What Do I Do When Business Isn’t Going as Planned?
Over the past few months, life as we know it has changed drastically. With these rapid and unexpected changes caused by COVID-19, many of us are thrown into unfamiliar and unpleasant situations. Businesses are losing customers, laying off employees and restructuring their whole business model. As more businesses begin to face these challenges, the fear of going under becomes a realistic and dangerous threat.
In the case where a business becomes insolvent, declaring bankruptcy is an option that many companies consider. However, the price of filing bankruptcy can go far beyond fulfilling these financial obligations. After declaring bankruptcy, a company may face damages to their reputation, further litigation, uncertainty of outcome and high costs. It turns out there are many alternatives to bankruptcy that could be a much better option in certain situations.
The first alternative to bankruptcy is going the route of a State Court Receivership. This is a process in which a court order elects all the property subject to legal dispute under the control of an independent party (a Receiver) to secure a company’s assets. Creditors, shareholders and the corporation can move to appoint this third party Receiver to act in the interest of all parties involved.
Situations in which a Receivership is optimal are when the debtor’s business is a single asset real estate business or when the company suffers from management issues and it is more beneficial to bring in a third party. There are many benefits to choosing this route: the overall costs may be lower, the process may be faster, there is less of a negative stigma around this option, flexibility and creativity is allowed, poor management can be replaced by the receiver and there are less requirements for reporting and court hearings.
Out of Courts Workout
Another option to address financial difficulties is working out an agreement with your creditors to bypass the bankruptcy court with the so-called out of court workout. Some of the advantages of such an agreement may be that it is a less expensive and more private process for all parties involved. This option allows for more flexibility when it comes to controlling the process and is usually much faster than bankruptcy, when an agreement with your creditors is reached.
Disadvantages regarding the out of courts workout all depend on whether an agreement between you and most of your creditors has been reached. Some of your creditors may still go ahead and pursue collection actions during your negotiations. In this case you have the option of working out a forbearance agreement with your attorney that would stop collections attempts during pending negotiations.
Assignment for the Benefit of the Creditors (ABC’s)
In this alternative to bankruptcy, the troubled company voluntarily allocates the legal and equitable title over to an independent third party known as the “assignee.” This third party is responsible for liquidating the assets of the troubled company, while being legally required to get the maximum value for the assets to distribute to the creditors. This process is governed by state law rather than federal bankruptcy law and the ABC company becomes legally responsible for the business’s debts.
Transferring responsibilities to an ABC firm versus a bankruptcy trustee has two main advantages. The ABC firm will most likely get you a higher return on your assets. When it comes to intellectual property, the ABC companies are also usually the more appropriate partner when dealing with intellectual property, something a bankruptcy trustee most likely will not take care of. Other advantages include a quicker process with more flexibility and lower costs compared to filing for bankruptcy in the traditional sense.
The Article 9 Sale Process
During these unexpected times of a looming global pandemic many companies are considering a strategy of selling assets outside of bankruptcy in order to generate much needed cash flow and save their business. This process is referred to as the Article 9 sales scenario and is essentially a sale of collateral to a third party in a private or public sale without judicial proceedings.
There are many advantages to a company liquidating its assets. It’s a simpler and less expensive process compared to the court managed bankruptcy sale. However, there are requirements that have to be met in order to proceed with an Article 9 sale. All involved parties have to be notified of the sale in a timely manner. Even though the sale doesn’t have to be approved by a court, it has to be conducted in a “commercially reasonable” manner. This requirement means that the time, place, manner and other factors of the sale have to be in conformity with reasonable commercial practices among dealers who conduct the sale such as a secured creditor, an auction house or other sales professional. This obligation is in place to prevent the reduction of the value of the assets that are being sold.
During these uncertain times, many different scenarios could come up requiring a change of path. The first thing that comes to mind in these situations is taking the route of bankruptcy. In this article we wanted to demonstrate that there are many options outside of bankruptcy when you’re struggling to stay afloat. There are restructuring or liquidating procedures that can actually have the potential of achieving higher returns at a lower cost for all parties involved. Utilizing different value-maximizing strategies could lead to avoiding the bankruptcy process altogether.