Troubled companies often perceive bankruptcy as the only way to address their problems. However,
Commercial Code (UCC) Article 9
sales, assignments for the benefit
of creditors (ABCs), compositions,
and statutory dissolutions, are
also tools that can be used to turn
around or liquidate a business.
These alternatives do not exist in
a vacuum and are informed by a
company’s capital structure, creditor
body, form of organization, and ability
to enlist some of its creditors as allies
to pressure uncooperative creditors.
Moreover, the longer a company waits
to consider its options and delays
hiring experienced financial and legal
advisors, the more constrained its
choices become. In the restructuring
world, it is never too early to develop
a turnaround or orderly wind-down
strategy, and the proactive company
is generally the one that survives or
liquidates with the least disruption.
Although non-bankruptcy alternatives
are far from perfect, a small to middle
market distressed company has
already lost many of the protections
and advantages historically afforded
by the U.S. Bankruptcy Code.
Chapter 11 cases have become
costly and reorganizations rare.
Significant administrative expenses,
costly financing, reduced timelines to
reject leases, and creditor impatience
have all contributed to the reduced
number of bankruptcy filings. Further,
Chapter 11 cases often favor short-term
balance sheet relief at the expense of
strategic and operational changes. In
other cases, intercreditor disputes over
make-whole premiums, structural
subordination, and alleged avoidable
transfers have made significant
litigation—at the estate’s expense—
the rule and not the exception.
If a Chapter 11 case makes a true
reorganization or fresh start unlikely,
non-bankruptcy options may
accomplish a similar or superior, less
costly result more quickly. Further, the
mere threat of filing for bankruptcy
or deploying a non-bankruptcy
option may cause creditors to accept
negotiated accommodations to
provide a troubled company time and
space to right-size its operations.
Non-bankruptcy options allow a
troubled company to reorganize,
sell assets, or liquidate to maximize
value. Though they lack bankruptcy
protections like the automatic
stay and discharge, a distressed
company’s fate is never guaranteed.
Accordingly, all options require
consideration to best protect the
enterprise and its stakeholders.
Non-bankruptcy options may arise
under state law, be subject to various
degrees of judicial oversight, be
privately negotiated and enforced by
contract, or involve some combination
of those alternatives. Unlike the
Bankruptcy Code, the mechanics
may also vary across jurisdictions,
making management’s choice of
advisors crucial to any decision.
A distressed company’s capital
structure often drives its restructuring
or wind-down options. A secured
capital structure constrains options,
but also limits key negotiations
to the company and the secured
creditor. Thus, unsecured creditors,
unless vital to the business’s ongoing
operations, must often wait their turn.
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