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In industries far and wide, planned bankruptcies have emerged as a strategic tool in corporate restructuring.
A planned Chapter 11 business bankruptcy, also known as reorganization bankruptcy, is commonly undertaken when a company becomes cash-strapped and chooses to restructure its business debt. The goal is to repay creditors while continuing to be operational, and can often include layoffs.
Unlike traditional bankruptcies, which often signal failure, planned bankruptcies serve as calculated moves to shed debt and protect core business assets. As the legal and financial landscapes continue to evolve, understanding the nuances of this approach will serve your business well.
This article will explore the implications of planned bankruptcies on corporate restructuring strategies—highlight risks, benefits, and the best practices should you wish to pursue this route.
Understanding planned bankruptcies
Planned bankruptcies, also known as “pre-packs,” involve pre-negotiations for the approval of a company’s bankruptcy filing. Instead of winding up its business, the company is given the privilege of restructuring, with hopes of returning to normal business operations and sound financial health in the future. This type of bankruptcy is generally sought by corporations that need time to restructure debt that has become impossible to manage.
Previously only available for selective marketplaces like the United States and the United Kingdom, planned bankruptcies have now gained momentum all over Europe due to the changing economic situation and conformist regulatory frameworks.
Key features of planned bankruptcies:
Pre-negotiated terms: Terms for the restructuring of debts are typically negotiated beforehand.
Speed and efficiency: Planned bankruptcies save courtroom time, avoiding disruptions to the operation.
Preservation of assets: This strategy can prevent fire sales and ensure the preservation of capital for the brand.
A Chapter 11 reorganization is generally the most expensive—and complex—bankruptcy proceeding. However, it presents the firm with the potential to start afresh. Because the restructuring plan requires the firm to still fulfill its debtor obligations, it is undertaken only after a company has carefully considered all the alternatives for paying back the debt.
Public companies tend to file under Chapter 11 instead of Chapter 7 because this allows them to continue to run their businesses rather than simply turning over their assets to a trustee for liquidation, as it would have to in Chapter 7.
Drivers behind the spike in planned bankruptcies
Several factors have contributed to the rise of planned bankruptcies, especially in sectors like retail, hospitality, and energy. These can be summed as:
Economic volatility: Inflation, rising interest rates, and supply chain disruptions have placed huge monetary burdens on industries.
Changing consumer behavior: Today’s consumer demands businesses to move with the times, so the shift to e-commerce has accelerated retail bankruptcies, prompting companies to undertake a more tactical reorganizational approach.
Regulatory developments: Bankruptcy reforms in other jurisdictions, including the Netherlands, have made them more prevalent and transparent, hence more appealing for companies.
Investor pressure: Shareholders and creditors increasingly urge pre-negotiated arrangements that shield firm value and avoid protracted judicial processes.
Legal considerations
Planned bankruptcies depend on legal frameworks, which vary by country. If your firm seeks to take this approach, it must be able to deal with intricate regulations for conformity and avoid litigation. Some of the factors that come into play include:
Transparency and fairness: Courts and administrators appreciate transparency for purposes of precluding process abuses. Firms must be able to demonstrate stakeholders were treated equitably.
Stakeholder approval: Employees, creditors, and representatives of shares step into a key role of accepting the terms of the restructuring.
Cross-border implications: For multinational corporations, coordinating planned bankruptcies across jurisdictions adds more complexity for international companies. Lawmakers must harmonize their plans so as not to arrive at inconsistent judgments.
Fraudulent conveyance risks: There’s greater legal jeopardy when planned bankruptcy transactions involve assets being moved into related affiliates. Companies need to be able to justify every transfer on fair value.
The benefits
When executed correctly, planned bankruptcies offer a range of advantages for businesses. These include, but are not limited to:
Minimized business disruption: Pre-negotiated terms ensure smooth operations with the least disruption for consumers, employees, and suppliers.
Cost efficiency: The settlements take place quickly, reducing administrative and legal fees.
Enhanced control: Businesses retain greater control over the restructuring process compared to traditional bankruptcies, where courts often dictate terms.
Reputation management: Planned insolvencies can also shield companies from the negative publicity tied to sudden insolvencies.
Risks and pitfalls
Despite their advantages, planned bankruptcies carry significant risks:
Stakeholder resistance: Securing approval from all stakeholders can be challenging, especially if certain groups feel disadvantaged.
Regulatory scrutiny: The plans can be refused by the courts if there’s unfair treatment of creditors and employees.
Operational risks: Poorly executed planned bankruptcies can lead to supply chain disruptions, customer attrition, or talent loss.
Reputational damage: Although less severe than traditional bankruptcies, planned bankruptcies may still raise concerns among investors and partners.
Best practices
Businesses considering planned bankruptcy need to implement these best practices for optimal possible success:
Engage early with legal and financial advisors to allow your businesses to identify potential restructuring options before a crisis escalates.
Maintain transparent lines of communication between you and your stakeholders, as this will build trust and facilitate smoother negotiations.
Practice comprehensive due diligence by undertaking extensive examinations of finances and operations on realistic terms of the reorganization.
Develop multiple restructuring scenarios to adapt to changing circumstances or stakeholder demands.
Partner with experienced legal teams that understand the nuances of bankruptcy law in your relevant jurisdiction.
These strategies underscore the critical role of planning, communication, and execution in determining the outcome of a planned bankruptcy for you.
Conclusion
As economic times remain uncertain, planned bankruptcy will become an even more prominent tool in corporate restructuring strategies because it represents a strategic shift in how businesses approach financial distress.
By offering greater control, cost efficiency, and business continuity, they have the potential to reshape corporate restructuring strategies. But their efficacy relies on strict preparation, legal sophistication, and teamwork from stakeholders. To survive and thrive in today’s uncertain economic environment, recognizing and instituting planned bankruptcies could be the secret of sustaining resilience and growth.
