Seven Commandments for the Financially Distressed Company

Most restructuring professionals will let you know that there isn’t any “typical” restructuring. That’s completely true. Each financially distressed enterprise is completely different and the character and course of its restructuring can be extremely dependent upon, amongst others, its capital construction, its liquidity profile, and the degree of assist it may construct for its reorganization amongst key stakeholder our bodies. However, there are some essential similarities in the means that any firm ought to initially tackle a distressed state of affairs. We talk about under quite a lot of key duties, or “commandments,” that we advocate any firm ought to undertake as quickly because it anticipates doable monetary misery.

Number one:  Thou Shall Successfully Handle Thy Runway

As soon as the firm has consulted restructuring advisors, it ought to flip to negotiating with its principal collectors and different key stakeholders on the phrases of an out-of-court restructuring, recapitalization, or sale transaction. In doing so, the firm and its advisors ought to contemplate, amongst others, the following:

  • The corporate’s liquidity place—the amount of money and money equivalents the firm has readily available and any availability below current credit score amenities; and

  • The crucial dates dealing with the firm, together with, with out limitation, maturity dates, borrowing base redeterminations, upcoming curiosity funds, monetary reporting obligations, termination dates below default notices, and the dates on which litigation liabilities might change into due.

These components ought to provide you with a basic sense of the firm’s “runway”—how lengthy the firm has till it wants to achieve a take care of its collectors or, instead of final resort, start a case below chapter 11 of title 11 of the U.S. Code (the “Bankruptcy Code”). As you may count on, money is crucial. All else equal, a stronger liquidity place and manageable deadlines will enable an organization time to barter with collectors and keep away from making hasty outcome-determinative choices.

As such, we frequently advise corporations to fully draw down their current traces of credit score and, as applicable, place the proceeds in an account that the firm’s lenders don’t have any fast proper to entry. This can guarantee the firm maximizes its liquidity and minimizes lenders’ sensible skill to take management of the funds ought to a default happen below the related mortgage documentation. As well as, a monetary advisor and, probably, a chief restructuring officer, will help the firm handle its liquidity by, amongst others, negotiating extra favorable cost phrases with distributors and suppliers and minimizing excellent receivables.

Quantity 2:  Thou Shall Try to Develop an Out-of-Court docket Answer that Avoids Chapter 11

The corporate’s runway or lack thereof, however, we at all times search to achieve an out-of-court answer to monetary misery earlier than pursuing in-court methods as a result of an out-of-court deal is sort of at all times cheaper and faster. In lots of circumstances, the firm might not attain a take care of its collectors on the phrases of an out-of-court transaction to handle its debt obligations earlier than a default is anticipated to happen below the firm’s debt paperwork. If negotiations are ongoing, and can proceed previous any maturity or default occasions, the firm ought to search to have its collectors conform to enter right into a short-term forbearance or waiver of the default to permit the events time to barter with out worry that collectors will train cures or any cross defaults will happen. Usually, the preliminary forbearance or waiver lasts between 30 and 60 days, however such durations are sometimes prolonged a number of instances by settlement of the events.

A profitable out-of-court restructuring nearly at all times requires the unanimous assist of the firm’s funded debt holders, which is regularly tough to acquire. Particularly, any out-of-court transaction that contemplates the modification of quantities, rates of interest, maturity dates, or amortization—i.e., “amend and extend” transactions—is probably going going to require unanimous lender consent as a way to be consummated out-of-court. In consequence, an absence of consensus amongst key stakeholders is amongst the commonest explanation why we see out-of-court exercises fail or a  chapter 11 chapter turning into crucial. The Chapter Code permits a chapter 11 debtor to power the phrases of its restructuring on recalcitrant lenders and fairness holders below sure circumstances.

Quantity 3:  Thou Shall Interact in Contingency Planning

It could be robust medication to swallow given the expense of doing so, however it’s crucial {that a} distressed firm put together for a chapter 11 submitting lengthy earlier than the firm and its advisors decide {that a} submitting is critical. As mentioned above, there isn’t any assure that an organization will attain a take care of its stakeholders on the phrases of an out-of-court restructuring. We now have seen many circumstances by which an out-of-court deal appeared probably, however fell by way of unexpectedly at the final minute and necessitated a crash chapter 11 submitting to acquire the good thing about the automated keep to forestall collectors from exercising cures.

In these unlucky circumstances, the final thing an organization desires is to be caught unprepared to file given the benefit that an orderly submitting supplies and the sheer quantity of labor that ample preparation calls for. With a view to make sure that its transition out of business is seamless and that its enterprise operations proceed uninterrupted throughout the pendency of its case, a chapter 11 debtor sometimes information plenty of pleadings on the first day of its case looking for operational and procedural aid. The corporate and its advisors sometimes work collectively to organize these paperwork as they require detailed details about, amongst others, the firm’s capital construction, monetary efficiency, enterprise operations, and the occasions that result in its chapter 11 submitting. The purpose right here is that these paperwork require vital time to organize, and having adequate time to plan the chapter 11 can also be advantageous to resolving points that could be problematic if they’re found after a chapter 11 submitting.

In our expertise, there’s additionally probably a tactical benefit to making ready the firm for submitting weeks upfront in that these paperwork may be shared with stakeholders as a method to display that the firm is critical a few chapter 11 submitting. Typically the menace of a chapter 11 case—together with the Chapter Code’s cramdown provisions—is a powerful incentive for stakeholders to agree with a distressed firm’s proposed out-of-court restructuring. The choice for recalcitrant stakeholders is to incur vital authorized charges in chapter 11 solely to have the phrases of a much less favorable restructuring imposed on them by the chapter courtroom. On this means, due to this fact, fairly sarcastically, the preparation for a chapter 11 case could make it much less probably that such a case ever happens.

Lastly, the firm and its advisors ought to give critical thought to precisely the place they could file a chapter 11 case if chapter turns into a crucial eventuality. A lot ink has been spilled on the deserves of “forum shopping” in the chapter context, however from a distressed firm’s perspective, we will unequivocally let you know that the venue by which an organization commences its chapter 11 circumstances can have a major impact on the consequence of the case. And since the present venue guidelines are pretty permissive—a debtor can file chapter 11 in any jurisdiction by which it has its principal property, principal administrative center, domicile, or any of its associates at present has a chapter case pending—we frequently see debtors have interaction in pre-filing exercise designed to create circumstances that enable them to file for chapter 11 in a specific jurisdiction. Amongst the major causes that company debtors search to start their circumstances in these jurisdictions is that the judges in these jurisdictions preside over a lot of the giant chapter 11 circumstances which can be filed, and, consequently, an organization and its advisors may be comparatively assured of the consequence {that a} case in these jurisdictions can present.

Quantity 4:  Thou Shall Seek the advice of Restructuring Advisors

Considered one of the most important errors we see distressed corporations make is to attend too lengthy to speak to restructuring advisors and thereby considerably hamper their skill to efficiently tackle monetary misery out of courtroom. It’s crucial that the firm seek the advice of restructuring advisors, together with legal professionals, bankers, and monetary advisors, as quickly as doable monetary misery seems on the horizon. Skilled advisors is not going to solely assist you to decide the finest path ahead, however they’ll have the ability to start negotiating with collectors on a possible consensual transaction lengthy earlier than the firm must make any remaining choices concerning its restructuring. They will even present a layer of safety to the firm in opposition to doable future claims for improper actions or inactions. Regularly, creditor teams will arrange and rent counsel as quickly as they believe monetary bother, and it’s best if the firm assembles its personal skilled staff of authorized advisors to fulfill collectors’ counsel head-on. Equally, proactively participating an skilled funding financial institution permits an organization to run an extended, extra strong advertising course of to search out new capital or potential consumers which can be keen to buy the firm as a going-concern on worth maximizing phrases.

Quantity 5:  Thou Shall Take into account Appointing Unbiased Administrators

The corporate also needs to contemplate who will truly be tasked with deciding which restructuring proposal the firm ought to pursue. Always, administrators needs to be free from conflicts of curiosity, and may place the pursuits of the firm forward of their very own.[1] In lots of circumstances, due to this fact—even when the firm has D&O insurance coverage (and it higher)—we advise distressed corporations to nominate a number of impartial administrators to the firm’s board of administrators to assist make sure that any restructuring proposal that the firm finally decides to pursue isn’t later efficiently challenged on the foundation that a number of members of the board was self-interested.

Whether or not to nominate impartial administrators is of specific significance in the context of personal corporations, sponsor-backed corporations, or corporations by which members of the board are additionally affiliated with a number of of the firm’s debt holders. For instance, we frequently see an organization’s current non-public fairness sponsor or junior collectors amongst the solely stakeholders keen to assist a transaction to recapitalize the firm. If that’s the case, then we extremely advocate that board members affiliated with these teams recuse themselves from any decision-making concerning the firm’s restructuring. That, in flip, might necessitate the appointment of impartial administrators. Competent restructuring counsel can be well-versed in these points and can have the ability to assist with the appointment of impartial administrators at the outset of counsel’s engagement.

Quantity 6:  Thou Shall Take into account Buying “Tail” Protection for Your D&O Coverage

Given the contentious nature of monetary restructuring, particularly in the chapter 11 context, claims and causes of motion in opposition to an organization’s administrators and officers are sometimes threatened by quite a few constituencies looking for to exert leverage and extract worth. To make issues worse, an organization might discover itself unable to indemnify its officers and administrators or in any other case advance their protection prices whereas the firm is in chapter 11. In consequence, director and officer legal responsibility insurance coverage (“D&O Insurance”) is essential for an organization in a distressed atmosphere to forestall administrators and officers from bearing the financial burden of any private legal responsibility for claims introduced in opposition to them in reference to their roles at the firm.

Most D&O Insurance coverage insurance policies present for a restricted interval throughout which the insured could make claims for protection below the coverage. Typically, claims can now not be made upon a “change of control” as outlined in the related coverage. The consummation of a restructuring usually leads to a “change of control.” For these causes, we sometimes advise corporations to buy runoff or “tail” protection to permit claims to be made lengthy after the coverage has expired. This offers administrators and officers peace of thoughts that acts coated by the related D&O Insurance coverage coverage will profit from protection, together with associated protection prices, however {that a} specific declare or reason for motion might have been introduced in opposition to them in a monetary restructuring after the unique reporting interval has expired.

Quantity 7:  Thou Shall Take into account Whether or not to Pay Retention Bonuses to Key Executives Earlier than a Chapter 11 Submitting (If Any)

Lately, a number of giant chapter 11 debtors have elected to pay retention bonuses to sure of their senior executives on the eve of their chapter 11 filings. The Chapter Code forbids corporations from paying such bonuses to executives whereas in chapter 11. Though paying retention bonuses to executives previous to a chapter 11 submitting is arguably a dangerous technique as these funds might, in concept, be topic to clawback below varied causes of motion, we aren’t conscious of a outstanding circumstance by which an govt has been ordered to show over a pre-bankruptcy retention bonus. Moreover, as a sensible matter, would-be challengers to those bonuses might discover it extra bother than it’s value to hunt an order to disgorge the funds given the value of the associated litigation relative to the measurement of the bonuses. In consequence, any distressed firm that could be inclined to pay retention bonuses ought to contemplate whether or not it desires to make such funds earlier than commencing a chapter 11 case. Doing so is actually not with out danger, but when previous outcomes are any prediction of future success, there could also be a great argument for making the retention bonus funds. In its place, the firm might contemplate looking for approval from the chapter courtroom to create a performance-based bonus plan (in any other case generally known as key worker incentive plan or “KEIP”) fairly than a retention bonus program.


Though the foregoing “commandments” are all crucial for any distressed firm, we don’t imply to recommend that this listing is exhaustive in nature or a fulsome treatment for addressing monetary misery. The info and circumstances of a specific state of affairs will at all times drive the final consequence in a restructuring. Nonetheless, by following these commandments, a troubled firm can have positioned itself nicely on the highway to a profitable consequence.


[1]      For a extra detailed dialogue of administrators’ fiduciary duties, please see Precautionary and Prudency Measures for Boards Addressing COVID-19 Business Uncertainties – Finance & Bankruptcy Law Blog (

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