A troubled company often reflexively perceives a bankruptcy filing as the prototype solution to its financial distress. Bankruptcy is an important and powerful tool to address insolvency—providing for an automatic stay, the sale of assets free and clear, confirmation of a plan over the objection of creditors, and discharge of debts.
A bankruptcy, however, has several limitations, including significant time and expense. Bankruptcy also frequently results in a sale or liquidation, as opposed to reorganization, and may involve protracted litigation. These drawbacks often render bankruptcy an impractical or undesirable option, particularly for small and medium-size companies.
Since 2011, the number of bankruptcy filings has declined every year. In 2017, there were only 23,157 corporate bankruptcies filed under any chapter of the Bankruptcy Code, down from more than 60,000 in 2009 and more than 40,000 in 2012. Part of this decline can be attributed to the economic recovery after the Great Recession. Another significant factor is the increased use of bankruptcy alternatives, including assignments for the benefit of creditors (ABCs), receiverships, and Article 9 foreclosures.
Now more than ever, it is incumbent upon advisors to have command of bankruptcy alternatives to fully inform a troubled company and its decision makers of the complete spectrum of viable options to develop and implement a strategy to achieve the desired goals. With the increasing implementation of alternatives to bankruptcy it is also important for lenders, creditors, and other parties with interests in a company’s capital structure to understand these processes, beginning with negotiating initial agreements with a company to pursuing rights within insolvency processes.
Finally, prospective purchasers—both strategic and financial—are increasingly encountering opportunities to acquire assets in these bankruptcy alternatives, making it critical to understand the powers and limitations of the processes, particularly any ability to sell free and clear or assign contracts.
This issue of the Journal of Corporate Renewal describes the insolvency processes of assignments for the benefit of creditors, receiverships, and Article 9 foreclosures. Figure 1 compares these and other insolvency alternatives, including Chapter 7 and 11 bankruptcies, to assist in analyzing and selecting the best method for a particular circumstance.
Andrew De Camara of Sherwood Partners Inc. describes ABCs, a state law process whereby assets are transferred to a third party administrator—the assignor—to be sold. As De Camara explains, the process relieves the company’s decision makers of the obligations and potential liabilities associated with addressing financial challenges, and the ABC process is flexible, scalable, efficient, and timely, but it also has significant limitations.
Minnesota District Court Judge Edward T. Wahl and James A. Bartholomew of Lighthouse Management Group discuss receiverships, particularly the prospect of their use to resolve complex business litigation. They provide real-world examples of successful uses of receiverships.
Christopher Harayda and Kayla Britton of Faegre Baker Daniels LLP describe Article 9 foreclosure, whereby a secured party transfers title to the collateral to a buyer by sale, lease, or license without judicial intervention. The article describes advantages and challenges of the Article 9 foreclosure process.
Finally, Don Harer and Alpesh Amin of Conway MacKenzie discuss their experience addressing liquidity challenges and performance issues in the Strack and Van Til supermarkets cases, for which bankruptcy ultimately became unavoidable. They describe the initial attempts to sell and liquidate underperforming stores and restructure around performing stores, and the subsequent bankruptcy. The authors discuss the lessons learned and explain how a successful resolution was reached despite the many challenges.