Economies all over the world are facing challenging times with changing market dynamics, which oftentimes have pushed them to the limit on profits and turn-over. This has led to companies either seeking to file for bankruptcy or being pushed to liquidation.
Corporate bankruptcy is the process often sanctioned and guided by a court process in which an organization or business is declared that it is incompetent or unable to pay its debts. A company can either move to seek relief to stop debtors from attaching its property due to unpaid debts. Also, other companies can move to have a company compelled to pay its debts and in the process, a company is declared bankrupt.
In a bankruptcy case, a court must be convinced that the debts of the company are so overwhelming for it to pay and the best and feasible option is to declare the company insolvent.
The U.S. laws allow for companies to seek bankruptcy orders and shield itself from being auctioned. Both Chapter 7 and Chapter 11 provide situations under which a company can be reorganized or restructured to avoid loss and ultimate liquidation. These laws are typically slow in ordering liquidation but allow a company to negotiate with its creditors for a prolonged repayment of what it owes.
Smaller companies and sole proprietorships often find themselves with more options in filing for bankruptcy which includes the same chapters mentioned above, but can also seek Chapter 13. This chapter is reserved for consumers and sole proprietorships that stipulate to a repayment formula that helps the company get back to profitability.
Types of Bankruptcy
Based on the US bankruptcy laws, there are mainly two types of bankruptcy that a corporate entity can go through. These are guided by chapter 7, chapter 11 of the Act. These include Chapter 7 Liquidation, Chapter 11 Reorganization:
- Liquidation: This is the extreme kind of bankruptcy. In this type of bankruptcy, a company might file for total liquidation after there is proof that the company can’t manage to make repayments. As enshrined in chapter 7, the bankruptcy court appoints a caretaker manager who is responsible for managing the company’s assets and works on a formula to dissolve the company and distribute the proceeds to debtors. It is normally seen as the last step in folding a company.
- Reorganization: This is the path taken by companies who have a glimmer of hope of turning around the bad financial times and make the company profitable yet again. This is guided by chapter 11 and a court appoints a trustee who runs the business normally, until a time it can make a profit again and manage to pay off its debtors. This is a complex way of keeping a company afloat and not all corporates who seek orders under this chapter get it. The repayment of loans can be extended up to 20 years meaning a longer period to rethink and reorganize how to approach business. This also affects creditors, and the court process allows them to vote on any plan before it is ratified by the court.
Factors that lead to Corporate Bankruptcy
Bankruptcy is not always a result of bad management. There are various ways in which a company may fall into bankruptcy even if it has done everything well. These could include prevailing market conditions, financing, natural disasters and other causes beyond human ability. But still, there are cases of bad management, fraud and poor vision that lead a company to be on its knees:
- Prevailing market conditions – Sometimes a company finds itself under intense competition as well as increasing hard economic times. This affects the overall sales as well as the costs of running a business. This can lead to a company failing to pay its debts in time.
- Expensive financing options – In business management, a company might enter into a situation whereby it needs financing desperately. This might result in the company choosing expensive or sometimes unsuitable repayment schedules.
- Poor decision making – CEOs and executives making decisions that a company will live to regret.
- Lack of institutional memory- If a founder of an organization retires, sells the company or dies, the company might struggle living in the dreams or visions of the founder.
- Natural catastrophes – When a hurricane or an earthquake hits an area, there are companies which might never recover. This also refers to areas of strife, war or general chaos.
- Tax and fraud-related issues – Some organizations are forced to shut down operations when it is unable to pay its taxes or there have been cases of company executives being involved in fraud.
Managing Business during Bankruptcy
Running a corporate entity during the bankruptcy period can be a challenge. All eyes are on the company to avoid making other poor decisions. The court-appointed caretaker manager often runs the company with the main aim of remaining afloat.
This can also be a tricky time to get new credit, new staff or venture into new areas of operation. A company that survives this process will have a mark in its history. The good thing with this kind of process is that it does not affect the credit history of an individual unless the property was attached to the owner.
Chapter 11 – Business Reorganization & Restructuring
Reorganization of business can have a varied meaning to different people. The general meaning can be as simple as looking at how a business is run and introducing changes. It can also mean finding ways to extend the life of a company possibly facing imminent bankruptcy, or that has already been declared bankrupt. This is done through either extending credit lines or negotiating with suppliers to continue providing materials to keep the organization afloat.
Restructuring can include reducing or increasing the number of branches, reconstituting the board, or even selling off shares to the public or a significant shareholder.
Restructuring can also involve reshaping the goals and missions of the business that makes it either focus on new areas or expand to other areas that were not part of the main core business.
Steps of Reorganizations
Most of the reorganization steps start internally, and if a business is big enough to have an internal legal advisor, they will initiate this step together with the management. If there is no internal legal secretary, an external legal firm is responsible for this change. In the case where there is a legal suit on reorganization, a court can order this process to commence, especially in instances of bankruptcy.
Once a legal process commences, and the bankruptcy court rules that there is a need for reorganization, through a reorganization plan, the company begins to pay its debtors and attempts to change how it collects and uses its finances.
Many States allow for companies to reorganize their affairs rather than face liquidation. This involves getting new terms on loans and staggering payments. This is also supported by the U.S. Bankruptcy law which sees liquidation as the last step in a troubled organization.
Once a company secures new credit repayment schedules, the company can then move to seal the holes that led to the problem or challenges it is facing. This can include restructuring the organization, changing the management of the firm, or reducing the workforce.
Things to look out for before you reorganize your company
Before a company reorganizes itself, there are vital issues that our attorneys look out for to ensure the company does not go back to the previous situation it was. There is a need to do a proper analysis of the life of the organization and explore ways and means of introducing changes. Though some of these things are agreed upon in a bankruptcy court, there is a need for any legal team that is managing this process to be sure what is best for the organization.
- Does the organization have the capacity to remain afloat: Sometimes, as a receiver-manager or a legal team managing a reorganization process is forced to make radical decisions that eventually affect the life of a company? For example, if they evaluate the cause of the collapse was as a result of a sweeping change in the fortunes of an industry, they might not see the need to continue the losses. This was common when many coal and iron companies in the coal belt continued when the industry crumbled.
- Is the business model being used the main reason it failed? The reorganization team can look at how the company had been conducting business. If most of the sales were coming from one area of focus, they might recommend casting the net wider. This is part of the restructuring plan that can lead the company into new areas and adopting a new business model.
- Would the company shareholders achieve more if the company was liquidated rather than extending its life? Rather than waiting until the value of the company is too low, our attorneys might float an idea of immediate liquidation to shield the owners and shareholders from losing the value of their work. This is done by calculating the amount the company owes and how much workers would be paid and then figuring the balance.
- Is there an option for merger and acquisition? Some business organizations move into mergers to expand its reach and use the strength of numbers to attack the market?
Steps of Restructuring a Business
A company may be forced to undergo restructuring to get more market benefits than it is currently getting. This can include changing the ownership of the company, reconstituting the board, reducing the number of branches or outlets, and changing how it conducts business.
This gives a company more strength and advantage on the market and helps avoid loss of profit or reduced income.
The primary process of restructuring is guided by both legal and financial experts who evaluate the strengths and weaknesses of the organization. They also assess how the company has been running and propose new ways of getting to the next level that might be beneficial to the overall good of the company.
After coming up with a plan, a legal team deals with matters that touch on the staff, their contracts and deals with worker’s representatives or trade unions, where applicable. The team also deals with office matters rather than the business side of things. They also deal with agreements on new acquisitions as well as mergers.
This is then pushed through the board to approve some of the changes recommended. If the board doesn’t like the changes, the team can then be forced to redraft new options. This process can be delicate as there are many influential people within the company who stand to lose in the restructuring.
The team also looks at the taxation issues and irons out any debts that might be outstanding in the event a company is sold. Taxes, in particular, can be tricky because as much as a company might be meeting its tax obligations; there is a need to check whether there exist gray areas before mergers and acquisition.
When to Restructure a Business Organization
There are specific reasons that lead a company to restructure. Most of these reasons are based on the need to reduce the costs of running a business as well as ensuring the company is making business sense in the field.
- Reduce operational costs: This includes reducing the number of employees, the cost of running different outlets, cut on non-profitable operations, and focus on the main business of the day.
- Improve its competitive advantage, among others: This involves shifting the business focus to the core business of the organization.
- Prepare for a merger with another company: When a new company comes on board, there are casualties, mainly managers and staff. This means a company that merges with another has to reduce cases of duplication of roles and tasks and jobs overlay. In most cases, mergers lead to loss of jobs.
- Weed out some dead wood, including inside the board: Some organizations are run by boards that aren’t in tune with the mission of the organization. Restructuring helps introduce some new energy and new ideas in running the company. It also helps in reducing the influence of some board members who have not had a significant impact on the team.
- Introduce new technologies: When there is need to introduce new technologies that will help run the company, an organization is forced to lay off some staff or even add new business models that will push the organization to greater heights.
Introduce a new strategic partner: This is different from a merger. This is where a company gets engaged with a new partner in doing business that will help it get into new areas of focus. The partner can also be a merger. When this happens, the company needs to restructure its goals and mission to be in tandem with the new partner.