is also trending among real estate enterprises carrying unsecured loans backed up by personal guarantees. These debtors can often solve their problems by working with their lenders on a plan to sell assets and restructure debt.
Board and Lender Considerations. Lenders and boards of directors are increasingly concerned about Chapter 11 proceedings that can spawn lawsuits against them as potential deep pockets.
ADVANTAGES of RESTRUCTURING
There are several advantages to pursuing an amicable out-of-court restructuring instead of immediately filing a Chapter 11 bankruptcy reorganization, including the following:
- When successful, a collaborative out-of-court restructuring is far less expensive than a bankruptcy proceeding, which can entail millions of dollars in professional fees and court costs.
- Bankruptcy is a forum that facilitates creditor filings of claims, and usually involves protracted wrangling among creditors’ committees, individual creditors, and a bankruptcy trustee.
- Successful restructurings can avoid the messy investigations and litigation that often come with bankruptcy, and sometimes affect officers, directors and even lenders as potential deep-pocket targets.
- In an informal restructuring, there are no “clawbacks” of money from unhappy vendors who got paid within 90 days of bankruptcy filing.
- The result of a good restructuring is more money for both the creditors and the distressed borrower when all parties can reach an amicable solution without litigating.
DISADVANTAGES of RESTRUCTURING
The primary disadvantages to out-of-court restructuring solutions are:
- The restructuring cannot produce the absolute finality and termination of all potential claims and litigation that a bankruptcy court order provides.
- The informal collaborative approach cannot provide the automatic stay of all creditor claims and litigation that bankruptcy does.
- In an out-of-court restructuring, any sale of assets by the distressed company will not be totally free and clear of all claims unless the debtor obtains all necessary creditor consents.
- While debtors can extinguish claims by junior lienholders through UCC Article 9 foreclosure sales of assets and real estate foreclosure sales, these sales cannot provide complete successor liability protection to buyers (for more information on this topic, see our summary of video no. 3 regarding Article 9 and real estate foreclosure sales).
Even if a distressed company tries to reach a collaborative solution with creditors and fails, the negotiations can potentially form the foundation or starting point for a more detailed and formal Chapter 11 bankruptcy plan. Any successful initial negotiations with the debtor’s senior secured and critical lenders can carry a lot of momentum into the bankruptcy proceedings since those parties have priority ranking in claim satisfaction.
The Key Elements of an Out of Court Restructuring
Article 9 Foreclosures