Out of Court Restructuring as an Alternative to Chapter 11 Bankruptcy | Goulston & Storrs PC

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Goulston & Storrs Bankruptcy Lawyer Doug Rosner recently collaborated with Thomson Reuters to create a three-part video series on alternative solutions to the financial problems of struggling businesses. This summary highlights the pros and cons of out-of-court restructuring as an alternative to Chapter 11 bankruptcy reorganization (part one of the series). Click here to watch the video.

Medium-sized companies. The out-of-court approach is becoming particularly popular among mid-sized businesses that have a finite and manageable number of creditors, as well as limited resources to pay the large professional fees necessarily associated with bankruptcy proceedings.

Real estate companies. This approach is also trending among real estate businesses carrying unsecured loans backed by personal guarantees. These debtors can often resolve their problems by working with their lenders on a plan to sell assets and restructure debt.

Board and Lender Considerations. Lenders and boards 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 out-of-court restructuring instead of immediately filing a Chapter 11 bankruptcy reorganization, including the following:

  • When successful, collaborative out-of-court restructuring is much less expensive than bankruptcy proceedings, which can result in millions of dollars in professional fees and legal costs.
  • Bankruptcy is a forum that makes it easier for creditors to file claims and usually involves protracted wrangling between creditors’ committees, individual creditors, and a trustee in bankruptcy.
  • Successful restructurings can avoid the messy investigations and litigation that often accompany bankruptcy, and sometimes land executives, directors and even lenders as potential deep-pocketed targets.
  • In an informal restructuring, there is no “clawback” of money from disgruntled sellers who have been paid within 90 days of filing for bankruptcy.
  • The result of a good restructuring is more money for creditors and the troubled borrower when all parties can reach an amicable solution without litigation.

DISADVANTAGES of RESTRUCTURING

The main disadvantages of out-of-court restructuring solutions are:

  • Restructuring cannot produce the absolute finality and end to all potential claims and litigation that a bankruptcy court order provides.
  • The informal collaborative approach cannot provide for the automatic suspension of all creditor claims and litigation that bankruptcy entails.
  • In an amicable restructuring, any sale of assets by the company in difficulty will only be totally free and clear of all debts if the debtor obtains all the necessary consents from the creditors.
  • Although debtors may extinguish the claims of junior lienholders through sale of assets with foreclosure under UCC Article 9 and sale with foreclosure, such sales cannot provide protection. successor liability to buyers (for more on this, see our summary of Video #3 regarding Section 9 and Foreclosure Sales).

FINAL THOUGHTS

Even if a struggling business tries to find a collaborative solution with creditors and fails, negotiations can potentially form the basis or starting point for a more detailed and formal Chapter 11 bankruptcy plan. Any successful initial negotiations with major secured and critical debtor lenders can add a lot of momentum to the bankruptcy process, as these parties have priority in settling claims.

Related:

The key elements of an out-of-court restructuring

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